**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington, D.C. 20549




**Form
      10-KSB**




(Mark
      One)




**x** **ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF**


**1934
      FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007**




**o**  **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**


**FOR
      THE TRANSITION PERIOD FROM __________ TO __________**


**COMMISSION**  **FILE
      NUMBER ________________________________**





**LATTICE
      INCORPORATED**


(Name
      of
      small business issuer in its charter)




DELAWARE
            22-2011859(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





7150
      N. Park Drive, Suite 500, Pennsauken, New Jersey 08109


(Address
      of principal executive offices) (Zip Code)





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




Securities
      registered under Section 12(b) of the Exchange Act: None.




Securities
      registered under Section 12(g) of the Exchange Act: Common Stock,


$.01
      par
      value




Check
      whether the issuer is not required to file reports pursuant to Section
      13


or
      15(d)
      of the Exchange Act. o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o




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


Yes o No x




State
      issuer's revenues for its most recent fiscal year. $15,217,827




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the average bid and asked price of
      such
      common equity as of April 15, 2008 was $6,731,980.




As
      of
      April 15, 2008, the issuer had 16,829,950 outstanding shares of Common
      Stock.




**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**




Transitional
      Small Business Disclosure Format (check one): Yes o No x







TABLE
      OF
      CONTENTS





PagePART
                IItem
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            7Item
                3.
            Legal
                Proceedings
            8Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            8PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters
            8Item
                6.
            Management's
                Discussion and Analysis or Plan of Operation
            10Item
                7.
            Financial
                Statements
            19Item
                8.
            Changes
                In and Disagreements with Accountants on Accountingand
                Financial Disclosure
            19Item
                8A(T).
            Controls
                and Procedures
            19Item
                8B.
            Other
                Information
            19PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons;Compliance
                With Section 16(a) of the Exchange Act
            19Item
                10.
            Executive
                Compensation
            21Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Managementand
                Related Stockholder Matters
            25Item
                12.
            Certain
                Relationship and Related Transactions
            26Item
                13.
            Exhibits
            27Item
                14.
            Principal
                Accountant Fees and Services
            29SIGNATURES
            31








**PART
      I**


**ITEM
      1. DESCRIPTION OF BUSINESS. [COMPANY, PLEASE UPDATE AS
      NEEDED]**




**ORGANIZATIONAL
      HISTORY**




We
      were
      formed under the name Science Dynamics Corporation, incorporated in the State
      of
      Delaware in May 1973 and began operations in July 1977. We have been developing
      and delivering technologically advanced telecommunication solutions for over
      25
      years. We changed our name to Lattice Incorporated in February 2007. Lattice
      incorporated is referred to herein as the "Company," "we," "us," and
      "our".





On
      February 14, 2005, we acquired approximately 86% of the stock of Systems
      Management Engineering, Inc., a Virginia corporation (“SMEI”) on a fully-diluted
      basis, for which we paid $1,655,325 in cash and issued 1,737,861 shares of
      common stock.




Pursuant
      to a stock purchase agreement dated September 12, 2006, between us, Ricciardi
      Technologies Inc. (“RTI”) and RTI’s shareholders, we acquired all of the issued
      and outstanding capital stock of RTI for $3,500,000 in cash, issued 5,000,000
      shares of common stock, and issued a $500,000 promissory note and 1,000,000
      shares of series B convertible preferred stock. To secure the indemnification
      obligations of the former RTI stockholders, $350,000 and 583,333 shares of
      common stock was placed in escrow for a period of 18 months, subject to any
      claims that may arise under the agreement during the 18-month warranty survival
      period.




At
      December 31, 2007, we operated the businesses of SMEI and RTI as separate legal
      entities with regards to our contractual relationships with our government
      clients. For reporting reasons, the SMEI and RTI operations comprise the
      Technology Services segment. In addition, Lattice Incorporated continues to
      supply call control technology to service providers offering Collect-Only
      calling to inmates of correctional institutions. We have been a primary supplier
      to a major Local Exchange Carrier and, in recent years; have expanded our
      customer base to include the newly emerging unregulated companies offering
      the
      same service in today’s more highly competitive telecom environment. Our
      Commander product line is a versatile and feature rich platform, prepared to
      handle the increasing demand for investigative tools and security.




We
      are in
      the process of finalizing the integration of our businesses and hope to complete
      the integration by the 3 rd quarter
      of 2008.





**Reverse
      Split**





On
      February 2, 2007, we filed an amended and restated certificate of incorporation
      with the State of Delaware, which, among other things, effected a one-for-ten
      reverse split of our common stock. All share and per share information in this
      report retroactively reflects the reverse split.




**Business
      of SMEI**





SMEI
      was
      founded to provide engineering services coupled with advanced technology
      solutions to agencies of the federal government. SMEI has developed advanced
      data management applications, Internet server technology and information systems
      that it markets to both public and private sectors. SMEI’s technology helps its
      customers reduce development time for projects, manage the deployment of
      applications across the Internet to desktops around the world and implement
      military grade security on all systems where the applications are deployed.
      SMEI
      has two divisions, a consulting services division and the Aquifer Software
      division.





***Consulting
      Services Division***





SMEI
      provides the federal government and private industry with engineering services
      coupled with innovative information technology solutions. SMEI seeks to address
      the growing public and private sector demand for integrated, secure, enterprise
      class e-business solutions built on industry standards.





SMEI
      has
      designed, developed and implemented advanced business management applications,
      integration technologies and enterprise geospatial systems. SMEI currently
      supports several operational systems in all of these categories for major
      organizations and defense commands using web-based technologies and the
      consolidation of custom and commercial off-the-shelf software to unite
      dissimilar applications into integrated systems.





***Geospatial
      Information Systems***





SMEI
      specializes in the design and implementation of enterprise geographic
      information systems, enabling the vision of public and private sector clients
      for cross-organization data sharing. By doing this, we can manage the security
      of the GIS data layers so that what a user sees is based on his level of
      security-cross - organizational data sharing. Most GIS systems are not able
      to
      restrict to the granular level that we have designed into GeoReadiness. SMEI
      develops web services applications and secure geospatial solutions. SMEI also
      performs spatial analysis and risk assessment modeling for the military medical
      application. SMEI also developed GIS-R, an Army geospatial information system
      repository to provide a visual method for users to access information from
      a
      comprehensive set of government, commercial, and installation data sources
      in an
      expandable, user-friendly decision support application.




1




Implementation
      planning is critical to the success of enterprise geospatial information system
      initiatives. Cross-organizational data sharing and public visualization of
      corporate information through the Internet requires the understanding of data
      needs across functional areas, as well as the backbone technology to support
      an
      enterprise approach. The SMEI team includes key in-house experts in geospatial
      information system supporting technologies such as ESRI’s ArcSDE, Oracle
      Spatial, UNIX and Windows to ensure a stable architecture and operating
      environment for enterprise applications. As current customers of this service,
      the Naval Information Technology Center receives architectural and database
      support, systems integration analysis, and technical support from
      SMEI.





***Technical
      and Management Consulting Services***





SMEI
      provides network engineering, architectural guidance, database management,
      expert programming and functional area expert analysis to its Department of
      Defense clients.  SMEI provides strategic consulting to support business
      requirements, change management, and financial analysis and
      metrics for several major federal customers.




In
      addition, SMEI provides management, analytical, and technical consulting to
      support legacy application modernization and systems reduction goals under
      several major contracts including the Department of Navy’s Navy Marine Corps
      Intranet (NMCI).





**Aquifer
      Software**





SMEI
      develops and markets the Aquifer Application Services Platform, a proprietary
      software product embedded in the applications developed for its customers.
      Aquifer helps developers build a new class of software called rich Internet
      applications. These applications are secure custom or commercial desktop and
      mobile Windows Forms applications that use the traditional client/server model
      while exploiting Web Services-based communications over the
      Internet.





Aquifer
      is a .NET application platform built on a service-oriented architecture that
      delivers scalable and secure Web applications to Windows desktop and Windows
      CE
      platforms. Aquifer gives SMEI a competitive advantage with its service bids
      by;
      (i) reducing development time and (ii) enabling the management and the
      deployment of applications across the Internet to desktops around the world
      while implementing Department of Defense certified and accredited security
      on
      all deployed systems. Aquifer addresses the needs of development organizations
      to more rapidly develop custom Windows Forms applications and lower the costs
      to
      secure, deploy and maintain them. Aquifer helps organizations solve the
      following problems:





·
            Reduction
                in application development time, cost and
                risk;





·
            Reduction
                of desktop and PDA application deployment time and
                cost;





·
            Increased
                richness of user experience;





·
            Elimination
                of security concerns inherent with Web browser
                vulnerabilities;





·
            Decreased
                server software and hardware costs;
                and





·
            Optimization
                of network resources for best
                performance.





SMEI
      markets Aquifer as both a productivity tool and a secure application platform.
      Whether modernizing legacy applications or building new service-oriented, Web
      based systems, Aquifer is designed to shorten the time it takes to develop
      and
      deliver custom solutions in Microsoft .NET environments. Aquifer provides many
      common service components including:





·
            Data
                Access;





·
            Role-based
                User Profiles;





·
            Flexible
                Security Model including strong
                encryption;





·
            Configuration
                Management;




2




·
            Event
                Management;





·
            Integration
                Gateways; and





·
            Secure
                Client.





In
      its
      current version 5.4, the Aquifer Application Services Platform can support
      between 500 and 1,000 concurrent active desktops against a single server
      processor.





**Sales
      and Marketing**




SMEI
      markets its Aquifer Application Services Platform to mid to large-sized
      commercial accounts, federal government agencies, systems integrators and
      independent software vendors that are building Windows rich Internet
      applications. Aquifer’s products, training and services are focused on the .NET
      Windows Forms application development market where enterprise IT organizations
      and systems integrators are tasked with building and managing applications
      that
      run on the Internet using the .NET Framework.





SMEI
      employs the following marketing programs to sell the Aquifer Application
      Services Platform:





Direct
      Sales to Enterprise IT Organizations and Systems Integrators - A
      direct sales force performs this activity. This segment includes all new
      federal, systems integrator and commercial accounts. SMEI believes that
      reference-ability is a key post-sale objective.





Targeted
      Marketing - With
      the help of extensive lead generation, public relations and targeting marketing
      communication materials, SMEI hopes to establish itself as a leader in the
      rich
      Internet application development and management market with an emphasis on
      security over both wired and wireless communications. The tactics include
      marketing materials directed at DOD agencies, the financial services and health
      care markets and other markets where strong security is a common requirement.
      Print media, direct mail, trade shows/conferences and live Web casts are the
      main components of lead generation for SMEI.





Strategic
      Alliances - SMEI
      plans to continue to form strategic alliances with federal and commercial
      systems integrators and Web services performance management vendors to sell
      SMEI’s products as value-added resellers and to enhance Aquifer’s capabilities
      by integrating with other vendor’s performance monitoring capabilities. SMEI
      believes that engaging marketing an delivery channels that are not currently
      available to the company will broaden market reach, increase delivery bandwidth
      in some instances, and yield a greater return on sales and marketing
      expenditure. Currently, SMEI and AmberPoint co-market products to federal
      governmental agencies. SMEI plans to integrate Aquifer and AmberPoint to help
      developers more easily and accurately monitor the .NET applications they build.
      AmberPoint is a Silicon Valley-based software company that builds and markets
      management solutions for Web services.





**Business
      Development**





We
      believe our future success is dependent on expanding our existing product line
      to encompass a more diverse customer base. Management believes this will enable
      us to reduce our exposure to the risk of declines in telecommunications sales
      while capitalizing on potential gains in our other business sectors. As we
      expand product offerings into other sectors, we plan to move from primarily
      offering products to offering a mix of products and services to generate
      consistent recurring revenue streams. Some of the key areas we intend to focus
      on expanding are:





1.
            OEM
                Licensing - This would include licensing existing technology we have
                developed to other equipment manufacturers either to incorporate
                into
                their existing product offering or for
                resale.





2.
            Voice
                and Data Security Products - Our existing products provide feature
                rich
                call control technology that can be expanded to serve additional
                markets.





The
      first
      step in realizing our business development strategy requires enhancing existing
      products to address the needs of other markets. We continue to supply call
      control technology to service providers offering Collect-Only calling to inmates
      of correctional institutions. We plan to expand on our existing Commander
      Product line by licensing it to other vendors and also by modifying the product
      to meet the needs of other markets.





3




**Our
      Products**





We
      currently offer products based on our BubbleLink technology and on SMEI’s
      Aquifer technology. These products are marketed to the government and private
      industries.





***BubbleLink***





BubbleLink
      is a versatile and feature rich transaction processing platform that is used
      to
      develop and enhance a variety of customizable communications
      applications





***Commander
      Call Control System***




The
      Commander Call control system is built on our BubbleLink software architecture.
      This open source platform is a combination of integrated computer telephony
      hardware and software. The Commander Call control system is capable of handling
      thousands of call transactions per hour and provides correctional facility
      officials with effective tools to manage and control inmate telephone calls
      using the Commander System software.





The
      Commander I models are designed for the small to midsize municipal and county
      correctional facilities requiring control for up to 40 inmate telephone lines.
      The Commander I base system provides telephone control for 4 lines and can
      be
      expanded in 4 line increments.





Commander
      call control systems are supported by an integrated array of administrative
      and
      investigative programs that provide a management solution suite. All programs
      interact in real-time with Commander calls and databases via an Ethernet Local
      Area Network (LAN) or a Wide Area Network (WAN).




Commander
      provides technologically advanced call control and management tools targeted
      at
      investigation and law enforcement in the inmate telephone control industry.
      Commander includes live monitoring, debit and recording features. The Commander
      system can be structured to use pre-paid debit cards that support specialized
      tariffs and call timing. With pre-paid debit cards, Commander provides complete
      control and security.





The
      existing Commander system is ported to support multiple vendors’ equipment,
      which makes the product more flexible in its operation and also pricing. We
      are
      developing Commander’s investigative software to provide a single repository for
      storing call records, recordings and other documents related to a specific
      case
      or investigation.





***MinuteMan***





The
      MinuteMan product, which is also built on our BubbleLink technology, is a
      complete turnkey system. The MinuteMan is designed for smaller pre-paid card
      vendors that want to break free from the resale only mode of the card
      business.





***Aquifer***





Aquifer
      is a software architecture that provides users the ability to develop and manage
      applications in a secure distributed computing environment. Aquifer has been
      used in developing several applications within the Department of Defense.
      Aquifer’s security system is certified by the Department of
      Defense.





We
      plan
      to combine Aquifer’s secure development platform with the transaction processing
      capabilities of BubbleLink. We believe the products’ synergies will provide an
      end to end solution for secure communications.





***SensorView***





SensorView,
      which provides clients with the capability to command, control and monitor
      multiple distributed chemical, biological, nuclear, explosive and hazardous
      material sensors.




**Product
      Development**





We
      continue to refine our core BubbleLink software technology. The BubbleLink
      software provides a hosting platform for telephony transactions and processes.
      The BubbleLink technology supports our existing Commander family of inmate
      products and the MinuteMan pre-paid card system. Management believes the
      addition of Aquifer to our product offerings gives us greater flexibility with
      product design and will help keep our business competitive.





**Government
      Contracts**





Virtually
      all of our SMEI’s and RTI’s revenues are dependent upon continued funding of the
      United States government agencies that we serve. The portion of revenues
      contingent on government funding was primarily SMEI’s and RTI’s which
      represented approximately 91% of our total revenues for the twelve months
      ended December 31, 2007 and 77% for the year ended December 31, 2006.
      The full revenue contribution of RTI occurred in the 4 th quarter
      of 2006 since the acquisition closed late in the 3 rd quarter
      (September 19, 2006). Any significant reductions in the funding of United States
      government agencies or in the funding of specific programs served by or targeted
      by our business could materially and adversely affect our operating
      results.


4




U.S.
      government contracts are subject to termination for convenience by the
      government, as well as termination, reduction or modification in the event
      of
      budgetary constraints or any change in the government’s requirements. In
      addition, U.S. government contracts are conditioned upon the continuing
      availability of congressional appropriations. Congress usually appropriates
      funds on a fiscal year basis even though contract performance may take several
      years. Consequently, at the outset of a major program, the contract is usually
      incrementally funded and additional funds are normally committed to the contract
      by the procuring agency as Congress makes appropriations for future fiscal
      years. Any failure of such agencies to continue to fund such contracts or
      failure by Congress to make sufficient appropriations to the relevant agencies
      could have a material adverse effect on our operating results.





**Sales
      and Marketing**





We
      employ
      a direct sales team to market our products to IT organizations, systems
      integrators and IP carriers. Our direct sales team primarily focuses on
      independent regional carriers. SMEI markets its Aquifer Application Services
      Platform to mid to large-sized commercial accounts, federal government agencies,
      systems integrators and independent software vendors that are building Windows
      rich Internet applications. Aquifer’s products, training and services are
      focused on the .NET Windows Forms application development market where
      enterprise IT organizations and systems integrators are tasked with building
      and
      managing applications that run on the Internet using the .NET
      Framework.





SMEI
      employs the following tactics to sell the Aquifer Application Services
      Platform:





Direct
      Sales to Enterprise IT Organizations and Systems Integrators - A
      direct sales force performs this activity. This segment includes all new
      federal, systems integrator and commercial accounts. SMEI believes that
      reference-ability is a key post-sale objective.





Targeted
      Marketing - With
      the help of extensive lead generation, public relations and targeting marketing
      communication materials, SMEI hopes to establish itself as a leader in the
      rich
      Internet application development and management market with an emphasis on
      security over both wired and wireless communications. The tactics include
      marketing materials directed at DOD agencies, the financial services and health
      care markets and other markets where strong security is a common requirement.
      Print media, direct mail, trade shows/conferences and live Web casts are the
      main components of lead generation for SMEI.





Strategic
      Alliances - SMEI
      plans to continue to form strategic alliances with federal and commercial
      systems integrators and Web services performance management vendors to sell
      SMEI’s products as value-added resellers and to enhance Aquifer’s capabilities
      by integrating with other vendor’s performance monitoring capabilities. SMEI
      believes that engaging marketing an delivery channels that are not currently
      available to the company will broaden market reach, increase delivery bandwidth
      in some instances, and yield a greater return on sales and marketing
      expenditure.





Important
      partnerships SMEI has developed recently include:





·
            Microsoft.
                SMEI is a Microsoft Certified Partner. Recently, Aquifer’s security model
                and its presence on the Navy Marine Corps Intranet (NMCI) network
                have
                attracted interest from Microsoft Federal and from Microsoft Business
                Development in Redmond. SMEI is partnering with NMCI formal Microsoft/SMEI
                case study describing the benefits of .NET and
                Aquifer.




SMEI’s
      goal is to turn every Aquifer customer into a reference account. SMEI believes
      that first hand testimonials describing the productivity gains with Aquifer
      are
      of great value and can significantly enhance sales and marketing
      efforts




5




**Ricciardi
      Technologies, Inc. (“RTI”)**




**About
      Ricciardi Technologies Inc.**




RTI
      was
      formed in 1992 with the goal of providing a cost-effective method for customers
      in both the private and public sector to meet their growing needs for dependable
      systems and software solutions. RTI provides turn-key solutions, as well as
      on-site consulting and engineering support. RTI has a diverse group of software
      and hardware engineers who practice proven design, development and
      implementation processes and standards. RTI is organized into four distinct
      divisions to better serve our clients’ focus and needs:





·
            RTI’s
                E-Solutions Divisioncombines its experience in mission critical systems,
                distributed systems, web development, and knowledge environments
                to
                provide our customers with cutting-edge IT solutions for distributed
                e-business and web infrastructure.





·
            RTI’s
                Mobile Solutions Division works closely with the other RTI divisions
                to
                provide support in the areas of wireless communication and portable
                device
                data management. MSD solutions deal with real-time data management
                as well
                as mission critical solutions to government/military and commercial
                customers.





·
            RTI’s
                Professional Services Division provides both on-site and off-site
                consulting and engineering support. PSD has formed long-term and
                on-going
                relationships with companies such as Lockheed Martin, Motorola, Logistics
                Management Institute, BAE Systems, and Hughes Network Systems, to
                support
                their continuing engineering and consulting
                needs.





·
            RTI’s
                Software Systems Division (SSD) provides hard core and/or real-time
                embedded and mission critical solutions to government, military and
                commercial customers.




·
            RTI
                is headquartered in Manassas Virginia, with additional on-site personnel
                at client locations in Virginia, Maryland, and
                California.




**Research
      and Development**





Our
      research efforts are focused on adapting new technologies to current and
      potential products. Efforts in research cover new techniques in software
      development and component technologies. We are continuously redesigning and
      updating our existing products to integrate the latest technologies. As we
      expand our products in existing markets and make initial steps into new markets,
      increases in research expenditures will become necessary.





**Intellectual
      Property**





In
      June
      1998, we were granted a patent (Patent No. 5,768,355) from the U.S. Patent
      and
      Trademark Office on a three-way call detection system.





On
      December 21, 2004 the United States Patent and Trademark Office issued trademark
      serial number 78326540 for the name “Aquifer.” SMEI has not yet received the
      Certificate of Registration.




No
      assurance can be given as to the scope of any patent protection. We believe
      that
      rapid technological developments in the communications and IT industries may
      limit the protection afforded by its patents. Since our patents precisely define
      the parameters of their technology, that information may allow competitors
      to
      modify the technology in order to circumvent the original patent. Accordingly,
      we believe that our success is dependent on its engineering competence, service,
      and the quality and economic value of products.




**Customer
      Support**




**Lattice
      Incorporated**





Our
      technical support staff provides telephone support to customers using a
      computerized call tracking and problem reporting system. We also provide initial
      installation and training services for our products. We have instituted an
      annual maintenance contract which entitles customers to software updates,
      technical support and technical bulletins.





**SMEI**





The
      SMEI
      team includes in-house experts in GIS supporting technologies such as ESRI’s
      ArcSDE, Oracle Spatial, UNIX and Windows to ensure a stable architecture and
      operating environment for enterprise applications. As current customers of
      this
      service, the Naval Information Technology Center (NITC) receives architectural
      and database support, systems integration analysis, and technical support from
      SMEI.


6




**Competition**





There
      are
      six major competitors in the call control platform field. Of these competitors,
      T-Netis and Evercom both provide call control systems as part of a
      telecommunications service offering. In addition, both of these companies sell
      directly to the correctional facilities while we only sell to service providers.
      We compete with these companies primarily by offering service providers
      customized call control features not available on any other platform. Our
      technology is primarily deployed in smaller facilities where large competitors
      do not directly compete. This has created a market to sell to smaller regional
      service provides where the competition does not require major capital
      expenditures or large-scale support. The larger facilities which make up the
      majority of the market share are controlled by the major carriers such as
      Verizon or by larger competitors such as Evercom and T-Netix. Although the
      regional carriers only account for a small percentage of the inmate market,
      the
      competitive landscape is more favorable to us. Key equipment providers that
      compete with us in this market are Omni Phone and Radical. Both companies
      manufacture call control systems for this market. Our key competitive advantage
      in this market is the features our technology provides and our 3-way call
      detection. ****





As
      a
      company offering IT services, SMEI’s services market is fragmented and highly
      competitive. SMEI faces competition from companies providing IT outsourcing
      and
      business process outsourcing solutions. SMEI also competes with software vendors
      in the .NET Web Application Services Platform market. Potential competitors
      of
      SMEI’s Aquifer software include:





·
            Kinitos,
                Inc. delivers an enterprise deployment solution that allows IT to
                maintain
                centralized control of existing Windows Forms clients. The Kinitos
                .NET
                platform centralizes control of the monitoring, deployment and updating
                of
                existing Windows Forms client applications throughout the network.
                It
                handles policy based client deployment and rollback, enables real
                time
                monitoring and delivers centralized reporting of client
                applications.





Kinitos
      also has a component that provides client-side “plumbing” for creating Windows
      Forms applications. It handles the communications from client to server,
      provides online/offline services, reliable messaging, logging and dynamic
      updating of client applications.





·
            ObjectWare,
                Inc. markets its IdeaBlades technology as an application development
                platform for the rapid creation of smart client applications. ObjectWare
                leverages Microsoft .NET technology to streamline development, deployment
                and maintenance processes while simplifying the supporting hardware
                and
                software environments.





**Government
      Regulation**





The
      Federal Communications Commission requires that some of our products meet Part
      15 and Part 68 of the Code of Federal Regulations. Part 15 (subpart B) deals
      with the suppression of radio frequency and electro-magnetic radiation to
      specified levels. Part 68 deals with protection of the telephone network. Other
      than Federal Communication Commission requirements, our business is not subject
      to material governmental regulation. Because all of the components used in
      our
      equipment are purchased from other suppliers, their components have already
      satisfied FCC requirements. As a result FCC regulation does not impact our
      product.





**EMPLOYEES**





As
      of
      April 14, 2008, we had 51 full time employees and no part time employees. We
      supplement full-time employees with subcontractors and part-time individuals,
      consistent with workload requirements. None of our employees are covered by
      a
      collective bargaining agreement. We consider relations with our employees to
      be
      good.





As
      of
      April 14, 2008, SMEI had 15 full time employees and one part time employee.
      None
      of SMEI’s employees are covered by a collective bargaining agreement. SMEI
      considers relations with its employees to be good.





As
      of
      April 14, 2008, RTI had 25 full time employees. None of RTI’s employees are
      covered by a collective bargaining agreement. RTI considers relations with
      its
      employees to be good.





**ITEM
      2. DESCRIPTION OF PROPERTY.**





We
      lease
      a 3,000 square foot office in an industrial park in Pennsauken, New Jersey.
      This
      space is also used to test our products and for other corporate activities.
      Our
      lease began June 1, 2006 and is for a term of three years at $2,812 per
      month.




SMEI
      leases a facility located at 2411 Dulles Corner Drive, Herndon Virginia 20171.
      The facility is comprised of 8,740 square feet of office space. The lease is
      pursuant to a Lease Agreement dated October 22, 2007. The lease commenced
      November 1, 2007 and ends October 31, 2010. SMEI currently pays $21,850 per
      month under the lease.


7




RTI
      leases a facility located at 8306 Rugby Road, Manassas VA. The facility is
      comprised of 3,166 square feet of space. The lease expired on March 31, 2007.
      RTI pays rent of $6,229.17 a month for the RTI facility.





**ITEM
      3. LEGAL PROCEEDINGS.**




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





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**




None


**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS.**





**MARKET
      INFORMATION**





Our
      common stock is currently quoted on the OTC Bulletin Board under the symbol
      “LTTC.” For the periods indicated, the following table sets forth the high and
      low sales prices per share of common stock. These prices represent inter-dealer
      quotations without retail markup, markdown, or commission and may not
      necessarily represent actual transactions. The prices below have been adjusted
      to reflect the one-for-ten reverse split.





Year
      Ended December 31, 2007


High
            
            LowFirst
                Quarter ended March 31, 2007
            
            $
            .90
            
            $
            .36Second
                Quarter ended June 30, 2007
            
            $
            .51
            
            $
            .30Third
                Quarter ended September 30, 2007
            
            $
            .51
            
            $
            .36Fourth
                Quarter ended December 31, 2007
            
            $
            .53
            
            $
            .20








Year
      Ended December 31, 2006


High
            
            LowFirst
                Quarter ended March 31, 2006
            
            $
            .90
            
            $
            .50Second
                Quarter ended June 30, 2006
            
            $
            .80
            
            $
            .60Third
                Quarter ended September 30, 2006
            
            $
            .70
            
            $
            .50Fourth
                Quarter ended December 31, 2006
            
            $
            .60
            
            $
            .40




The
      market price of our common stock, like that of other technology companies,
      is
      highly volatile and is subject to fluctuations in response to variations in
      operating results, announcements of technological innovations or new products,
      or other events or factors. Our stock price may also be affected by broader
      market trends unrelated to our performance.




**HOLDERS**




As
      of
      March 4, 2008, we had 16,829,950 outstanding shares of common stock held by
      approximately 312 stockholders of record. The transfer agent of our common
      stock
      is Continental Stock Transfer and Trust Company.




**DIVIDENDS**




On
      September 19, 2006, the Company entered into a private placement with Barron
      Partners LP (Barron), pursuant to which the Company sold Barron a convertible
      subordinated promissory note in the principal amount of $4.5 million (See Note
      9). As a result of the filing of our amended and restated certificate of
      incorporation with the State of Delaware, on February 2, 2007, the principal
      and
      interest due on the Barron note automatically converted into 7,826,087
      shares of Series A Convertible Preferred Stock.





Under
      the
      terms of the Series A Convertible Preferred Stock Certificate of Designation,
      the conversion rate of the preferred stock was to be adjusted based on whether
      the Company met certain operating performance criteria. The criteria was
      measured based on the operating results of fiscal 2007. During fiscal 2007
      the
      initial $0.23 per share conversion rate on the preferred stock was adjusted
      downward as the Company did not achieve $0.549 pre-tax earnings per share from
      continuing operations and excluding non-recurring items during fiscal 2007.
      The
      adjustment was limited to a maximum of 30%.





Pursuant
      to EITF 98-5 a contingent beneficial conversion feature is measured at
      commitment date but is not recognized in earnings until the contingency is
      resolved. The Company recognized an incremental deemed dividend and adjustment
      to retained earnings of $2,954,507, on December 31, 2007, representing the
      intrinsic value of the additional costs of the shares issued arising from the
      reduction in the preferred stock conversion rate (from $0.23 to $0.161 per
      share) arising from the effects of not attaining the 2007 operating performance
      targets.





The
      Company has also recorded dividends on the $1.000, 000 5% Series B Preferred
      Stock In 2007, the Company recorded $50,000 of dividends payable. Dividends
      can
      not be paid as long as the Company has an outstanding balance on its revolving
      line of credit.


8




**Equity
      Compensation Plan Information**





The
      following table sets forth the information indicated with respect to our
      compensation plans under which our common stock is authorized for issuance
      as of
      the year ended December 31, 2007.




**Plan
                category**
            
            **Number
                of**
              **securities**
              **to
                be issued**
              **upon**
              **exercise of**
              **outstanding**
              **options,**
              **warrants and**
              **rights**
            
            **Weighted average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and**
              **rights**
            
            **Number
                of**
              **securities**
              **remaining**
              **available
                for**
              **future
                issuance under equity compensation**
              **plans
                (excluding securities**
              **reflected
                in**
              **column
                (a)****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation plans approved by security holders**
            
            
            1,371,000
            
            $
            1.00
            
            
            467,000**Equity
                compensation plans not approved by security
                holders**
            
            
            -0-
            
            
            -0-
            
            
            -0-**Total**
            
            
            1,371,000
            
            $
            1.00
            
            
            467,000




**RECENT
      SALES OF UNREGISTERED SECURITIES**




None.





9





**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION.**




**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.




**GENERAL
      OVERVIEW**




Lattice
      Incorporated (formerly Science Dynamics) was incorporated in the State of
      Delaware in May 1973 and commenced operations in July 1977. We have been
      developing and delivering secure technologically advanced communication
      solutions for over twenty-five years.





10




**Business
      Overview**





We
      began
      as a provider of specialized solutions to the telecom industry. Currently we
      provide advanced solutions for several vertical markets. The greatest change
      in
      operations is in the shift from being a component manufacturer to a solutions
      provider focused on developing applications through software on its core
      platform technology. To further its strategy of becoming a solutions provider,
      we acquired a majority interest in “SMEI” in February 2005 and acquired “RTI” in
      September 2006.





On
      September 19, 2006, pursuant to a securities purchase agreement, we sold to
      Barron Partners LP, for $4,500,000 (a) a note in the principal amount of
      $4,500,000, and (b) common stock purchase warrants to purchase up to 12,500,000
      shares of common stock at $0.50 per share and 12,500,000 shares of common stock
      at $1.25 per share.





Pursuant
      to the purchase agreement, our board of directors approved, subject to
      stockholder approval, a restated certificate of incorporation which, among
      other
      provisions, affects a one-for-ten reverse split in our common stock, and agreed
      to submit the restated certificate of incorporation to the stockholders for
      their approval. The restated certificate of amendment was approved by the
      stockholders on December 18, 2006 and became effective on February 2,
      2007.





Upon
      the
      effectiveness of the restated certificate of incorporation, principal and
      interest due on the Note automatically converted into 7,826,087 shares of
      our series A preferred stock.





Each
      share of series A preferred stock is convertible into 2.5 shares of common
      stock
      subject to adjustment in certain instances, including the issuance by us of
      common stock at a price which is less than the conversion price applicable
      to
      the series A preferred stock (the “Series A Conversion Price”), which is $.23
      per share, subject to adjustment. In connection with this purchase, we paid
      brokerage fees of $234,000 to Dragonfly Capital Partners, LLC $125,000 to
      Colebrook Capital and $20,000 to Crescent Fund LLC. In addition, we issued
      to
      Dragonfly warrants to purchase 489,100 share of common stock at $.50 per share,
      and 489,100 shares of common stock at an exercise price of $1.25 per
      share





In
      September 2006, using the proceeds from the Barron financing, we acquired all
      of
      the issued and outstanding common stock of Ricciardi Technologies Inc. (“RTI”).
      Pursuant to the acquisition agreement with RTI, the consideration for stock
      of
      RTI consisted of (a) $3,500,000, which was paid from the proceeds of the sale
      of
      the Note and warrants to Barron, (b) 5,000,000 shares of common stock, (c)
      a
      $500,000 promissory note (the “RTI Note”), which if not paid sooner must be paid
      in full on the earlier of (i) twelve months from the closing date, or (ii)
      the
      consummation of a transfer of all or substantially all of our assets or equity
      securities to a third party, and (b) 1,000,000 shares of our Series B
      Convertible Preferred Stock. To secure the indemnification obligations of the
      former RTI stockholders, a portion of the purchase price, consisting of $350,000
      and 583,333 shares of common stock was placed in escrow for a period of 18
      months, subject to any claims that may arise under the agreement during the
      18-month warranty survival period. Pursuant to a registration rights agreement
      between us and the shareholders of RTI, the RTI shareholders were given certain
      registration rights.


11




Pursuant
      to the Laurus Agreement, on September 19, 2006, in exchange for the cancellation
      of the remaining balance of $1,500,000 on the original term note in the
      principal amount of $ 2,000,000, the Company (a) paid $500,000 in principal
      amount of the Term Note, (b) issued an amendment and restated note in the
      principal amount of $250,000, and (c) issued a warrant to purchase up to
      1,458,333 shares of common stock (subject to adjustment), upon the cashless
      exercise by the holder thereof for an imputed exercise price of $1.00 per
      share.





In
      connection with the Laurus Agreement, Laurus also executed a lock up agreement,
      pursuant to which it agreed that, provided the Company is not in default on
      the
      note, it will not without the written consent of the Company sell, offer,
      contract or grant any option to sell (including without limitation any short
      sale), pledge, transfer, establish an open “put equivalent position” within the
      meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended,
      or otherwise dispose of the Shares or publicly announce an intention to do
      any
      of the foregoing, for a period of five (5) months from September 19, 2006.
      Additionally, pursuant to an irrevocable Proxy, Laurus also gave us a proxy
      to
      vote all shares of Common Stock of the Company, now or in the future owned
      by
      Laurus to the extent such shares are issued to Laurus upon its exercise of
      its
      warrant to purchase 1,458,333 shares of common stock. Upon the sale or other
      transfer of the Shares, in whole or in part, or the assignment of the warrant,
      the proxy shall automatically terminate (x) with respect to such sold or
      transferred shares at the time of such sale and/or transfer, or (y) with respect
      to all shares in the case of an assignment of the warrant, at the time of such
      assignment, in each case, without any further action required by any
      person.





Pursuant
      to a letter agreement between us and the Keshet Fund LP and Keshet L.P.
      (collectively the “Keshet”), we agreed to issue 300,000 shares of common stock
      in consideration of the cancellation of all payment obligations arising under
      the convertible notes issued to Keshet by us. Additionally, Keshet will, at
      our
      expense, terminate all of its agreements with us, other than in respect of
      (x)
      indemnification and expense reimbursement provisions of such agreements and
      such
      other provisions thereof as expressly survive the payment in full of the
      obligations and (y) any options and/or warrants received by Keshet from
      us.





**RESULTS
      OF OPERATIONS - YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR
      ENDED**  **DECEMBER
      21, 2006**





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




12




For the Years Ending 
                December 31,2007
            
            2006Sales
            
            $
            15,217,827
            
            $
            7,494,888Net
                income (loss)
            
            $
            3,726,213
            
            $
            (15,551,433
            )Net
                income (loss) per common share - Diluted
            
            $
            0.01
            
            $
            (1.31
            )




OPERATING
                EXPENSES
            
            PERCENT
                OF SALES2007
            
            2006
            
            2007
            
            2006Research
                & Development
            
            
            432,069
            
            
            435,768
            
            
            2.8
            %
            
            5.8
            %Selling,
                General & Administrative
            
            
            6,113,338
            
            
            2,508,559
            
            
            40.2
            %
            
            33.5
            %Total
                Operating Costs and Expenses, less amortization
            
            $
            6,545,407
            
            $
            2,944,327
            
            
            43.0
            %
            
            39.3
            %




SALES:





Total
      Revenues for the fiscal year ended December 31, 2007 increased to $15,217,827
      compared to $7,494,888 in the prior year ended December 31, 2006, representing
      an increase of $7,722,939, or 103%. The revenue increase attributable to the
      acquisition of RTI (acquired revenues) in Sept 2006 was $5,299,000 or 71%.
      The
      remaining increase in revenues (32%) representing existing growth was mainly
      attributable to new contract vehicles and the expansion of existing contract
      vehicles in our Technology Services segment.




We
      derived 91% and 77% of our revenue during the twelve months ended
      December 31, 2007 and 2006, respectively, from contracts with U.S.
      government agencies which we segment as Technology Services. Our
      Technology Service revenues are derived from services and solutions provided
      to
      the federal government Dept of Defense (DoD) agencies or to prime contractors
      supporting the federal government, including services provided by our employees
      and our subcontractors.


13


COST
      OF
      SALES:





Cost
      of
      Sales for the fiscal year ended December 31, 2007 increased 151% to $8,423,090
      from $3,335,221 for the prior year ended December 31, 2006. The increase in
      cost
      of sales attributable to the RTI acquisition in Sept 2006 was $2,720,000 or
      82%.
      The remaining increase (69%) was attributable to organic growth and an increased
      use of subcontractors (higher component of cost of sales) to support our
      Technology Services revenues. Cost of sales in our Technology Services segment
      consists of direct
      labor and ODCs, which include, among other costs, subcontractor labor and
      materials along with equipment purchases and travel expenses. ODCs, which are
      common in the government contracting industry, typically are incurred in
      response to specific client tasks and may vary from period to period. As
      a
      percentage of revenues, cost of sales increased 10.6% to 55.4% from 44.8% for
      the same period in 2006. The increase was mainly due to a higher component
      of
      our costs of sales attributable to an increased use of subcontractors in support
      of our government contracts, primarily the JPMIS Seaport-e contract a material
      contract which was awarded late in the 3 rd quarter
      of 2007. If all options and award terms are exercised, this contract can
      generate revenue of $55 million over five years.




RESEARCH
      AND DEVELOPMENT:





Research
      and Development Expenses decreased slightly to $432,069 for the fiscal year
      ended December 31, 2007 from $435,768 in the year ended December 31, 2006.
      Engineering staffing levels are comparable to 2006 levels. Management believes
      that continual enhancements of the Company's products will be required to enable
      Lattice to maintain its competitive position. Lattice will have to focus its
      principal future product development and resources on developing new,
      innovative, technical products and updating existing products.




SELLING,
      GENERAL AND ADMINISTRATIVE:




Selling,
      General and Administrative Expenses ("SG&A") consist primarily of expenses
      for management, finance and administrative personnel, legal, accounting,
      consulting fees, sales commissions, non-cash depreciation and amortization
      expenses, marketing, and facilities costs. For the year ended December 31,
      2007,
      SG&A increased to $6,113,338 from $2,508,559 for the comparable year ended
      December 31, 2006, representing an increase of $3,604,779 or 144%. The RTI
      acquisition in Sept 2006 contributed $1,389,000 or 55% of the increase to
      SG&A costs for the period ended December 31, 2007. Also included in the
      increase were non-recurring expenses totaling approximately $750,000 incurred
      primarily in the 3 rd and
      4 th quarters
      of 2007consisiting of; integration expenses related to the RTI and SMEI
      acquisitions, office relocation costs , merger and acquisition expenses and
      management recruiting fees. The merger and acquisition expenses incurred in
      the
      4 th quarter
      were approximately $250,000 and were related to a transaction which failed
      to
      close. Additionally, our CEO had waived his salary in the 1 st half of
      2006 accounting for approximately $100,000 of the 2007 increase over prior
      year.
      Also included in our SG&A was $245,760 and $90,612 in share-based
      compensation expense under SFAS No. 123R, for the years ended
      December 31, 2007 and 2006, respectively. The remaining increase was
      attributable to added SG&A costs incurred to accommodate the RTI and SMEI
      acquisitions and prepare for future growth. As a percentage of revenues,
      SG&A costs increased to 40.2% from 33.5% for the years ended December 31,
      2007 and 2006 respectively. Excluding nonrecurring items, our SG&A as a
      percentage of revenues for 2007 was 35.2% compared to 33.5% for the year ago
      period.





AMORTIZATION





Non-cash
      amortization expense for 2007 and 2006 related to intangible assets recognized
      in the purchase accounting of SMEI and RTI amounted to $1,990,164 and $739,454
      respectively.




INTEREST
      EXPENSE;





Interest
      Expense consists of interest paid and accrued on: outstanding convertible notes,
      amortization of debt discount, notes payable, interest due on loans from
      stockholders. Interest expense decreased to $494,414 for the year ended December
      31, 2007 from $704,178 for the prior year ended December 31, 2006. Included
      in
      interest expense for 2007 was $316,427 related to derivative accounting of
      the
      2006 Barron Convertible Note and the 2005 Laurus Convertible Note. The
      derivative interest expense arises from amortizing to the face or redemption
      value (using the effective interest method) the discounted value of the host
      debt instrument. Included in interest expense for 2006 was $371,753 related
      to
      the derivative accounting of the 2006 Barron Convertible Note and the 2005
      Laurus Convertible Note. Excluding the effects of the derivative expense,
      interest costs decreased slightly to $177,987 from $332,425 in 2006. During
      February 2007, the Barron debt was automatically converted into preferred
      stock.





FINANCE
      EXPENSE:





Finance
      Expense for the year ended December 31, 2007 amounted to $99,279, compared
      to
      $1,334,335 for the year ended December 31, 2006. Finance expense in 2007
      represents our amortization of deferred financing fees that were incurred with
      the September 2006 Barron financing amounting to $33,530. Financing expense
      also
      includes $65,749 of estimated damages under registration payment arrangements
      that we will have to pay for delays in the meeting registration effectiveness
      dates. Subsequent to year-end, the Company and the investors settled these
      liquidated damages. However, the contractual provisions of the registration
      payment arrangements remain in effect and, accordingly, the Company may again
      be
      required to accrue registration payments if and when such amounts become both
      probable and reasonably estimable.




DERIVATIVE
      INCOME (EXPENSE):





The
      following table is derived from Note 10 in the accompanying financial
      statements.




Year
                ended
              December
                31, 2007
            
            Year
                ended
              December
                31, 2006Derivative
                  income (expense)
            
            $
            (467,120
            )
            $
            (13,858,526
            )Conversion
                  features and day-one derivative loss
            
            $
            5,438,051
            
            $
            105,231Warrant
                  derivative
            
            $
            4,970,931
            
            $
            (13,753,295
            )





As
      provided in the discussion of the Company’s accounting policies in Note 1,
      derivative financial instruments are recorded initially and subsequently at
      fair
      value. 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, estimated terms and risk free rates) necessary to fair
      value
      these instruments. For complex derivative instruments, such as embedded
      conversion options, the Company generally uses the Flexible Monte Carlo
      valuation technique because it embodies all of the requisite assumptions
      (including credit risk, interest-rate risk and exercise/conversion behaviors)
      that are necessary to fair value these more complex instruments. For forward
      contracts that contingently require net-cash settlement as the principal means
      of settlement, the Company projects and discounts future cash flows applying
      probability-weightage to multiple possible outcomes. Estimating fair values
      of
      derivative financial instruments requires the development of significant and
      subjective estimates that may, and are likely to, change over the duration
      of
      the instrument with related changes in internal and external market factors.
      In
      addition, option-based techniques are highly volatile and sensitive to changes
      in the trading market price of our common stock, which has a high-historical
      volatility. Since derivative financial instruments are initially and
      subsequently carried at fair values, the Company’s income (loss) will reflect
      the volatility in these estimate and assumption changes.





It
      should
      be noted that during February 2007, the Company was able to reclassify the
      conversion feature in the above table to stockholders’ equity. Accordingly, no
      further fair value adjustments will arise from this feature. However, the
      warrants continue to require liability classification and fair value
      measurement. As noted in the preceding paragraph, the effects on our future
      income will be affected, possibly significantly, by the changes in the
      assumptions underlying our valuation techniques.





EXTINGUISHMENT
      LOSS:





On
      February 7, 2007, the Company entered into a letter agreement with Barron which
      provided for (i) the waiver of all accrued and unpaid liquidated damages for
      not
      filing the registration statement and (ii) the extension to a later date of
      certain mandated events, such as the re-composition of the Board. This waiver
      required compensation in the form of warrants to purchase 1,900,000 shares
      of
      common stock which were valued at approximately $1,031,000 using the
      Black-Scholes-Merton technique. The accrued liability settled amounted to
      $874,000 and, accordingly, the difference between the fair value of the warrants
      and the carrying amount of the liability was recognized as a loss on
      extinguishment of approximately $151,000.





NET
      INCOME (LOSS):





The
      Company's net income for the year ended December 31, 2007 was $3,626,213 which
      compared to a net loss of $(15,551,433) for the year ended December 31, 2006.
      Net income (loss) is influenced by the matters discussed in the other sections
      of this MDA However, it should be noted that net loss included $4,970,932 of
      derivative income which represents the decrease in fair value of derivative
      liabilities (principally compound derivatives that were bifurcated from hybrid
      convertible securities and non-exempt warrants). See Derivative Income (Expense)
      above where we discuss the material assumptions underlying fair value
      adjustments and their potential effect on income.





INCOME
      (LOSS) APPLICABLE TO COMMON STOCKHOLDERS:





Income
      (loss) applicable to common stock gives effect to our net income (loss),
      cumulative undeclared dividends on our Series B Preferred Stock amounting to
      $50,000 and $8,333 for the year ended December 31, 2007 and 2006, respectively.
      Income applicable to common stockholders’ serves as the numerator in our basic
      earnings per share calculation. We will continue to reflect cumulative preferred
      stock dividends until the preferred stock is converted into common, if ever.
      In
      connection with our adjustment to the conversion price of the Series A
      Convertible Preferred Stock on December 31, 2007, we recorded deemed dividends
      of $2,954,507. These deemed dividends are reflected as an adjustment to net
      income for year ended 2007 to arrive at net loss applicable to common
      stockholders on the consolidated statement of operations and for purposes of
      calculating basic and diluted earnings per shares.


14





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company’s auditors have expressed a going concern opinion in their audit reports
      for 2007 and 2006. Management acknowledges the basis for the going concern
      opinion, given the Company’s historical net losses and working capital deficits.
      However, it should be noted that the Company has made significant improvements
      in its operating performance in 2007. The Company has increased its sales by
      approximately 103% compared to 2006, through organic growth and acquisitions
      and
      reported positive cashflow from operating activities of $1,086,050 for 2007
      compared to negative operating cashflow of $212,135 in 2006. The Company has
      also repaid short term debt totaling $833,000 in 2007. Additionally, upon the
      effectiveness of its restated certificate of incorporation on February 2, 2007,
      the Company was able to convert its $4.5M note with Barron to Series A Preferred
      Stock. Given these events collectively and the anticipation that the positive
      trends will continue, management expects the going concern opinion to be removed
      from future filings.





At
      December 31, 2007, the Company’s current assets of $4,803,306 compared to
      current liabilities of $13,751,680. Current liabilities included $7,217,099
      of
      non-cash derivative liabilities and a $1,500,000 accrued liability in accordance
      with an earn-out provision of the RTI securities purchase agreement. The
      earn-out provision was based on performance targets set for the 12 month
      anniversary from the date of acquisition (September 19, 2006). The cash earn-out
      payment of $1,500,000 will become payable at May 31, 2008. Excluding the
      derivative liabilities and the earn-out contingency, our total current
      liabilities were $5,034,581 which compared to current assets of $4,803,306
      at
      December 31, 2007. Subsequent to December 31, 2006 the Company reclassified
      $7,223,000 of derivative liabilities to stockholders’ equity upon achieving
      equity classification conditions for the embedded conversion feature previously
      bifurcated from certain hybrid debt agreements and fair value adjustments to
      remaining derivative financial instruments that continue to require liability
      classification and fair value measurement. However, the remaining derivative
      balance after this reclassification of $7,217,099 relates to certain warrants
      that do not achieve equity classification under current accounting standards.
      Other components of our working capital and changes therein are discussed as
      follows:





Cash
      and
      cash equivalents increased to $769,915 at December 31, 2007 from $392,275 at
      December 31, 2006. Net cash provided from operating activities was $1,086,050
      for the twelve months ended December 31, 2007 compared to net cash used by
      operating activities of $212,135 in the corresponding twelve months ended
      December 31, 2006. The $1,086,050 cash provided form operating activities
      consisted of; a net income of $3,626,213 favorably offset by non-cash finance
      expense of $91,589, minority interest expense of $79,038, an increase in
      accounts payable and accrued expenses of $2,294,270 offset by; non-cash income
      items totaling $2,186,878, a non-cash tax benefit of $1,225,976, an increase
      in
      inventory of $1,404 and an decrease in deferred revenue of $62,495, an increase
      in our accounts receivable of $1,427,580, and an increase in other assets of
      $100,727. The increase in receivables of $1,427,580 was mainly due to higher
      4 th quarter
      revenues compared to a year ago combined with some processing delays in
      collecting government receivables as a result of funding modifications made
      to
      task orders on a couple of our government contract vehicles. The processing
      delays have since been resolved in the 1 st quarter
      of 2008 and our level of receivables is in line with industry standards.




Net
      cash
      used in investment activities was $24,916 for the twelve months ended December
      31, 2007 compared to $3,548,703 in the corresponding period ended December
      31,
      2006. The investment in 2006 consisted mainly of the net cash component of
      the
      RTI purchase price combined with direct acquisition costs totaling $3,508,866.
      Purchase of Property, Plant and equipment totaled $24,916 for 2007 compared
      to
      $39,837 prior year. With revenues mostly focused on services, there is not
      a
      significant requirement for capital expenditures. The capital requirement is
      limited to mostly personal computers, in-house servers and network
      infrastructure.




Net
      cash
      used by financing activities was $683,494 for the twelve months ended December
      31, 2007 compared to net cash provided by financing activities of $4,099,116
      in
      the corresponding twelve months ended December 31, 2006. The $683,494 consisted
      of; repayments of short term notes totaling $833,000 favorably offset by
      increased borrowings on our line of credit facility of
      $149,506.


15




On
      November 10, 2006, the Company secured a Line of Credit facility with Greater
      Bay Business Funding ("GBBF") for $2,000,000. The line is primarily secured
      by
      the Company's accounts receivables. The Advance Rate is 85%. Interest on the
      line will be charged at the rate of prime plus 6%. Upon securing the line with
      GBBF, the Company closed the line of credit and repaid in full the outstanding
      balance with Presidential Financial Group. The outstanding balance with GBBF
      was
      $740,254 as of December 31, 2007.





On
      March
      7, 2008, Lattice Incorporated (the “Company”) paid off the CAPCO line and
      entered into a Loan and Security Agreement (the “Loan Agreement”) with the
      Private Bank of Peninsula (“Private Bank”) pursuant to which Private Bank agreed
      to extend a line of credit of up to $4.0 million to the Company. Pursuant to
      the
      Loan Agreement, the Company can request advances on the Line of Credit, which
      in
      the aggregate do not exceed 85% of the Company’s eligible accounts. The Line of
      Credit bears interest at 3% above the Prime Rate.




Liquidity
      is our ability to generate sufficient cash flows from operating activities
      to
      meet our obligations and commitments. In addition, liquidity includes the
      ability to obtain appropriate financing. Currently, our financing requirements
      are primarily driven by working capital requirements and debt repayments. At
      December 31, 2007, we had $769,915 in cash and cash equivalents. We
      originally anticipated that our expected cashflows from operations and the
      availability on our Credit Facility together will provide the necessary
      liquidity to support operations and any payments coming due in the next twelve
      months. Since that time, we have experienced follow-on task order and funding
      delays on several of our existing contract vehicles which have negatively
      impacted our profitability and cashflows from operations in the 4 th quarter
      of 2007 and into the 1 st quarter
      of 2008. As a result, we are projecting that our cash position together with
      the
      availability on our line of credit with Private Bank will be insufficient to
      pay
      the $1,500,000 earn-out payment due the former RTI owners on May 30, 2008.
      We
      are projecting a shortfall of approximately $1,000,000. Management has been
      actively engaged in seeking alternative financing to make up for this shortfall.
      As of the time of this filing, we have not been able to secure the necessary
      financing.




**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, results of
      operations, liquidity or capital expenditures.




**CRITICAL
      ACCOUNTING POLICIES AND SENSITIVE ESTIMATES:**





**Use
      of Estimates**





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




**Basis
      of Financial Statement Presentation**





The
      Company’s auditors have expressed a going concern opinion in their audit reports
      for 2007 and 2006. Management acknowledges the basis for the going concern
      opinion, given the Company’s historical net losses and working capital deficits.
      However, it should be noted that the Company has made significant improvements
      in its operating performance in 2007. The Company has increased its sales by
      approximately 103% compared to 2006, through organic growth and acquisitions,
      posted positive operating cashflow of $1,086,050 versus negative operating
      cashflow of $212,135 in 2006. Additionally, upon the effectiveness of its
      restated certificate of incorporation on February 2, 2007, the Company was
      able
      to convert its $4.5M note with Barron to Series A Preferred Stock. Given these
      events collectively and the anticipation that the positive trends will continue,
      management expects the going concern opinion to be removed from future
      filings.




**Principles
      of Consolidation**





The
      consolidated financial statements included the accounts of the Company and
      all
      of its subsidiaries in which a controlling interest is maintained. All
      significant inter-company accounts and transactions have been eliminated in
      consolidation. For those consolidated subsidiaries where Company ownership
      is
      less than 100%, the outside stockholders' interests are shown as minority
      interests.





**Derivative
      Financial Instruments**





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




**Revenue
      Recognition**





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





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


16




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


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




**Impairments
      of long-lived assets**





At
      least
      annually, the Company reviews all long-lived assets with determinate lives
      for
      impairment. Long-lives assets subject to this evaluation include property and
      equipment and intangible assets that amount to $13,011,233 (or 73%) of total
      assets at December 31, 2007. The Company considers the possibility that
      impairments may be present when indicators of impairment are present. In the
      event that indicators are identified or, if within management’s normal
      evaluation cycle, the Company establishes the presence of possible impairment
      by
      comparing asset carrying values to undiscounted projected cash flows. The
      preparation of cash flow projections requires management to develop many, often
      subjective, estimates about the Company’s performance. These estimates include
      consideration of revenue streams from existing customer bases, the potential
      increase and decrease in customer sales activity and potential changes in the
      Company’s direct and indirect costs. In addition, if the carry values of
      long-lived assets exceed undiscounted cash flow, the Company would estimate
      the
      impairment based upon discounted cash flow. The development of discount rates
      necessary to develop this cash flows information requires additional assumptions
      including the development of market and risk adjusted rates for discounting
      cash
      flows. While management utilizes all available information in developing these
      estimates, actual results are likely to be different than those
      estimates.





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


17




**RISKS
      RELATED TO OUR****BUSINESS**




**Except
      for the net income generated during the year ended December 31, 2007, we have
      a
      history of losses and expect to incur losses for the foreseeable
      future.**





We
      generated net income of $3,726,213 for the year ended December 31, 2007 as
      compared to a net loss of $(15,551,433) for the year ended December 31, 2006.
      The Company’s net loss for the year ended December 31, 2006 included derivative
      expense of $13,753,295. We cannot assure you that we will be able to operate
      profitably in the future.





**Because
      we depend on government contracts for most of our revenues, loss of government
      contracts or a reduction in funding of government contracts could adversely
      affect our revenues and cash flows.**





Revenue
      from contracts with agencies of the United States government accounted for
      approximately $13,853,580, or 91% of sales, for the year ended December 31,
      2007
      as compared to $5,802,836, or 77% of our sales for the year ended December
      31, 2006. Our government contracts are only funded on an annual basis, and
      the government agencies may require re-bidding before a contract is renewed,
      with no assurance that we will be awarded an extension of the contract. Further,
      agencies of the United States government may cancel these contracts at any
      time
      without penalty or may change their requirements, programs or contract budget
      or
      decline to exercise options. Any such action by the government agencies could
      result in a decline in sales and cash flows.





**Because
      we sell our products and services in highly competitive markets, we may not
      be
      able to compete effectively.**





Competition
      for our products and services are highly competitive. In offering our services,
      we compete with a number of companies some of which are considerably larger
      than
      we are, including major defense contractors who offer technology services as
      well as other products to government agencies. In addition, there are numerous
      smaller companies that offer both general and specialized services to both
      government agencies and commercial customers. In marketing our technology
      products, we compete with a number of large companies, including defense
      contractors, and smaller companies. In selecting vendors, the government
      agencies consider such factors as whether the product meets the specifications,
      the price at which the product is sold and the perceived ability of the vendor
      to deliver the product in a timely manner. Competitors may use our financial
      condition and history of losses in competing with us.


18




**We
      depend on a limited number of suppliers for certain parts, the loss of which
      could result in production delays and additional
      expenses.**





Although
      most of the parts used in our products are available from a number of different
      suppliers on an off-the-shelf basis, certain parts are available from only
      one
      supplier, specifically, certain circuit boards from Natural Micro Systems.
      Although we believe that our technology is adaptable to other suppliers; it
      would require two to four months of development work that could delay other
      engineering initiatives, and as a result the added costs and delays could hurt
      our business.





**If
      our products and services fail to perform or perform improperly, revenues and
      results of operations could be adversely affected and we could be subject to
      legal action to recover losses incurred by our customers.**





Products
      as complex as ours may contain undetected errors or “bugs,” which may result in
      product failures or security breaches or otherwise fail to perform in accordance
      with customer expectations. Any failure of our systems could result in a claim
      for substantial damages against us, regardless of our responsibility for the
      failure. Although we maintain general liability insurance, including coverage
      for errors and omissions, we cannot assure you that our existing coverage will
      continue to be available on reasonable terms or will be sufficient to cover
      one
      or more large claims, or that the insurer will not disclaim coverage as to
      any
      future claim. The occurrence of errors could result in loss of data to us or
      our
      customers which could cause a loss of revenue, failure to achieve acceptance,
      diversion of development resources, injury to our reputation, or damages to
      our
      efforts to build brand awareness, any of which could have a material adverse
      affect on our market share, revenues and, in turn, our operating
      results.





**Changes
      in technology and our ability to enhance our existing products, including
      research and development, will require technical and financial resources, the
      unavailability of which could hinder sales of our products and result in
      decreased revenues.**





The
      markets for our products, especially the telecommunications industry, change
      rapidly because of technological innovation, changes in customer requirements,
      declining prices, and evolving industry standards, among other factors. To
      be
      competitive, we must both develop or have access to the most current technology
      and incorporate this technology in our products in a manner acceptable to our
      customers. Our failure to offer our customers the most current technology could
      affect their willingness to purchase our products, which would, in turn, impair
      our ability to generate revenue.




**If we
      lose our security clearance our business could be adversely
      affected.**





Certain
      of our contracts with government agencies require us to maintain security
      clearances.  Although our subsidiaries have the clearances necessary to
      perform under our current contracts, the federal government could at any
      time in its discretion remove these security clearances, which could effect
      our
      ability to get new contracts.





**If
      we make any acquisitions, they may disrupt or have a negative impact on our
      business.**




We
      have
      recently made acquisitions and we may make additional acquisitions in the
      future. If we make acquisitions, we could have difficulty integrating the
      acquired companies’ personnel and operations with our own. In addition, the key
      personnel of the acquired business may not be willing to work for us. We cannot
      predict the affect expansion may have on our core business. Regardless of
      whether we are successful in making an acquisition, the negotiations could
      disrupt our ongoing business, distract our management and employees and increase
      our expenses. In addition to the risks described above, acquisitions are
      accompanied by a number of inherent risks, including, without limitation, the
      following:




·
            the
                difficulty of integrating acquired products, services or
                operations;




·
            the
                potential disruption of the ongoing businesses and distraction of
                our
                management and the management of acquired
                companies;




·
            the
                difficulty of incorporating acquired rights or products into our
                existing
                business;




·
            difficulties
                in disposing of the excess or idle facilities of an acquired company
                or
                business and expenses in maintaining such
                facilities;




·
            difficulties
                in maintaining uniform standards, controls, procedures and
                policies;




19




·
            the
                potential impairment of relationships with employees and customers
                as a
                result of any integration of new management
                personnel;





·
            the
                potential inability or failure to achieve additional sales and enhance
                our
                customer base through cross-marketing of the products to new and
                existing
                customers;




·
            the
                effect of any government regulations which relate to the business
                acquired;




·
            potential
                unknown liabilities associated with acquired businesses or product
                lines,
                or the need to spend significant amounts to retool, reposition or
                modify
                the marketing and sales of acquired products or the defense of any
                litigation, whether of not successful, resulting from actions of
                the
                acquired company prior to our
                acquisition.




Our
      business could be severely impaired if and to the extent that we are unable
      to
      succeed in addressing any of these risks or other problems encountered in
      connection with these acquisitions, many of which cannot be presently
      identified, these risks and problems could disrupt our ongoing business,
      distract our management and employees, increase our expenses and adversely
      affect our results of operations.




**We
      may not be able to enhance our existing products to address of other
      market**




The
      first
      step on realizing our business development strategy requires us to enhance
      current products so they can meet the needs of other markets. If we are unable
      to do this, we may not be able to increase our sales and further develop our
      business.





**RISKS
      RELATING TO OUR COMMON STOCK**





**The
      potential issuance of a significant number of shares upon exercise or conversion
      of convertible securities and notes may depress the market price of our common
      stock.**





As
      of
      April 15, 2008, we had 16,829,950 shares of common stock issued and outstanding
      and 33,828,432 shares of common stock were issuable upon conversion of our
      convertible securities and warrants. The sale or potential sale of these shares
      issuable pursuant to convertible securities and warrants may result is
      substantial dilution to the holders of common stock and these factors may have
      a
      depressive effect upon the market price of our common stock.





**We
      are now required to pay liquidated damages because the registration
      statement of which this prospectus is a part was not declared effective in
      a
      timely manner. We may also be required to pay liquidated damages if we do not
      maintain a board consisting of a majority of independent
      directors.**




The
      registration rights agreement, as amended, which we executed in connection
      with
      the private placement with Barron Partners LP required us to file a registration
      statement by February 12, 2007 and to have the registration statement declared
      effective by the SEC within 120 days of February 12, 2007. The registration
      statement was not declared effective by February 12, 2007. Thus, we are required
      to issue 575.6 shares of series A preferred stock to the investors for each
      day that we fail to meet either of the scheduled dates or if we fail to keep
      the
      registration statement effective thereafter. The registration statement was
      declared effective by the SEC on October 5, 2007. As of April 15, 2008, we
      have
      issued an aggregate of 52,599 shares of series A preferred stock as a result
      of
      our registration statement not being declared effective.




The
      purchase agreement relating to the private placement with Barron Partners LP
      requires us to maintain a board of directors on which a majority of directors
      are independent directors and an audit committee composed solely of independent
      directors and a compensation committee with a majority of independent
      directors. Our failure to continue to meet these requirements could result
      in
      our payment of liquidated damages that could be payable in cash or by the
      issuance of additional shares of series A preferred stock, as the investors
      shall determine.





**The
      volatility of and limited trading market in our common stock may make it
      difficult for you to sell our common stock for a positive return on your
      investment.**





The
      public market for our common stock has historically been very volatile. Over
      the
      past two fiscal years, the market price for our common stock has ranged from
      $0.20 to $0.90. Any future market price for our shares is likely to continue
      to
      be very volatile. Further, our common stock is not actively traded, which may
      amplify the volatility of our stock. These factors may make it more difficult
      for you to sell shares of common stock.




20


**Because
      we are subject to the “penny stock” rules, you may have difficulty in selling
      our common stock.**




Because
      our stock price is less than $5.00 per share, our stock is subject to the SEC’s
      penny stock rules, which impose additional sales practice requirements and
      restrictions on broker-dealers that sell our stock to persons other than
      established customers and institutional accredited investors. The application
      of
      these rules may affect the ability of broker-dealers to sell our common stock
      and may affect your ability to sell any common stock you may own.




According
      to the SEC, the market for penny stocks has suffered in recent years from
      patterns of fraud and abuse. Such patterns include:




·
            Control
                of the market for the security by one or a few broker-dealers that
                are
                often related to the promoter or
                issuer;




·
            Manipulation
                of prices through prearranged matching of purchases and sales and
                false
                and misleading press releases;




·
            “Boiler
                room” practices involving high pressure sales tactics and unrealistic
                price projections by inexperienced sales
                persons;




·
            Excessive
                and undisclosed bid-ask differentials and markups by selling
                broker-dealers; and




·
            The
                wholesale dumping of the same securities by promoters and broker-dealers
                after prices have been manipulated to a desired level, along with
                the
                inevitable collapse of those prices with consequent investor
                losses.




**As
      an issuer of “penny stock” the protection provided by the federal securities
      laws relating to forward looking statements does not apply to
      us.**





**ITEM
      7. FINANCIAL STATEMENTS.**





All
      financial information required by this Item is attached hereto at the end of
      this report beginning on page F-1 and is hereby incorporated by reference.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.**




On
      December 30, 2007, the Company was notified that Peter C. Cosmas, CPAs, (“Former
      Auditor”), resigned as independent registered public accountants for the
      Company.





On
      January 22, 2008, the Company engaged Demetrius & Company L.L.C.
      (“Demetrius”) as its new independent registered accountants to audit its 2007
      financial statements, which engagement was approved by the Company’s board of
      directors.





The
      audit
      reports of the Former Auditor on the financial statements of the Company for
      the
      two most recent fiscal years of 2006 and 2005 and through the date of this
      Current Report did not contain an adverse opinion or a disclaimer of opinion,
      and were not qualified or modified as to uncertainty, audit scope or accounting
      principles. The Company’s auditors have expressed a going concern opinion in
      their audit reports for 2006 and 2005. Management acknowledged the basis for
      the
      going concern opinion, given the Company’s net losses and working capital
      deficits.





In
      connection with the audit of the Company's financial statements for the two
      most
      recent fiscal years of 2006 and 2005 and through the date of this report, there
      were: (i) no disagreements between the Company and the Former Auditor on any
      matters of accounting principles or practices, financial statement disclosure,
      or auditing scope or procedures, which disagreements, if not resolved to the
      satisfaction of the Former Auditor, would have caused the Former Auditor to
      make
      reference to the subject matter of the disagreement in their reports on the
      Company's financial statements for such years, and (ii) no reportable events
      within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.





The
      Company engaged Demetrius as of January 22, 2008. A partner at Demetrius was
      engaged to perform independent concurring partner reviews for the Former Auditor
      on Company engagements for the past three years, as required by the standards
      of
      the Public Company Accounting Oversight Board (PCAOB). This review consisted
      of
      reading the auditors report and financial statements for compliance with U.S.
      generally accepted accounting principals (GAAP). Demetrius also read the body
      of
      form 10-KSB for any inconsistencies with the financial statements. The
      concurring review also consisted of examining certain audit documentation and
      discussing with the lead partner and other engagement personnel of any unusual
      or significant auditing, accounting or reporting matters. Demetrius had no
      direct contact with the Company’s personnel or officers and was contracted by
      and worked for the Former Auditor. Accordingly, the Company had no consultations
      during the fiscal years 2006, 2005 and the subsequent interim period through
      January 22, 2008 with Demetrius, with respect to the application of accounting
      principles to a specific completed or contemplated transaction or the type
      of
      audit opinion that might be rendered on the Company’s financial
      statements.





**ITEM
      8A(T). CONTROLS AND PROCEDURES.**


During
        the course of the audit,
        our auditors determined that accounting errors were made in the accounting
        for
        and disclosing for deferred tax liabilities and goodwill in the connection
        with
        the acquisitions of SMEI and RTI during the years ended December 31, 2006
        and
        December 31, 2005.  In accordance with the proposed adjustments by our
        auditors, we have recorded the required deferred tax liabilities and
        corresponding increases to goodwill.  Management has determined that such
        adjustments did not require a restatement of our financial statements for
        the
        year ended December 31, 2006 as there was no impact on our statement of
        operations.  In addition, we determined that the limited financial
        backgrounds of members of our executive management beyond our chief financial
        officer are inhibiting our financial reporting process.  Accordingly, we
        plan on hiring additional personnel with more substantial financial backgrounds.
 
 As
        a
        result, we have determined that our disclosure controls were not effective
        as of
        the end of the period covered by this report.




**Management’s
      Report on Internal Control over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Our internal control system was designed
      to
      provide reasonable assurance to our management and Board of Directors regarding
      the preparation and fair presentation of published financial
      statements.





Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, it used the
      changing criteria set forth by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (COSO) in *Internal
      Control—Integrated Framework* . Based
      on
      our assessment we believe that, as of December 31, 2007, our internal control
      over financial reporting is effective based on those criteria.





This
      annual report does not include an attestation report of the Company’s registered
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission





**ITEM
      8B. OTHER INFORMATION.**




None.


21





**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      SECTION 16(A) OF THE EXCHANGE ACT.**





**EXECUTIVE
      OFFICERS, DIRECTORS AND KEY EMPLOYEES**




The
      following table sets forth the names and ages of the members of our Board of
      Directors and our executive officers and the positions held by each. There
      are
      no family relationships among any of our Directors and Executive
      Officers.





**Name**
            
            **Age**
            
            **Position**Paul
                Burgess
            
            42
            
            President,
                chief executive officer and directorJoe
                Noto
            
            48
            
            Chief
                financial officer and secretaryEric
                D. Zelsdorf
            
            41
            
            Chief
                technology officerJeannemarie
                Devolites Davis
            
            51
            
            DirectorRobert
                E. Galbraith
            
            63
            
            DirectorDonald
                Upson
            
            53
            
            Director




**BACKGROUND
      OF EXECUTIVE OFFICERS AND DIRECTORS**




***Paul
      Burgess, President, Chief Executive Officer and
      Director.***  **** From
      March 1, 2003 until February 14, 2005, Mr. Burgess was our Chief Operating
      Officer. As of February 9, 2005, Mr. Burgess was appointed our President and
      Chief Executive Officer. On February 14, 2005, Mr. Burgess was appointed a
      member of our Board of Directors. From January 2000 to December 2002, Mr.
      Burgess was President and Chief Financial Officer of Plan B Communications.
      Prior to Plan B Communications, Mr. Burgess spent three years with MetroNet
      Communications, where he was responsible for the development of MetroNet’s coast
      to coast intra and inter city networks. Mr. Burgess was also influential in
      developing the operations of MetroNet during the company’s early growth stage.
      Prior to joining MetroNet, Mr. Burgess was with ISM, a company subsequently
      acquired by IBM Global Services, where he was responsible for developing and
      deploying the company’s distributed computing strategy.





***Joe
      Noto, Chief Financial Officer and Secretary.*** Mr. Noto
      joined Lattice in March 2005 as Vice President of Finance and served in that
      position until May 2005 when he accepted the position of Chief Financial
      Officer. Prior to joining the Company, from 2002 to 2005, Mr. Noto was
      VP/Controller heading financial operations at Spectrotel Inc. (formerly Plan
      B
      Communications), a communications service provider. From 2000 to 2002, Mr.
      Noto
      was the Finance Director at Pivotech Systems, a communications software start-up
      Company. Mr. Noto holds a B.A. degree from Rutgers College and is a Certified
      Public Accountant of New Jersey and is a member of the American Institute of
      CPA’s and the New Jersey Society of CPA’s.




***Eric
      D. Zelsdorf, Chief Technology Officer*** . Mr.
      Zelsdorf founded SMEI in 1997 and since then he has been the Chief Technology
      Officer, President and a Director of SMEI. Mr. Zelsdorf has led SMEI since
      its
      inception and currently advises clients as well as industry standards groups
      on
      the implementation of secure Web services and enterprise architecture and
      integration. From 1992 to 1997, Mr. Zelsdorf was Vice President and Chief
      Technology Officer for ECG, Inc.





***Robert
      E. Galbraith, Director.*** Mr.
      Galbraith is currently a consultant to firms seeking innovative technical
      solutions in the security marketplace. Areas in which Mr. Galbraith has
      consulted include: data encryption, internet telephony (VoIP), intelligent
      data
      recording, secure local and wide area network solutions, physical security
      and
      biometric security. Prior to consulting, Mr. Galbraith was President, owner
      and
      technical administrator of Secure Engineering Services, Inc. (“SESI”) from its
      inception in 1979 until the firm was sold in 1996. During this period, SESI
      provided services and equipment to the U.S. Forces and NATO component Forces
      in
      Europe. Clients included the U.S. Army, Navy and Air Force, the SHAPE Technical
      Center, Euro Fighter Program, Sandia Labs, JPL, MITRE and NATO
      programs.





**Jeannemarie
      Devolites Davis, Director.** Ms.
      Davis has been a member of our board of directors since January 2007. Ms. Davis
      is a member of the Virginia State Senate. Ms. Davis served in the Virginia
      House of Delegates for three terms, before being elected to the State Senate.
      Ms. Devolites is also a partner with ICG Government, a technology consulting
      group. Ms. Davis earned a BA in Mathematics from the University of Virginia
      in
      1978.


22




**Donald
      Upson, Director.** Mr.
      Upson has been a member of our board of directors since January 2007 **.** Mr.
      Upson recently retired as the Commonwealth of Virginia’s first Secretary of
      Technology. Mr. Upson has more than two decades of government, corporate, and
      high technology experience. Mr. Upson is a graduate of California State
      University Chico.




**BOARD
      COMPOSITION**




At
      each
      annual meeting of stockholders, all of our directors are elected to serve from
      the time of election and qualification until the next annual meeting of
      stockholders following election. The exact number of directors is to be
      determined from time to time by resolution of the board of
      directors.




**COMMITTEES**




We
      have
      an audit committee. The members of our audit committee are Donald Upson,
      Jeannemarie Devolites, and Robert E. Galbraith, all of whom are independent.
      Thomas F. Gillett resigned from the audit committee on December 12, 2007. We
      do
      not have an audit committee financial expert, as that term is defined in Item
      401 of Regulation S-B, but expect to designate one in the near future. We have
      not yet adopted an audit committee charter but expect to do so in the near
      future.




We
      have a
      compensation committee. The members of the compensation committee are Paul
      Burgess, Jeannemarie Devolites Davis, Robert Galbraith, and Donald Upson. Thomas
      F. Gillett resigned from the compensation committee on December 12, 2007.




We
      do not
      have a nominating committee because of our limited resources. The full board
      will take part in the consideration of director nominees.




**CODE
      OF ETHICS**




We
      have
      adopted a Code of Ethics and Business Conduct for Officers, Directors and
      Employees that applies to all of our officers, directors and employees. The
      Code
      of Ethics is filed as Exhibit 14.1 to our annual report on Form 10-KSB for
      the
      fiscal year ended December 31, 2003, which was filed with the Securities and
      Exchange Commission on April 9, 2004. Upon request, we will provide to any
      person without charge a copy of our Code of Ethics. Any such request should
      be
      made to Attn: Paul Burgess, Lattice Incorporated, 7150 N. Park Drive, Suite
      500,
      Pennsauken, N.J. 08109. Our telephone number is (856) 910-1166.




SECTION
      16(A) BENEFICIAL OWNERSHIP COMPLIANCE




Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and
      executive officers and persons who beneficially own more than ten percent of
      a
      registered class of our equity securities to file with the SEC initial reports
      of ownership and reports of change in ownership of common stock and other of
      our
      equity securities. Officers, directors and greater than ten percent stockholders
      are required by SEC regulations to furnish us with copies of all Section 16(a)
      forms they file. To our knowledge, the following persons have failed to file,
      on
      a timely basis, the identified reports required by Section 16(a) of the Exchange
      Act during the most recent fiscal year ended December 31, 2007: [SECTION
      16 FILINGS TO BE REVIEWED BY SRFF].





**ITEM
      10. EXECUTIVE COMPENSATION.**




The
      following table sets forth all compensation earned in respect of our Chief
      Executive Officer and those individuals who received compensation in excess
      of
      $100,000 per year, collectively referred to as the named executive officers,
      for
      our last three completed fiscal years.





23





**SUMMARY
      COMPENSATION TABLE [COMPANY, PLEASE UPDATE FOR 2007]**







The
      following information is furnished for the years ended December 31, 2007 and
      2006 for our principal executive officer and the two most highly compensated
      officers other than our principal executive officer who was serving as such
      at
      the end of our last completed fiscal year:





Name
                and Principal Position
            
            Year
            
            Salary
              $
            
            
            Bonus
              $
                (1)
            
            Stock
                Awards
              $
            
            Option
                Awards
              $
                (2)
            
            Non-Equity
                Incentive Plan Compensation
              $
            
            Nonqualified
                Deferred Compensation Earnings
              $
            
            All
                Other Compensation
              $
            
            Total
              $Paul
                Burgess
            
            
            2007
            
            $
            225,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            225,000President,
                Chief Executive Officer and Director
            
            
            2006
            
            $
            112,500
            (3)
            
            $
            52,500
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            165,500Joseph
                Noto
            
            
            2007
            
            $
            150,000
            
            
            $
            30,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            180,000Chief
                Financial Officer
            
            
            2006
            
            $
            150,000
            
            
            
            30,000
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            180,000Mike
                Ricciardi (4)
            
            
            2007
            
            $
            176,422
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            15,000
            (5)
            $
            191,422Chief
                Operating Officer
            
            
            2006
            
            
            41,250
            
            
            
            —
            
            
            
            
            $
            75,000
            
            
            
            
            
            
            
            $
            15,000
            (5)
            
            131,250Eric
                Zelsdorf
            
            
            2007
            
            $
            160,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            160,000Chief
                Technology Officer
            
            
            2006
            
            $
            160,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            160,000




24





(1)
      Represents performance bonus earned in the year when paid.




(2)
      These
      amounts represent the estimated present value of stock options or warrants
      at
      the date of grant, calculated using the Black-Scholes options pricing
      model.





(3)
      Mr.
      Burgess waived $112,500 of his salary in the first half 2006. His annual base
      salary is $225,000 per his employment agreement.




(4)
      Mr.
      Ricciardi’s salary is for part of the year since his hire date was
      September 19, 2006 coinciding with the acquisition of RTI. Additionally Mr.
      Ricciardi received 125,000 options with a strike price of $0.60 per share which
      vest annually over three years from date of hire. Mr. Ricciardi ceased working
      for the Company on October 16, 2007. On October 16, 2007 the Company entered
      into a severance agreement with Michael Ricciardi the former COO of the Company,
      which supersedes his September 19, 2006 employment agreement. Per the agreement
      the Company will pay $210,000 as follows: $20,000 upon signing of the agreement
      and $190,000 shall be paid in equal bi-monthly payment for 12 months. For such
      consideration the employee agrees to a non compete agreement for the next 12
      months.







(5)
      Included in other compensation is $15,000 pursuant to a consulting arrangement
      with Mr. Ricciardi’s spouse. This arrangement expired March 30,
      2007.





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR END**




The
      following table sets forth with respect to grants of options to purchase our
      common stock to the name executive officers as of December 31, 2007




Name
            
            Number
                of Securities Underlying Unexercised Options
              #
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options
              #
              Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              #
            
            Option
                Exercise
              Price
              $
            
            Option
                Expiration
              Date
            
            Number
              of
              Shares
              or
                Units
              of
                Stock
              That
              Have
              Not
              Vested
              #
            
            Market
              Value
              of
              Shares
              or
                Units
              of
                Stock
              That
              have
                not
              vested
              $
            
            Equity
              Incentive
              Plan
              Awards:
                Number of
              Unearned
              Shares
                Units
              or
                Other
              Rights
                That
              Have
                Not
              Vested
                #
            
            Equity
                Incentive
              Plan
              Awards
              Market
                or
              Payout
              Value
                of
              Unearned
              Shares
                Units
              or
                Other
              Rights
                That
              have
                not
              Vested
              $Joseph
                Noto
            
            
            133,333
            
            
            66,667
            (1)
            
            —
            
            $
            1.00
            
            July
                2015Paul
                Burgess
            
            
            200,000
              200,000
              400,000
            
            
            —
              —
              200,000
            (2)
            
            
            
            $
              $
              $
            0.30
              0.50
              1.00
            
            May
                2014
              Oct
                2014
              Feb
                2015




(1)
            66,667
                vests July 2008(2)
            200,000
                vests Feb’ 2008




25


**COMPENSATION
      OF DIRECTORS**




Directors
      are compensated $1,000 per in-person Director’s meeting. All directors are
      reimbursed for their reasonable out-of-pocket expenses incurred in connection
      with their duties to us.   No director received any compensation for
      serving as a member of our board of directors.




**EMPLOYMENT
      AGREEMENTS**





On
      February 4, 2005, we entered into an employment agreement with SMEI and Eric
      D.
      Zelsdorf. Under the agreement, Mr. Zelsdorf will be employed as SMEI’s Chief
      Technology Officer until December 31, 2007. For his services, SMEI agreed to
      pay
      Mr. Zelsdorf a base salary of $160,000 per year. Mr. Zelsdorf also may be paid
      an incentive bonus based on a percentage of his base salary. We agreed to grant
      Mr. Zelsdorf stock options upon completion of the acquisition of SMEI in
      accordance with our employee stock option program. The exercise price of the
      stock options is to be set at the stock price at the close of the acquisition
      of
      SMEI. The agreement will terminate upon the following events and
      conditions:




(a)
      upon
      expiration of its terms;




(b)
      for
      cause by SMEI immediately upon written notice;




(c)
      For
      cause by Mr. Zelsdorf immediately upon written notice;




(d)
      without cause by either party upon written notice;




Or
      (e) in
      the event Mr. Zelsdorf is unable to perform services required under the
      agreement by reason of incapacity or disablement for more than six
      months.




Cause
      by
      SMEI is defined in the agreement as: a material breach by Mr. Zelsdorf, a felony
      conviction or any willful act or omission of dishonesty which causes harm to
      SMEI. Resignation of Mr. Zelsdorf with cause is defined to include, but not
      limited to: a reduction in position and/or responsibilities, a material change
      in Mr. Zelsdorf’s reporting structure, or relocation beyond 30 miles of SMEI’s
      principal office. If the agreement is terminated by SMEI without cause or if
      Mr.
      Zelsdorf resigns with cause, Mr. Zelsdorf will be entitled to all compensation
      and benefits otherwise remaining unpaid under the remaining term of the
      agreement and all stock options which have been granted under the agreement
      will
      become immediately vested and exercisable. In the event Mr. Zelsdorf is
      terminated for cause or resigns voluntarily, no compensation will be due to
      him
      other than what was earned through the date of termination.




On
      February 14, 2005, upon effectiveness of the acquisition of SMEI, we entered
      into an Executive Employment Agreement Amendment with Paul Burgess. Under the
      Executive Employment Agreement Amendment, Mr. Burgess is employed as our Chief
      Executive Officer for an initial term of three years. Thereafter, the Executive
      Employment Agreement Amendment may be renewed upon the mutual agreement of
      the
      parties. Mr. Burgess will be paid a base salary of $225,000 per year under
      the
      Executive Employment Agreement Amendment. We previously agreed to grant Mr.
      Burgess 200,000 shares of restricted stock. This grant was replaced by the
      grant
      of fully vested options to purchase 200,000 shares of common stock at an
      exercise price of $0.30 per share. We also agreed to grant Mr. Burgess fully
      vested options to purchase an additional 200,000 shares of common stock at
      an
      exercise price of $0.50 per share as a bonus for services rendered during 2004.
      Further, upon the effective date of the Executive Employment Agreement
      Amendment, we agreed to grant Mr. Burgess options to purchase 600,000 shares of
      common stock at an exercise price of $1.00 per share, which will vest one-third
      each year over a three-year period beginning February 14, 2005. In addition,
      we
      agreed to pay Mr. Burgess an incentive bonus based on 1% of the revenue of
      the
      most recent 12-month period of any acquisitions closed by us during the term
      of
      the Executive Employment Agreement Amendment. The Executive Employment Agreement
      Amendment may be terminated by Mr. Burgess at his discretion by providing at
      least 30 days prior written notice to us. In the event our business is acquired,
      or we are the non-surviving party in a merger, or we sell all or substantially
      all of our assets, the surviving company is bound to the provisions of the
      Executive Employment Agreement Amendment. In September 2006, Mr. Burgess’
employment agreement was amended to provide that he will receive an incentive
      bonus based on five percent of our before tax net income of the most recent
      twelve month period of any acquisitions closed by us during the term of the
      agreement, so long as such before tax net income also resulted in an increase
      in
      earnings per share. The incentive salary payment shall be made within thirty
      day
      of the close of any such transactions. The amendment also added a provision
      that
      provides that following the termination of the agreement and for one year
      thereafter Mr. Burgess will not engage in the information and communication
      technology business in the United States where we then have officers and/or
      sell
      our products.





On
      March
      7, 2005, we signed a three year employment agreement with Joe Noto to be our
      Vice President of Finance and Administration, at an initial annual base salary
      of $130,000. The term of the agreement is for three years commencing February
      1,
      2005. Thereafter, the agreement may be renewed upon mutual agreement of the
      parties. Mr. Noto is entitled to a cash incentive bonus equal to 20% of base
      salary based on meeting predetermined objectives. As part of the agreement
      he
      will receive medical, vacation and profit sharing benefits consistent with
      our
      current policies. The agreement may be terminated by Mr. Noto upon at least
      30
      days prior written notice to us. The agreement may be terminated by us upon
      five
      days notice to Mr. Noto in the event Mr. Noto: (a) is in material breach of
      the
      agreement; (b) habitually neglects his duties; (c) engages in any dishonest
      conduct, damages the our reputation or standing or is convicted of any criminal
      act or engages in any act of moral turpitude. The agreement provides that in
      the
      event Mr. Noto is promoted to the position of Chief Financial Officer, his
      base
      salary will adjust to not less than $150,000 per year. Effective May 12, 2005,
      Mr. Noto assumed the position as our Chief Financial Officer at an annual base
      salary of $150,000. In September 2006, Mr. Noto’s employment agreement was
      amended to add a provision that provides that following the termination of
      the
      agreement and for one year thereafter Mr. Noto will not engage in the
      information and communication technology business in the United States where
      we
      then have officers and/or sell our products.


26




In
      September 2006, we entered into an employment agreement with Michael Ricciardi,
      pursuant to which he is serving as our Chief Operating Officer. Pursuant to
      his
      employment agreement, Mr. Ricciardi is to receive a base salary of $165,000
      per
      year and an annual bonus of not less than 30% of his then current base salary,
      if established revenue and personal goals are achieved. In addition, the Company
      is to grant an incentive stock option to purchase 125,000 shares of the common
      stock at an exercise price of $.60 per share. The term of the agreement is
      three
      (3) year unless sooner terminated pursuant to its terms. Thereafter, the
      Agreement shall automatically renew from year to year unless terminated as
      provided therein. Mr. Ricciardi ceased working for the Company on October 16,
      2007.





**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.**




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      following table provides information about shares of common stock beneficially
      owned as of April 15, 2008 by:




·
            each
                director;





·
            each
                officer named in the summary compensation
                table;





·
            each
                person owning of record or known by us, based on information provided
                to
                us by the persons named below, to own beneficially at least 5% of
                our
                common stock; and





·
            all
                directors and executive officers as a
                group.




Name
                of Beneficial Owner (1)
            
            Common
                Stock
              Beneficially
                Owned (2)
            
            Percentage
                of
              Common
                Stock
              Beneficially
                Owned (2)Paul
                Burgess (3)
            
            
            1,000,000
            
            
            5.6
            %Eric
                D. Zelsdorf
            
            
            583,560
            
            
            3.5
            %Robert
                Galbraith (4)
            
            
            124,500
            
            
            *Michael
                Ricciardi (5)
            
            
            3,118,703
            
            
            18.5
            %Marie
                Ricciardi (5)
            
            
            3,118,703
            
            
            18.5
            %Burlington
                Assembly of God (6)
              2035
                Columbus Road
              Burlington,
                New Jersey 08016
            
            
            1,000,000
            
            
            5.8
            %Joe
                Noto (3)
            
            
            133,333
            
            
            *Dragonfly
                Capital Partners, LLC (7)
              420
                Lexington Avenue Suite 2620
              New
                York, New York 10170
            
            
            978,200
            
            
            5.5
            %Jeannemarie
                Devolites Davis
            
            
            -
            
            
            *Thomas
                F. Gillett (8)
            
            
            -
            
            
            *Donald
                Upson
            
            
            -
            
            
            *Alan
                Bashforth (9)
            
            
            1,759,836
            
            
            9.9
            %All
                named executive officers and directors as a group (8
                persons)
            
            
            1,841,393
            
            
            9.9
            %





*
 
      Less than 1%





(1)
            Except
                as otherwise indicated, the address of each beneficial owner is c/o
                Lattice Incorporated , 7150 N. Park Drive, Suite 500, Pennsauken,
                NJ
                08109(2)
            Applicable
                percentage ownership is based on 16,829,428 shares of common stock
                outstanding as of April 15, 2008, together with securities exercisable
                or
                convertible into shares of common stock within 60 days of April 15,
                2008
                for each stockholder. Beneficial ownership is determined in accordance
                with the rules of the Securities and Exchange Commission and generally
                includes voting or investment power with respect to securities. Shares
                of
                common stock that are currently exercisable or exercisable within
                60 days
                of April 15, 2008, 2008 are deemed to be beneficially owned by the
                person
                holding such securities for the purpose of computing the percentage
                of
                ownership of such person, but are not treated as outstanding for
                the
                purpose of computing the percentage ownership of any other
                person.




27




(3)
            Represents
                shares issuable upon exercise of
                options.





(4)
            Includes
                5,000 shares owned by Mr. Galbraith’s wife, as to which Mr. Galbraith
                disclaims beneficial interest





(5)
            Mr.
                and Mrs. Ricciardi are husband and wife. The number of shares beneficially
                owned by each of them includes (a) 717,974 shares owned by Michael
                Ricciardi, (b) 1,480,823 shares owned by Marie Ricciardi, and (c)
                919,905
                shares owned by them as custodian for their minor child. Mr. and
                Mrs.
                Ricciardi disclaim beneficial interest in the shares owned by the
                other
                and their minor child.




(6)
            Represents
                666,667 shares of common stock and 333,333 shares of common stock
                issuable
                upon exercise of warrants.(7)
            Warrants
                issued to Dragonfly as placement fees for the Barron financing. These
                warrants were issued in 2 traunches of 489,100 each with a strike
                price of $0.50 and $1.25 per share respectively with a five year
                term.(8)
            Mr.
                Gillett resigned from the Board of Directors and its audit and
                compensation committees on December 12,
                2007.




(9)
            Includes:
                (a) 16,500 shares owned by Mr. Bashforth; (b) 152,000 shares owned
                by
                Innovative Communications Technology, Ltd., which is controlled by
                Mr.
                Bashforth; (c) 436,336 shares owned by Calabash Holdings Ltd., which
                is
                controlled by Mr. Bashforth; and (d) 200,000 shares issuable upon
                exercise
                of options held by Calabash Holdings Ltd exercisable at 0.50 per
                share
                which expire March 31, 2008; and (e) 600,000 warrants exercisable
                at $1.00
                per share which expire 2012 and (f) 170,000 shares and 850,000 warrants
                issued in connection with the private placement of common stock between
                April 14thand May 11, 2006. The warrants are five year warrants and have a
                strike
                price of $1.20 per share. We issued 100,000 shares of common stock
                in
                December 2007 related to consulting services
                rendered.





Barron
      Partners owns notes and warrants which, if fully converted and exercised, would
      result in the ownership of more than 5% of our outstanding common stock.
      However, the note and warrant, by their terms, may not be converted or exercised
      if such conversion or exercise would result in Barron Partners or its affiliates
      owning more than 4.9% of our outstanding common stock. This limitation may
      not
      be waived.




No
      Director, executive officer, affiliate or any owner of record or beneficial
      owner of more than 5% of any class of our voting securities is a party adverse
      to our business or has a material interest adverse to us.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




On
      February 4, 2005, we entered into a consulting agreement with SMEI and Herbert
      B. Quinn, Jr., who was a director which is effective as of the date we completed
      the acquisition of SMEI. Under the agreement, Mr. Quinn will perform strategic
      analytical and advisory services as reasonably requested by SMEI’s Chief
      Executive Officer. For his services, SMEI agreed to pay Mr. Quinn $150,000
      per
      year. Mr. Quinn also is eligible to receive options under our stock option
      plan
      or any similar plan that is in effect. The term of the agreement is for one
      year
      and will automatically renew for one additional year unless either party gives
      at least 30 days prior written notice of their intent not to extend the
      agreement. The agreement does not contain any termination
      provisions.




28




Director
      Independence




Of
      the
      members of the Company’s board of directors, Jeannemarie Devolites Davis, Thomas
      F. Gillett and Donald Upson are considered to be independent under the listing
      standards of the Rules of NASDAQ setforth in the NASDAQ Manual independent
      as that term is set forth in the listing standards of the National Association
      of Securities Dealers.





**ITEM
      13. EXHIBITS.**





ExhibitNumber
            
            Description2.12.2
            
            Stock
                Purchase Agreement dated December 16, 2004 among Science Dynamics
                Corporation, Systems Management Engineering, Inc. and the shareholders
                of
                Systems Management Engineering, Inc. identified on the signature
                page
                thereto (Incorporated by reference to Form 8-K, filed with the Securities
                and Exchange Commission on December 22, 2004)2.3
            
            Amendment
                No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science
                Dynamics Corporation, Systems Management Engineering, Inc. and the
                shareholders of Systems Management Engineering, Inc. identified on
                the
                signature page thereto (Incorporated by reference to Form 8-K, filed
                with
                the Securities and Exchange Commission on February 11,
                2005)2.4
            
            Stock
                purchase agreement by Ricciardi Technologies, Inc., its Owners, including
                Michael Ricciardi as the Owner Representative and Science Dynamics
                Corporation, dated as of September 12,
                2006.**




29




3.1
            
            Certificate
                of Incorporation (Incorporated by reference to the Company's registration
                statement on Form S-18 (File No. 33-20687), effective April 21,
                1981)3.2
            
            Amendment
                to Certificate of Incorporation dated October 31, 1980 (Incorporated
                by
                reference to the Company's registration statement on Form S-18 (File
                No.
                33-20687), effective April 21, 1981)3.3
            
            Amendment
                to Certificate of Incorporation dated November 25, 1980 (Incorporated
                by
                reference to the Company's registration statement on Form S-18 (File
                No.
                33-20687), effective April 21, 1981)3.4
            
            Amendment
                to Certificate of Incorporation dated May 23, 1984 (Incorporated
                by
                reference to the Company's registration statement on Form SB-2 (File
                No.
                333-62226) filed with the Securities and Exchange Commission on June
                4,
                2001)3.5
            
            Amendment
                to Certificate of Incorporation dated July 13, 1987 (Incorporated
                by
                reference to the Company's registration statement on Form SB-2 (File
                No.
                333-62226) filed with the Securities and Exchange Commission on June
                4,
                2001)3.6
            
            Amendment
                to Certificate of Incorporation dated November 8, 1996 (Incorporated
                by
                reference to the Company's registration statement on Form SB-2 (File
                No.
                333-62226) filed with the Securities and Exchange Commission on June
                4,
                2001)3.7
            
            Amendment
                to Certificate of Incorporation dated December 15, 1998 (Incorporated
                by
                reference to the Company's registration statement on Form SB-2 (File
                No.
                333-62226) filed with the Securities and Exchange Commission on June
                4,
                2001)3.8
            
            Amendment
                to Certificate of Incorporation dated December 4, 2002 (Incorporated
                by
                reference to the Company's information statement on Schedule 14C
                filed
                with the Securities and Exchange Commission on November 12,
                2002)3.9
            
            By-laws
                (Incorporated by reference to the Company's registration statement
                on Form
                S-18 (File No. 33-20687), effective April 21, 1981)3.10
            
            Restated
                Certificate of Incorporation (Incorporated by reference to the
                Registration Statement On Form SB-2. file with the Securities and
                Exchange
                Commission on February 12, 2007)4.1
            
            Secured
                Convertible Term Note dated February 11, 2005 issued to Laurus Master
                Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
                Securities and Exchange Commission on February 18,
                2005)4.2
            
            Common
                Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master
                Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
                Securities and Exchange Commission on February 18,
                2005)4.3
            
            Second
                Omnibus Amendment to Convertible Notes and Related Subscription Agreements
                of Science Dynamics Corporation issued to Laurus Master Fund, Ltd.
                (Incorporated by reference to Form 8-K, filed with the Securities
                and
                Exchange Commission on March 2, 2005)4.4
            
            Form
                of warrant issued to Barron Partners LP**4.5
            
            Promissory
                Note issued to Barron Partners LP**4.6
            
            Form
                of warrant issued to Dragonfly Capital Partners LLC**4.7
            
            Secured
                Promissory Note issued to Michael Ricciardi**4.8
            
            Amended
                and Restated Common Stock Purchase Warrant issued to Laurus Master
                Fund
                LTD to Purchase up to 3,000,000 share of Common Stock of Lattice
                Incorporated.**4.9
            
            Amended
                and Restated Common Stock Purchase Warrant issued to Laurus Master
                Fund,
                LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice
                Incorporated**4.10
            
            Common
                Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase
                14,583,333 Shares Of Common Stock of Lattice
                Incorporated.4.11
            
            Second
                Amended and Restated Secured Term Note from Lattice Incorporated
                to Laurus
                Master Fund, LTD.10.1
            
            Executive
                Employment Agreement Amendment made as of February 14, 2005 by and
                between
                Science Dynamics Corporation and Paul Burgess (Incorporated by reference
                to Form 8-K filed with the Securities and Exchange Commission on
                March 2,
                2005)**10.2
            
            Stock
                Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including
                Michael Ricciardi as Owner Representative and Lattice Incorporated,
                dated
                September 12, 2006.**10.3
            
            Omnibus
                Amendment and Waiver between Lattice Incorporated and Laurus Master
                Fund,
                LTD, dated September 18, 2006.**10.3
            
            Agreement
                dated December 30, 2004 between Science Dynamics Corporation and
                Calabash
                Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with
                the
                Securities and Exchange Commission on February 25,
                2005)10.4
            
            Employment
                Agreement dated January 1, 2005 between Science Dynamics Corporation,
                Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated
                by
                reference to Form 8-K filed with the Securities and Exchange Commission
                on
                February 25, 2005)10.5
            
            Executive
                Employment of dated March 7, 2005 by and between Science Dynamics
                Corporation and Joe Noto (Incorporated by reference to the 10-KSB
                filed on
                April 17, 2006)


30





10.7
            
            Sub-Sublease
                Agreement made as of June 22, 2001 by and between Software AG and
                Systems
                Management Engineering, Inc. (Incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on February 18,
                2005)10.8
            
            Securities
                Purchase Agreement dated February 11, 2005 by and between Science
                Dynamics
                Corporation and Laurus Master Fund, Ltd. (Incorporated by reference
                to
                Form 8-K filed with the Securities and Exchange Commission on February
                18,
                2005)10.9
            
            Master
                Security Agreement dated February 11, 2005 among Science Dynamics
                Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master
                Fund,
                Ltd. (Incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on February 18, 2005)10.10
            
            Stock
                Pledge Agreement dated February 11, 2005 among Laurus Master Fund,
                Ltd.,
                Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp.
                (Incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on February 18, 2005)10.11
            
            Subsidiary
                Guaranty dated February 11, 2005 executed by M3 Acquisition Corp.
                and
                SciDyn Corp. (Incorporated by reference to Form 8-K filed with the
                Securities and Exchange Commission on February 18,
                2005)10.12
            
            Registration
                Rights Agreement dated February 11, 2005 by and between Science Dynamics
                Corporation and Laurus Master Fund, Ltd. (Incorporated by reference
                to
                Form 8-K filed with the Securities and Exchange Commission on February
                18,
                2005)10.13
            
            Microsoft
                Partner Program Agreement (Incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on February 18,
                2005)10.14
            
            AmberPoint
                Software Partnership Agreement (Incorporated by reference to Form
                8-K
                filed with the Securities and Exchange Commission on February 18,
                2005)10.15
            
            Securities
                Agreement between Science Dynamics Corporation and Barron Partners
                LP,
                dated September 15, 2006**10.16
            
            Employment
                Agreement between Science Dynamics Corporation and Michael
                Ricciardi**.10.17
            
            Amendment
                to Employment Agreement - Paul Burgess**10.18
            
            Amendment
                to Employment Agreement - Joseph Noto**10.19
            
            Registration
                Rights Agreement by and among Science Dynamics Corporation and Barron
                Partners LLP, dated As of September 19, 2006.**10.20
            
            Amendment
                to Securities Purchase Agreement and Registration Rights Agreement
                (Incorporated by Reference to the Registration Statement on Form
                SB-2
                filed with the SEC on February 12, 2007).14.1
            
            Code
                of Ethics (Incorporated by reference to the Company's annual report
                on
                Form 10-KSB for the fiscal year ended December 31, 2003, filed with
                the
                Securities and Exchange Commission on April 9, 2004)21.1
            
            Subsidiaries
                of the Company(Incorporated by Reference to the Registration Statement
                on
                Form SB-2 filed with the SEC on February 12, 2007).31.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act31.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act32.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code32.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code99.1
            
            Pledge
                and Security Agreement made by and between Science Dynamics Corporation
                in
                favor of and being delivered to Michael Ricciardi as Owner Representative,
                dated September 19, 2006**99.10
            
            Lockup
                Agreement from Laurus Master Fund, LTD.**99.11
            
            Irrevocable
                Proxy**99.2
            
            Escrow
                Agreement by and between Science Dynamics Corporation, Ricciardi
                Technologies, Inc. and the individuals listed on Schedule 1 thereto,
                dated
                September 19, 2006**99.3
            
            Form
                of Lock Up Agreement, executed pursuant to the Securities Purchase
                Agreement between Science Dynamics Corporation and Barron Barron
                Partners,
                dated September 15, 2006.**







**
      Incorporated by reference to the 8-K filed by the Company with the SEC on
      September 25, 2006





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**




**Audit
      Fees**




The
      aggregate fees billed by our principal accountant for the audit of our annual
      financial statements, review of financial statements included in the quarterly
      reports and other fees that are normally provided by the accountant in
      connection with statutory and regulatory filings or engagements for the fiscal
      years ended December 31, 2007 and 2006 were $107,500 and $101,357,
      respectively.




**Tax
      Fees**




The
      aggregate fees billed for professional services rendered by our principal
      accountant for tax compliance, tax advice and tax planning for the fiscal years
      ended December 31, 2007 and 2006 were $7,500 and $2,450, respectively. These
      fees related to the preparation of federal income and state franchise tax
      returns.




31






**All
      Other Fees**




There
      were no other fees billed for products or services provided by our principal
      accountant for the fiscal years ended December 31, 2007 and 2006.




**Audit
      Committee Pre-Approval Policies and Procedures**




All
      members of the Company’s audit committee approved the engagement of Demetrius
& Company LLC as the Company’s independent registered public
      accountants.







32





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**LATTICE INCORPORATED**




Date:
                April 15, 2008
            By:
            /s/
                Paul BurgessPaul
                BurgessPresident,
                Chief Executive Officer
              and
                Director




Date:
                April 15, 2008
            By:
            /s/
              Joe
              NotoJoe
                NotoChief
                Financial Officer and Principal
              Accounting
                Officer





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




Signature
            
            Title
            
            Date/s/
              Paul BurgessPaul
                Burgess
            
            President,
                Chief Executive Officer and Director
            
            April
                15, 2008/s/
Joe
              NotoJoe
                Noto
            
            Chief
                Financial Officer and Secretary
            
            April
                15, 2008/s/
Robert
              GalbraithRobert
                Galbraith
            
            Director
            
            April
                15, 2008/s/
                    Jeannemarie Devolites DavisJeannemarie
                Devolites Davis
            
            Director
            
            April
                15, 2008Donald
                Upson
            
            Director
            
            April
                15,2008




33




**Lattice
      Incorporated (formerly Science Dynamics Corp)**


Index
      to
      Consolidated Financial Statements





Report
                of Independent Accountants dated April 15, 2008
            F-2Report
                  of Independent Accountants dated March 9, 2008
            F-3Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-4Consolidated
                Statements of Operations, two years ended December 31,
                2007
            F-5Consolidated
                Statements of Cash Flows, two years ended December 31,
                2007
            F-6Consolidated
                Statements of Changes in Shareholders' Equity, two years ended December
                31, 2007
            F-7Notes
                to Consolidated Financial Statements
            F-8
                - F-21




F-1


**Report
            of Independent Registered Public Accounting Firm**
 
 **To
            The Board of Directors and**
 **Shareholders
            of Lattice Incorporated**
 
 We
            have
            audited the accompanying consolidated balance sheet of Lattice Incorporated
            and
            its subsidiaries as of December 31, 2007 and the related consolidated
            statements
            of operations, stockholders' (deficit), and cash flows for the year then
            ended.
            These consolidated financial statements are the responsibility of the
            Company's
            management. Our responsibility is to express an opinion on these consolidated
            financial statements based on our audit.
 
 We
            conducted our audit in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audits to obtain reasonable assurance about whether the
            financial statements are free of material misstatement. Our audit included
            consideration of internal control over financial reporting as a basis
            for
            designing audit procedures that are appropriate in the circumstances,
            but not
            for the purpose of expressing an opinion on the effectiveness of the
            Company’s
            internal control over financial reporting. Accordingly, we express no
            such
            opinion. An audit also includes examining, on a test basis, evidence
            supporting
            the amounts and disclosures in the financial statements also assessing
 
the accounting principles used and significant estimates made by management,
            as
            well as evaluating the overall financial statement presentation. We believe
            that
            our audit provides a reasonable basis for our opinion.
 
 In
            our
            opinion, the consolidated financial statements referred to above present
            fairly,
            in all material respects, the financial position of Lattice Incorporated
            and
            subsidiaries as of December 31, 2007, and the results of their operations
            and
            their cash flows for the year then ended in conformity with accounting
            principles generally accepted in the United States of America.
 
 The
            accompanying consolidated financial statements have been prepared assuming
            that
            Lattice Incorporated and subsidiaries will continue as a going concern.
            As
            discussed in Note1b to the financial statements, the Company requires
            additional
            working capital to meet its current liabilities. This condition raises
            substantial doubt about its ability to continue as a going concern. Management’s
            plans in regard to this matter are more fully described in Note 1b. The
            consolidated financial statements do not include any adjustments that
            might
            result from the outcome of this uncertainty.
 
 
 /s/
            Demetrius & Company, L.L.C.
 
 Demetrius
            & Company, L.L.C.
 Wayne,
            New Jersey 07470
 April
            15,
            2008


F-2


**Report
              of Independent Registered Public Accounting
              Firm**
 **To
            The Board of Directors and**
 **Shareholders
            of Lattice Incorporated**
 
 We
            have
            audited the accompanying consolidated statements of operations, stockholders’
equity (deficit), and cash flows of Lattice Incorporated and its subsidiaries
            for the year ended December 31, 2006. These consolidated financial statements
            are the responsibility of the Company's management. Our responsibility
            is to
            express an opinion on these consolidated financial statements based on
            our
            audit.
 
 We
            conducted our audit in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audit to obtain reasonable assurance about whether the
            financial
            statements are free of material misstatement. The Company is not required
            to
            have, nor were we engaged to perform, an audit of its internal control
            over
            financial reporting. Our audit included consideration of internal control
            over
            financial reporting as a basis for designing audit procedures that are
            appropriate in the circumstances, but not for the purpose of expressing
            an
            opinion on the effectiveness of the Company’s internal control over financial
            reporting. Accordingly, we express no such opinion. An audit also includes
            examining, on a test basis, evidence supporting the amounts and disclosures
            in
            the financial statements, assessing   the accounting principles used and
            significant estimates made by management, as well as evaluating the overall
            financial statement presentation. We believe that our audit provides
            a
            reasonable basis for our opinion.
 
 In
            our
            opinion, the consolidated financial statements referred to above present
            fairly,
            in all material respects, the consolidated statements of Operations and
            cash
            flows for of Lattice Incorporated and subsidiaries for the year ended
            December
            31, 2006, and the results of their operations and their cash flows for
            the years
            then ended in conformity with accounting principles generally accepted
            in the
            United States of America.
 
 The
            accompanying consolidated financial statements have been prepared assuming
            that
            Lattice Incorporated will continue as a going concern. As discussed in
            Note1 (b)
            to the financial statements, the Company has generated significant losses
            and
            requires additional working capital to continue operations. These conditions
            raise substantial doubt about its ability to continue as a going concern.
            Management’s plans in regard to these matters are more fully described in Note
            1(b). The consolidated financial statements do not include any adjustments
            that
            might result from the outcome of this uncertainty.
 
 /s/
            Peter
            C. Cosmas Co. CPA’s
 
 Peter
            C.
            Cosmas Co. CPA’s
 370
            Lexington Ave.
 New
            York,
            NY 10017
 March
            9,
            2007
 F-3




**LATTICE
                  INCORPORATED AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEET****December
                  31,****2007**ASSETS:Current
                  assets:Cash
                  and cash equivalents
              
              $
              769,915Accounts
                  receivable, net
              
              
              3,839,744Inventories
              
              
              65,846Other
                  current assets
              
              
              127,801Total
                  current assets
              
              
              4,803,306Property
                  and equipment, net
              
              
              27,530Goodwill
              
              
              7,629,632Other
                  intangibles, net
              
              
              5,354,071Other
                  assetes
              
              
              118,623Total
                  assets
              
              $
              17,933,162LIABILITIES
                  AND SHAREHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              2,716,411Accrued
                  expenses
              
              
              1,252,916Due
                  to former Stockholder's per Sept 19, 2006 purchase
                  agreement
              
              
              1,500,000Customer
                  deposits
              
              
              15,000Deferred
                  revenue
              
              
              -Notes
                  payable
              
              
              1,050,254Derivative
                  liability
              
              
              7,217,099Total
                  current liabilities
              
              
              13,751,680Deferred
                  tax liabilities
              
              
              2,661,954Minority
                  interest
              
              
              214,599Shareholders'
                  equityPreferred
                  Stock - .01 par value
              
              
              88,38710,000,000
                  shares authorized, 8,838,686 and 1,000,000 shares issued and outstanding
                  respectivelyCommon
                  stock - .01 par value, 200,000,000 authorized,
              
              
              168,42516,842,428
                  and 16,642,428 issued, 16,829,428 and 16,629,848 outstanding respectivelyAdditional
                  paid-in capital
              
              
              36,854,901Accumulated
                  deficit
              
              
              (35,408,951
              )1,702,762Common
                  stock held in treasury, at cost
              
              
              (397,833
              )Shareholders'
                  equity
              
              
              1,304,929Total
                  liabilities and shareholders' equity
              
              $
              17,933,162See
                  accompanying notes to the consolidated financial
                  statements.





F-4


**LATTICE
                  INCORPORATED AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****2007**
              
              **2006**Revenue
                  - Technology Services
              
              $
              13,853,580
              
              $
              5,802,836Revenue
                  - Technology Products
              
              
              1,364,247
              
              
              1,692,052Total
                  Revenue
              
              
              15,217,827
              
              
              7,494,888Cost
                  of Revenue - Technology Services
              
              
              7,892,257
              
              
              2,801,085Cost
                  of Revenue - Technology Products
              
              
              530,833
              
              
              554,136Total
                  cost of revenue
              
              
              8,423,090
              
              
              3,355,221Gross
                  Profit
              
              
              6,794,737
              
              
              4,139,667Operating
                  expenses:Selling,
                  general and administrative
              
              
              6,113,338
              
              
              2,508,559Research
                  and development
              
              
              432,069
              
              
              435,768Amortization
                  expense
              
              
              1,990,164
              
              
              739,454Total
                  operating expenses
              
              
              8,535,571
              
              
              3,683,781Income
                  (Loss) from operations
              
              
              (1,740,834
              )
              
              455,886Other
                  income (expense):Derivative
                  income (expense)
              
              
              4,970,932
              
              
              (13,753,295
              )Extinguishment
                  loss
              
              
              (157,130
              )
              
              (158,266
              )Finance
                  expense
              
              
              (99,279
              )
              
              (1,334,335
              )Total
                  other income (expense)
              
              
              4,714,523
              
              
              (15,245,896
              )Net
                  interest expense
              
              
              (494,414
              )
              
              (704,178
              )Minority
                  Interest
              
              
              (79,038
              )
              
              (57,245
              )Income
                  (loss) before taxes
              
              
              2,400,237
              
              
              (15,551,433
              )Income
                  taxes (benefit)
              
              
              (1,325,976
              )
              
              -Net
                  income (loss)
              
              
              3,726,213
              
              
              (15,551,433
              )Reconciliation
                  of net income (loss) toincome
                  applicable to common shareholders:Net
                  income (loss)
              
              
              3,726,213
              
              
              (15,551,433
              )Series
                  A Preferred stock dividend
              
              
              (2,954,507
              )Series
                  B Preferred stock dividend
              
              
              (50,000
              )
              
              (8,333
              )Income
                  (loss) applicable to common stockholders
              
              
              721,706
              
              
              (15,559,766
              )Income
                  (loss) per common shareBasic
              
              $
              0.04
              
              $
              (1.31
              )Diluted
              
              $
              0.01
              
              $
              (1.31
              )Weighted
                  average shares:Basic
              
              
              16,658,343
              
              
              11,888,458Diluted
              
              
              57,542,816
              
              
              11,888,458
  See
          accompanying notes to the consolidated financial
          statements.


F-5
 
 **LATTICE
                    INCORPORATED AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS**Year
                    Ended December 31,2007
                
                2006Cash
                    flow from operating activities:Net
                    Income (Loss) before preferred dividends
                
                $
                3,726,213
                
                $
                (15,551,433
                )Adjustments
                    to reconcile net income (loss) to net cash provided by (used
                    for)
                    operating activities:Derivative
                    (income) expense
                
                
                (4,970,932
                )
                
                13,753,295Amortization
                    of intangible assets
                
                
                1,990,164
                
                
                739,454Provision
                    for income taxes
                
                
                (1,325,976
                )Amortization
                    of debt discount (effective method)
                
                
                205,809
                
                
                371,753Amortization
                    of deferred financing
                
                
                26,119
                
                
                1,334,335Stock
                    issued for services
                
                
                40,000Financing
                    expenses paid in stock
                
                
                65,470Extinguishment
                    loss
                
                
                157,130
                
                
                158,266Minority
                    interest
                
                
                79,038
                
                
                57,245Interest
                    derivative
                
                
                110,618Share-based
                    compensation
                
                
                245,760
                
                
                90,612Depreciation
                
                
                34,573
                
                
                40,831Changes
                    in operating assets and liabilities:(Increase)
                    decrease in:Accounts
                    receivable
                
                
                (1,427,580
                )
                
                (818,847
                )Inventories
                
                
                (1,404
                )
                
                23,150Other
                    current assets
                
                
                (105,040
                )
                
                (69,472
                )Other
                    assets
                
                
                4,313
                
                
                1,649Increase
                    (decrease) in:Accounts
                    payable and accrued liabilities
                
                
                2,294,270
                
                
                (270,269
                )Customer
                    deposits
                
                
                -
                
                
                (135,199
                )Deferred
                    revenue
                
                
                (62,495
                )
                
                62,495Total
                    adjustments
                
                
                (2,540,163
                )
                
                15,339,298Net
                    cash provided by (used for) operating activities
                
                
                1,086,050
                
                
                (212,135
                )Cash
                    Used in investing activities:Investment
                    in "RTI"
                
                
                -
                
                
                (3,665,638
                )Acquired
                    Cash RTI
                
                
                -
                
                
                156,772Purchase
                    of equipment
                
                
                (24,916
                )
                
                (39,837
                )Net
                    cash used for investing activities
                
                
                (24,916
                )
                
                (3,548,703
                )Cash
                    flows from financing activities:Issuance
                    of common stock, net
                
                
                -
                
                
                1,293,906Repayments
                    of convertible notes (Laurus)
                
                
                -
                
                
                (1,000,000
                )Issuance
                    of convertible debt, net of fees
                
                
                -
                
                
                4,450,000Financing
                    fees in connection with Barron financing and Revolving Line of
                    Credit
                
                
                149,506
                
                
                (553,059
                )Revolving
                    credit facility (payments) borrowings, net
                
                
                -
                
                
                137,898Short
                    term notes paid
                
                
                (833,000
                )
                
                (234,000
                )Loans
                    from Stockholders' & Officers
                
                
                -
                
                
                250,000Loans
                    paid Stockholders' & Officers
                
                
                -
                
                
                (245,629
                )Net
                    cash (used) provided by financing activities
                
                
                (683,494
                )
                
                4,099,116Net
                    increase (decrease) in cash and cash equivalents
                
                
                377,640
                
                
                338,278Cash
                    and cash equivalents - beginning of period
                
                
                392,275
                
                
                53,997Cash
                    and cash equivalents - end of period
                
                $
                769,915
                
                $
                392,275Supplemental
                    cash flow informationInterest
                    paid in cash
                
                $
                177,987
                
                $
                315,470Non-cash
                    :RTI
                    earn-out
                
                $
                1,500,000Prepaid
                    finance cost reclassified as equity
                
                $
                442,474Accrued
                    expenses settled with stock warrants
                
                $
                874,000See
                    accompanying notes to the consolidated financial
                    statements.


F-6


**LATTICE
        INCORPORATED AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF SHARHOLDERS' EQUITY (DEFICIT)**
 **FOR
        THE TWO YEARS ENDED DECEMBER 31, 2007**




**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional
                Paid In Capital**
            
            **Retained
                Earnings (Deficit)**
            
            **Treasury
                Stock**
            
            **Total****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            
            
            
            
            **Shares**
            
            **Amount****Shareholders'
                equity January 1, 2006**
            
            
            
            
            
            
            
            
            **8,967,477**
            
            **$**
            **89,675**
            
            **$**
            **19,609,720**
            
            **$**
            **(20,579,244**
            **)**
            
            **12,580**
            
            **$**
            **(397,833**
            **)**
            **$**
            **(1,277,682**
            **)**Issuance
                of Common Stock -Private Placmenent
            
            
            
            
            
            
            
            
            2,274,951
            
            
            22,750
            
            
            1,371,156
            
            
            
            
            
            
            
            
            
            
            
            1,393,906Issuance
                of Common Stock - RTI Acquisition
            
            
            
            
            
            
            
            
            5,000,000
            
            
            50,000
            
            
            3,040,000
            
            
            
            
            
            
            
            
            
            
            
            3,090,000Issuance
                of Common to Keshet in extinguishment of debt
            
            
            
            
            
            
            
            
            300,000
            
            
            3,000
            
            
            177,000
            
            
            
            
            
            
            
            
            
            
            
            180,000Issuance
                of Common - July 06 Laurus Amendment
            
            
            
            
            
            
            
            
            100,000
            
            
            1,000
            
            
            57,500
            
            
            
            
            
            
            
            
            
            
            
            58,500Preferred
                Series B issued - RTI acquisition
            
            
            1,000,000
            
            
            10,000
            
            
            
            
            
            
            
            
            504,179
            
            
            
            
            
            
            
            
            
            
            
            514,179Share
                based compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            91,412
            
            
            
            
            
            
            
            
            
            
            
            91,412Net
                Income (Loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,551,413
            )
            
            
            
            
            
            
            
            (15,551,413
            )**Stockholders'
                equity (deficit), December 31, 2006**
            
            
            **1,000,000**
            
            **$**
            **10,000**
            
            
            **16,642,428**
            
            **$**
            **166,425**
            
            **$**
            **24,850,967**
            
            **$**
            **(36,130,657**
            **)**
            
            **12,580**
            
            **$**
            **(397,833**
            **)**
            **$**
            **(11,501,098**
            **)**Net
                Income (Loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,726,213
            
            
            
            
            
            
            
            
            3,726,213Conversion
                of 40,000 SHS SeriesA Preferred
            
            
            (40,000
            )
            
            (400
            )
            
            100,000
            
            
            1,000
            
            
            (600
            )
            
            
            
            
            
            
            
            
            
            
            -Dragonfly
                warrants reclassed to equity upon Note Conversion
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            462,517
            
            
            
            
            
            
            
            
            
            
            
            462,517Share-based
                compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            245,760
            
            
            
            
            
            
            
            
            
            
            
            245,760Cash
                Dividends -SeriesB Preferred
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (50,000
            )
            
            
            
            
            
            
            
            (50,000
            )100,000
                SHS issued A Bashforth Consultling services
            
            
            
            
            
            
            
            
            100,000
            
            
            1,000
            
            
            39,000
            
            
            
            
            
            
            
            
            
            
            
            40,00052599
                SHS of Series A issued liquidated damages - Reg Filing
            
            
            52,599
            
            
            526
            
            
            
            
            
            
            
            
            65,223
            
            
            
            
            
            
            
            
            
            
            
            65,749Stock
                Dividends -Preferred SeriesA EBITDA Ratchet
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,954,507
            
            
            (2,954,507
            )
            
            
            
            
            
            
            
            -Conversion
                of Barron Convertible Debt
            
            
            7,826,087
            
            
            78,261
            
            
            
            
            
            
            
            
            8,237,527
            
            
            
            
            
            
            
            
            
            
            
            8,315,788**Stockholders'
                equity, December 31, 2007**
            
            
            **8,838,686**
            
            **$**
            **88,387**
            
            
            **16,842,428**
            
            **$**
            **168,425**
            
            **$**
            **36,854,901**
            
            **$**
            **(35,408,951**
            **)**
            
            **12,580**
            
            **$**
            **(397,833**
            **)**
            **$**
            **1,304,929**




F-7




**LATTICE
        INCORPORATED AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1- Organization and summary of significant accounting
        policies:**
 
 **a)
        Organization**
 
 Lattice
        Incorporated (the "Company") was incorporated in the State of Delaware 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. With the SMEI acquisition,
        approximately 90% of the Company’s revenues are derived from solution services.
        In September 2006 the Company purchased all of the issued and outstanding
        shares
        of the common stock of Ricciardi Technologies Inc. (“RTI”). RTI was founded in
        1992 and provides software consulting and development services for the command
        and control of biological sensors and other Department of Defense requirements
        to United States federal governmental agencies either directly or though
        prime
        contractors of such governmental agencies. RTI’s proprietary products include
        SensorView, which provides clients with the capability to command, control
        and
        monitor multiple distributed chemical, biological, nuclear, explosive and
        hazardous material sensors. With the SMEI and the RTI acquisitions,
        approximately 90% of the Company’s revenues are derived from solution services.
        RTI’s income and expresses are included in the results of operations from
        September 19, 2006. In January 2007, we changed our name from Science Dynamics
        Corporation to Lattice Incorporated.
 
 **b)
        Basis of Presentation**
 
 At
        December 31, 2007 the Company has a working capital deficiency of $8,948,374
        including non-cash derivative liabilities of $7,217,099. During 2007 the
        Company
        recorded a liability of $1,500,000 in connection with an earn-out provision
        of
        its securities purchase agreement with the former owners of RTI. Due to the
        working capital deficiency the Company does not have sufficient working capital
        to settle this obligation coming due on May 31, 2008. This condition raises
        substantial doubt regarding the Company’s ability to continue as a going
        concern. The Company’s ability to continue as a going concern is dependent upon
        management’s continuing and successful execution on its business plan to achieve
        profitability and the ability to secure alternative financing. The accompanying
        financial statements do not include any adjustments that may result from
        the
        outcome of this uncertainty.
 
 F-8
  **c)
        Principles of consolidation** :
 
 The
        consolidated financial statements included the accounts of the Company and
        all
        of its subsidiaries in which a controlling interest is maintained. All
        significant inter-company accounts and transactions have been eliminated
        in
        consolidation. For those consolidated subsidiaries where Company ownership
        is
        less than 100%, the outside stockholders' interests are shown as minority
        interests. Investments in affiliates over which the Company has significant
        influence but not a controlling interest are carried on the equity
        basis.
 
 **d)
        Use of estimates** :
 
 The
        preparation of these financial statements in accordance with accounting
        principles generally accepted in the United States (US GAAP) requires management
        to make estimates and assumptions that affect the reported amounts in the
        financial statements and accompanying notes. These estimates form the basis
        for
        judgments made about the carrying values of assets and liabilities that are
        not
        readily apparent from other sources. Estimates and judgments are based on
        historical experience and on various other assumptions that the Company believes
        are reasonable under the circumstances. However, future events are subject
        to
        change and the best estimates and judgments routinely require adjustment.
        US
        GAAP requires estimates and judgments in several areas, including those related
        to impairment of goodwill and equity investments, revenue recognition,
        recoverability of inventory and receivables, the useful lives long lived
        assets
        such as property and equipment, the future realization of deferred income
        tax
        benefits and the recording of various accruals. The ultimate outcome and
        actual
        results could differ from the estimates and assumptions used.
 
 **e)
        Cash and cash equivalents** :
 
 The
        Company considers all highly liquid debt instruments purchased with an original
        maturity of three months or less to be cash equivalents.
 
 **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), below, derivative financial instruments are carried
        at
        fair value.
 
 **g
        ) Cash**
 
 The
        Company maintains its cash balances with various financial institutions.
        Balance
        at various times during the year may at time 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)
        Income Taxes** :
 
 The
        Company accounts for income taxes in accordance with Statement of Financial
        Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes", (SFAS
        No.
        109) which establishes financial accounting and reporting standards for the
        effect of income taxes. The objective of accounting for income taxes is to
        recognize the amount of taxes payable or refundable for the current year
        and the
        deferred tax liabilities and assets for the future tax consequence of events
        that have been recognized in the entity’s financial statements.
 
 Effective
        January 1, 2007, the Company adopted Financial Interpretation No.48, “Accounting
        for Uncertainty in Income Taxes an interpretation of FASB
 Statement
        No. 109” (FIN 48), which is a change in accounting for income taxes. FIN 48
        specifies how tax benefits for uncertainties tax positions are to be recognized,
        measured, and derecognized in financial statements: requires certain disclosures
        of uncertain tax matters: specifies how reserves for uncertain tax positions
        should be classified on the balance sheet; and provides transition and interim
        period guidance, among other provisions.
  **j)**  **Revenue
        Recognition**:
 
 Revenue
        is recognized when all significant contractual obligations have been satisfied
        and collection of the resulting receivable is reasonably assured. Revenue
        from
        product sales is recognized when the goods are shipped and title passes to
        the
        customer.
 
 The
        company applies the guidance of SOP-97-2 with regards to its software products
        sold under its Technology Products segment. Under this guidance, the Company
        determined that its product sales do not contain multiple deliverables for
        an
        extended period beyond delivery where bifurcation of multiple elements is
        necessary. The software is embedded in the products sold and shipped. Revenue
        is
        recognized upon delivery, installation and acceptance by the customer. PCS
        (post-contract support) and upgrades are billed separately and when rendered
        or
        delivered and not contained in the original arrangement with the customer.
        Installation services are included with the original customer arrangement
        but
        are rendered at the time of delivery of the product and invoicing.
  F-9
 Under
        our
        Technology Services segment, our revenues are derived from IT and business
        process outsourcing services under cost-plus, time-and-material, and fixed-price
        contracts, which may extend up to 5 years. The majority of our 2007 and 2006
        service revenues were time -and-material and fixed-price based contracts.
        For
        fixed-price contracts, revenues are generally recorded as delivery is made.
        For
        time-and-material contracts, revenues are computed by multiplying the number
        of
        direct labor-hours expended in the performance of the contract by the contract
        billing rates and adding other billable direct costs. Under cost-plus contracts,
        revenues are recognized as costs are incurred and include an estimate of
        applicable fees earned. Services provided over the term of these arrangements
        may include, network engineering, architectural guidance, database management,
        expert programming and functional area expert analysis   Revenue is
        generally recognized when the product or service is provided and the amount
        earned is not contingent upon any further event. There were no open fixed
        price
        contracts at December 31, 2007.
  Our
          fixed price contracts are primarily based on unit pricing (labor hours)
          or level
          of effort As such, the Company recognizes revenue for the number of units
          delivered in any given fiscal period. Accordingly, these contracts do not
          fall
          within the scope of SOP 81-1, *Accounting
          for Performance of Construction-Type and Certain Production-Type
          Contracts* ,
          where revenue is recognized on the percentage-of-completion method using
          costs
          incurred in relation to total estimated costs.
  **k)
        Share-based payments -** On
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        Financial Accounting Standards Board Statement of Financial Accounting Standards
        (“SFAS”) No. 123(R), *Accounting
        for Share-based payments* , to
        account for compensation costs under its stock option plans and other
        share-based arrangements. Prior to January 1, 2006, the Company utilized
        the
        intrinsic value method under Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* .
        Statement 123R requires all share-based payments to employees, including
        grants
        of employee stock options, to be recognized in the financial statements based
        on
        their fair values. For purposes of estimating fair value of stock options,
        we
        use the Black-Scholes-Merton valuation technique. For the twelve months ended
        December 31, 2007 and 2006, share-based payment expense was $245,760 and
        $90,612
        respectively. As of December 31, 2007, there was approximately $127,833 of
        total
        unrecognized compensation cost related to unvested share-based compensation
        awards granted under the equity compensation plans which does not include
        the
        effect of future grants of equity compensation, if any. The $127,833 will
        be
        charged to operations over the weighted average remaining service period
        of two
        years. See Note 15 for more information.
 
 **l)
        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.
 
 Goodwill-
        Goodwill represents the difference between the purchase price of an acquired
        business and the fair value of the net assets acquired and the liabilities
        assumed at the date of acquisition. Goodwill is not amortized. The Company
        tests
        goodwill for impairment annually ( or in interim periods if events or changes
        in
        circumstances indicate that its carrying amount may not be recoverable) by
        comparing the fair value of each reporting unit, as measured by discounted
        cash
        flows, to the carrying value to determine if there is an indication that
        potential impairment may exist. Absent an indication of fair value from a
        potential buyer or similar specific transactions, the Company believes that
        the
        use of this income approach method provides reasonable estimates of the
        reporting unit’s fair value. Fair value computed by this method is arrived at
        using a number of factors, including projected future operating results,
        economic projections and anticipated future cash flows. The Company reviews
        its
        assumptions each time goodwill is tested for impairment and makes appropriate
        adjustments, if any, based on facts and circumstances available at that time.
        There are inherent uncertainties, however, related to these factors and to
        management’s judgment in applying them to this analysis. Nonetheless, management
        believes that this method provides a reasonable approach to estimate the
        fair
        value of the Company’s reporting units.
  The
        income approach, which is used for the goodwill impairment testing, is based
        on
        projected future debt-free cash flow that is discounted to present value
        using
        factors that consider the timing and risk of the future cash flows. Management
        believes that this approach is appropriate because it provides a fair value
        estimate based upon the reporting unit's expected long-term operating and
        cash
        flow performance. This approach also mitigates most of the impact of cyclical
        downturns that occur in the reporting unit's industry. The income approach
        is
        based on a reporting unit's five year projection of operating results and
        cash
        flows that is discounted using a build up approach. The projection is based
        upon
        management's best estimates of projected economic and market conditions over
        the
        related period including growth rates, estimates of future expected changes
        in
        operating margins and cash expenditures. Other significant estimates and
        assumptions include terminal value growth rates, future capital expenditures
        and
        changes in future working capital requirements based on management
        projections.
  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.
 
 **m)
        Derivative financial instruments and registration payment
        arrangements:**
 
 Derivative
        financial instruments, as defined in Financial Accounting Standard No. 133, *Accounting
        for Derivative Financial Instruments and Hedging Activities* (“FAS
        133”), consist of financial instruments or other contracts that contain a
        notional amount and one or more underlying (e.g. interest rate, security
        price
        or other variable), require no initial net investment and permit net settlement.
        Derivative financial instruments may be free-standing or embedded in other
        financial instruments. Further, derivative financial instruments are initially,
        and subsequently, measured at fair value and recorded as liabilities or,
        in rare
        instances, assets. The Company generally does not use derivative financial
        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 acquire classification in stockholders’ equity. See Note 8 for
        additional information.
 
 As
        previously stated, derivative financial instruments are initially recorded
        at
        fair value and subsequently adjusted to fair value at the close of each
        reporting period. The Company estimates fair values of derivative financial
        instruments using various techniques (and combinations thereof) that are
        considered to be consistent with the objective measuring fair values. In
        selecting the appropriate technique, management considers, among other factors,
        the nature of the instrument, the market risks that it embodies and the expected
        means of settlement. For less complex derivative instruments, such as
        free-standing warrants, the Company generally uses the Black-Scholes-Merton
        option valuation technique because it embodies all of the requisite assumptions
        (including trading volatility, dividend yield, estimated terms and risk free
        rates) necessary to fair value these instruments. For complex derivative
        instruments, such as embedded conversion options, the Company generally uses
        the
        Flexible Monte Carlo valuation technique because it embodies all of the
        requisite assumptions (including credit risk, interest-rate risk and
        exercise/conversion behaviors) that are necessary to fair value these more
        complex instruments. For forward contracts that contingently require net-cash
        settlement as the principal means of settlement, the Company projects and
        discounts future cash flows applying probability-weightage to multiple possible
        outcomes. Estimating fair values of derivative financial instruments requires
        the development of significant and subjective estimates that may, and are
        likely
        to, change over the duration of the instrument with related changes in internal
        and external market factors. In addition, option-based techniques are highly
        volatile and sensitive to changes in the trading market price of our common
        stock, which has a high-historical volatility. Since derivative financial
        instruments are initially and subsequently carried at fair values, our income
        (loss) will reflect the volatility in these estimate and assumption
        changes.
 
 During
        December 2006, the Financial Accounting Standards Board issued FASB Staff
        Position (FSP) EITF 00-19-2, *Accounting
        for Registration Payment Arrangements* , which
        amended FAS 133..The FASB Staff Position specifies that the contingent
        obligation to make future payments or otherwise transfer consideration under
        a
        registration payment arrangement, whether issued as a separate agreement
        or
        included as a provision of a financial instrument or other agreement, should
        be
        separately recognized and measured in accordance with FASB Statement No.
        5,
        Accounting for Contingencies (“FAS 5”). FAS 5 provides for the recognition of
        registration payments when they are both probable of being incurred and
        reasonably estimable. The Company adopted EITF 00-19-2 in the fourth fiscal
        quarter of the Company’s year ended December 31, 2006. Accordingly, during the
        fourth quarter of 2006, the Company recorded a contingent liability of $874,000
        related to the liquidated damages as estimated and calculated under FAS 5.
        As
        more fully discussed in Note 4(b), our liability was settled during the first
        quarter of this current fiscal year.
  F-10
 **n)
        Recent accounting pronouncements**
 
 In
        September 2006, the FASB issued statement No. 157, “Fair Value
        Measurements” *,* (SFAS 157).
        SFAS 157 defines fair value, establishes a framework for measuring fair
        value in accordance with accounting principles generally accepted in the
        United
        States, and expands disclosures about fair value measurements. The Company
        is
        subject to the provisions of SFAS 157 beginning January 1, 2008. The
        Company has not yet determined whether SFAS 157 will have a material impact
        on its financial condition, results of operations, or cash flow. However,
        the
        Company believes it will likely be required to provide additional disclosures
        as
        part of future financial statements, beginning with first quarter 2008.
 
 In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* , (“FAS
        159”). FAS 159 permit entities to choose to measure many financial instruments
        and certain other items at fair value. The objective is to improve financial
        reporting by providing entities with the opportunity to mitigate volatility
        in
        reported earnings caused by measuring related assets and liabilities differently
        without having to apply complex hedge accounting provisions. FAS 159 is
        effective for fiscal years beginning after November 15, 2007. The Company
        does
        not believe that FAS 159 will have any material effect on its financial
        statements.
  In
        December 2007, the FASB issued SFAS No. 141(R), “Business Combinations
        (revised - 2007)” (SFAS 141(R)). SFAS 141(R) is a revision to previously
        existing guidance on accounting for business combinations. The statement
        retains
        the fundamental concept of the purchase method of accounting, and introduces
        new
        requirements for the recognition and measurement of assets acquired, liabilities
        assumed and non-controlling interests. The statement is effective for fiscal
        years beginning after December 15, 2008. The Company does not expect
        adoption of this standard to have a material impact on its consolidated results
        of operations and financial condition.
  **o)
         Basic and diluted income (loss) per common share-** The
        Company calculates income (loss) per common share in accordance with Statements
        on Financial Accounting Standards No 128, Earnings Per Share (“FAS 128”). 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 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 58 million shares and 48 million shares at December 31,
        2007 and 2006, respectively. In connection with the Company’s adjustment to the
        conversion price of the Series A Convertible Preferred Stock on December
        31,
        2007, the Company recorded deemed dividends of $3,004,507. These deemed
        dividends are reflected as an adjustment to net income for the year ended
        2007
        to arrive at net income applicable to common stockholders on the consolidated
        statement of operations and for purposes of calculating basic and diluted
        earnings per shares.
  **Note
        2- Business acquisition:**
 
 On
        September 19, 2006, the Company closed on its Stock Purchase Agreement with
        Ricciardi Technologies Inc. (“RTI”) and the holders of all of the outstanding
        common stock of RTI. The Company completed the acquisition of 19,685 shares
        of
        the outstanding common stock of RTI which shares constitute 100% of the issued
        and outstanding shares of capital stock of RTI on a fully diluted basis.
        As
        consideration for such shares of RTI the Company paid (i) $3,500,000 in cash,
        and issued (ii) 5,000,000 shares of common stock, (iii)a $500,000 promissory
        note payable in full twelve months from the closing, and (iv)1,000,000 shares
        of
        the Company's Series B Convertible Preferred stock. Each share of Series
        B
        Preferred Stock will automatically convert into common stock on September
        18,
        2007, at the conversion rate of 8 1/3 shares of common stock provided that
        all
        accrued and unpaid dividends on the Series B preferred have been paid and,
        subject to adjustment in the event of stock dividends, splits and other
        distributions. The Company may at any time until September 18, 2007 redeem
        the
        Series B Preferred Stock at a redemption price of $0.50 per share. To secure
        the
        indemnification obligations of the former RTI stockholder, a portion of the
        purchase price, consisting of $350,000 and 5,833,333 shares of common stock
        was
        placed in escrow for a period of 18 months. The common stock issued was valued
        based upon an average of five days preceding and five days following the
        date
        that the Company and RTI agreed to all significant terms of the Agreement,
        and
        such terms were publicly disseminated. As of September 30, 2007, the Company
        had
        not declared any dividends on the Series B preferred. Accordingly, the Series
        B
        preferred has yet to be converted.
 
 During
        2007, the Company recorded a liability of $1,500,000 related to an additional
        purchase consideration to the former RTI stockholders. The liability was
        recorded as goodwill. The computation of the EBITDA was calculated as defined
        in
        the agreement. The payment is payable in May 2008 per the
        agreement..
 
 Pursuant
        to the RTI agreement the Company delivered to the RTI employee’s, incentive
        stock options to purchase 200,000 shares of common stock at an exercise price
        of
        $0.60. In addition, during the two years following the closing, the Company
        shall grant the RTI employees an additional 50,000 shares in each year of
        the
        two year period at an exercise price equal to the market price on the date
        of
        issuance. These options have three year vesting and a ten year
        life.
 
 F-11
  The
        total
        purchase price including contingent consideration amounted to $12,403,511
        and
        was allocated as follows, based upon the fair value of assets acquired and
        liabilities assumed:
 
 Category
              
              AmountCurrent
                  assets
              
              $
              1,230,027Property
                  and equipment
              
              
              1,473Intangible
                  assets
              
              
              12,073,506Deposits
              
              
              9,406Current
                  liabilities
              
              
              (910,901
              )$
              12,403,511
 
 Intangible
        assets acquired consisted of the following:
 
 LifeCustomer
                  relationships
              
              5
              
              $
              3,382,517Know
                  how and processes
              
              5
              
              
              2,924,790Goodwill
              
              —
              
              
              5,066,927Contractual
                  backlog
              
              1
              
              
              534,272Employment
                  contract
              
              1
              
              
              165,000$
              12,073,506
  The
        Company recorded amortization of $1,763,404 for the twelve months ended December
        31, 2007 related to the intangible assets listed above. The Company believes
        that the expansion into this business affords it an opportunity for synergy,
        thus justifying the amount of goodwill attributed to the acquisition of RTI.
 F-12
 
 **Note
        3- Segment reporting:**
 
 Management
        views its business as two operating units, Technology Products and Technology
        Services.
 
 Year
                  Ended
              
              Year
                  EndedDecember
                  31, 2007
              
              December
                  31, 2006RevenueTechnology
                  Services
              
              $
              13,853,580
              
              $
              5,802,836
              (a)Technology
                  Products
              
              
              1,364,247
              
              
              1,692,052Total
                  Consolidated Revenue
              
              $
              15,217,827
              
              $
              7,494,888Gross
                  ProfitTechnology
                  Services
              
              
              5,961,323
              
              
              3,001,751
              (a)Technology
                  Products
              
              
              833,414
              
              
              1,137,916Total
                  Consolidated Gross Profit
              
              $
              6,794,737
              
              $
              4,139,667
              (a)AssetsTechnology
                  Services
              
              $
              17,166,440Technology
                  Products
              
              
              766,722Total
                  Assets
              
              
              17,933,162
 
 **Note
        4 -Accounts Receivable**
 
 The
        Company evaluates its accounts receivable on a customer-by-customer basis
        and
        has determined that no allowance for doubtful accounts is necessary at December
        31, 2007.
  **Note
        5 -Property and Equipment**
 
 2007Computers,
                  fixturesAnd
                  equipment
              
              $
              1,658,592Less
                  accumulatedDepreciation
              
              
              (1,631,062Totals
              
              $
              27,530
 A
        summary
        of the major components of property and equipment is as follows:
  **Note 6
        - Notes payable**
 
 Notes
        payable consists of the following as of December 31, 2007.:
 2007Revolving
                  credit facility**(a)**
              
              $
              740,254Notes
                  Payable - Stockholders/Officers**(b)**
              
              
              310,000Short
                  term notes payable**(c)**
              
              
              0Convertible
                  note**(d)**
              
              
              0Total
                  notes payable
              
              
              1,050,254Less
                  current maturities, associated with notes payable
              
              
              (1,050,254Long-term
                  debt
              
              $
              --
 
 F-13
  **(a)
        Revolving line of credit:**
  On
        November 10, 2006, the Company secured a Line of Credit facility with Greater
        Bay Business Funding ("GBBF") for $2,000,000. The line is primarily secured
        by
        the Company's accounts receivables. The Advance Rate is 85% of qualifying
        accounts receivable. Interest on the line is at of Prime, plus 6.0%. Upon
        securing the line with GBBF, the Company repaid in full and closed out the
        credit facility with Presidential Financial Group. The total outstanding
        balance
        on this facility as of December 31, 2007 and December 31, 2006 was $740,254
        and
        $590,749 respectively. Additionally, the Company incurred an up-front fee
        of
        $20,000 which is being amortized on the straight-line method, due to the
        immaterial amount involved, over the twelve month term of the facility. See
        Note 19.
 
 **(b)
        Notes payable stockholders/officers:**
  The
        Company has a short-term loan payable to a former officer and stockholder
        of the
        Company amounting to $35,000. This note bears interest of 8.0% per annum.
        The
        note is an unsecured demand note.
  At
        December 31, 2007 the Company has a short term note payable of $275,000 with
        a
        director of the Company. The note bears interest at 20% per annum and is
        payable
        monthly at $12,500 from February 2008 to April 2008, than $32,812 until paid
        in
        full..
  As
        part
        of the RTI acquisition the Company issued a note in the amount of $500,000
        to
        the former stockholders of RTI as part of the purchase price. The note was
        payable in September 2007 and bore an interest rate of 10.0% per annum. In
        September 2007 the Company paid the entire note including accrued interest
        to
        the former stockholders of RTI.
 
 **(c)
        Short term notes:**
  On
        September 18, 2006, the Company entered into an Omnibus Amendment and Waiver
        Agreement with Laurus Master Fund, LTD (“Laurus”). into a Term Note for $250,000
        with Laurus. The Term Note bore interest at a rate per annum equal to the
        prime
        rate published in The Wall Street Journal from time to time, plus 3%, but
        shall
        not be less than 8%. Interest payments are due monthly, in arrears, commencing
        on August 1, 2006 and ending on the maturity date which is September 18,
        2007.
        In September 2007 the Company paid the outstanding balance of
        $250,000.
 
 F-14
  **(d)
        2006 Barron Financing Arrangement:**
 
 Convertible
        Promissory Notes
 
 On
        September 19, 2006, the Company entered into a financing arrangement that
        provided for the issuance of $4,500,000, 6.0% Convertible Promissory Notes,
        due
        May 31, 2007, and warrants to purchase 25,000,000 shares of common stock.
        Proceeds, which were net of $404,851 in cash financing costs, amounted to
        $4,045,149. The Convertible Promissory Note was convertible into Preferred
        Stock
        at $.575; however, if a Restated Certificate of Incorporation was not filed
        within 150 days, then for each month, the conversion price would be reduced
        by
        6%. Upon filing of the Restated Certificate of Incorporation, the note provided
        for automatic conversion of the face value into Series B Preferred Stock.
        The
        Company concluded that the conversion feature embedded in the note was not
        afforded either the FAS133 exemption as a “Conventional Convertible” instrument
        or the FAS133 exemption for derivative instruments indexed to a company’s own
        stock due to the variable conversion feature; that is, the variable conversion
        feature results in the presumption that the Company would have insufficient
        common shares to settle all of its share-indexed obligations. Since share
        settlement was not considered to be in the Company’s control, certain other
        non-exempt freestanding derivative instruments (principally warrants to purchase
        common stock) were considered tainted (that is, the aforementioned presumption
        puts their share settlement presumably beyond the Company’s control, also) and
        in accordance with Emerging Issues Task Force Consensus EITF 00-19, *Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in a
        Company’s Own Stock* , they
        were reclassed from stockholder’s equity to liabilities at their fair value of
        approximately $523,000.
 
 Proceeds
        from this financing arrangement were allocated to the fair value of the
        conversion option and warrants, based upon their fair values because
        share-settlement of these instruments was not considered to be within the
        Company’s control. There was no basis in the proceeds following the allocation
        to the derivative financial instruments to allocate to the Convertible Notes
        Payable. Thus, they were initially recorded a zero value and are subject
        to
        amortization over the term using the effective interest method.
 
 Financial
                  instrument:Warrant
                  derivative
              
              $
              13,895,090Compound
                  derivative
              
              
              8,113,451Convertible
                  notes payable
              
              
              —Financing
                  costs, net of cash costs of $454,851
              
              
              (867,357
              )Day-one
                  derivative loss
              
              
              (17,096,035
              )$
              4,045,149
 
 The
        derivative warrants were issued in two traunches, each having terms of five
        years. The traunches have exercise prices of $0.50 and $1.20, respectively,
        subject to adjustment in certain instances, including an adjustment in the
        event
        the Company’s EBITDA for the year ended December 31, 2006 is less than $.019 per
        share or if the Company’s EBITDA for the year ended December 31, 2007 is less
        than $.0549 on a fully-diluted basis, then the conversion price will be reduced
        by the percentage shortfall, up to a maximum of 30%. The Company fair valued
        the
        derivative warrants using the Black-Scholes-Merton Technique using a volatility
        factor of 90.76% and a risk free interest rate of $4.69%. The Company uses
        the
        Black-Scholes-Merton valuation technique for warrants because this technique
        embodies all of the assumptions necessary to fair value non-complex
        instruments.
 
 As
        reflected in the above table, proceeds were insufficient to record the
        derivative financial instruments at their fair values. Accordingly, the Company
        was required to recognize a day-one derivative loss in its statement of
        operations in the amount of $17,096,035. This charge was recorded in the
        Company’s third fiscal quarter of its year ended December 31, 2006.
  The
        Restated Certificate of Incorporation was filed on February 2, 2007, at which
        time, the conversion rate on the Convertible Promissory Notes became fixed
        at
        $.575 and the bifurcated conversion option no longer required separate
        derivative classification and accounting under FAS 133. However, the derivative
        value is still required to be adjusted to fair value on the date of this
        event
        and the adjustment is recognized in income. Based on the guidance of EITF
        06-07, *Issuers
        Accounting for a Previously Bifurcated Conversion Option No Longer Meets
        the
        Bifurcation Criteria in FASB Statement No.133* ,
        when a
        previously bifurcated conversion option no longer requires bifurcation, the
        Company is required to immediately adjust the derivative to fair value and
        reclass that amount to stockholder’s equity. Application of this standard
        resulted in reclassification of the fair value of the embedded conversion
        feature on the event date (amounting to $7,223,234) to Paid in capital. The
        warrants continue to require classification as derivative warrants because,
        notwithstanding the Company’s re-established ability to share settle all of its
        share-indexed financial instruments, the warrants continue to fail certain
        other
        requirements for equity classification (principally the requirement of payment
        of penalties in the event of non-filing of reports with the Securities and
        Exchange Commission; a requirement under the arrangement presumed not to
        be
        within the Company’s control).
 
 Generally,
        under EITF 06-07, the host debt instrument remains subject to continued
        amortization using the effective method following the reclassification of
        the
        embedded conversion feature to stockholder’s equity However, in accordance with
        the terms of the agreement, the convertible note automatically converted
        into
        Preferred Stock upon the filing of the Restated Certificate of Incorporation.
        Based on the guidance of APB 26, *Early
        Extinguishment of Debt* and a
        related Accounting Interpretation of APB Opinion No. 26, the carrying amount
        of
        the debt, including the unamortized discount was credited to the capital
        accounts upon conversion to reflect the stock issued and no gain or loss
        was
        recognized. Adoption of this guidance resulted in reclassification of $27,776
        to
        the capital accounts.
 
 On
        February 7, 2007, the Company entered into a letter agreement with Barron
        provided for (i) the waiver of all accrued and unpaid liquidated damages
        for not
        filing the registration statement and (ii) the extension to a later date
        of
        certain mandated events, such as the re-composition of the Board. This waiver
        required compensation in the form of warrants to purchase 1,900,000 shares
        of
        common stock which were valued at approximately $1,031,000 using the
        Black-Scholes-Merton technique. Significant assumptions used in the model
        included: exercise price of $.50; volatility factor of 126.43%; 5 year term
        to
        expiration; and a risk free rate of 4.73%. Since the warrants met the eight
        conditions for equity classification provided in EITF 00-19, the fair value
        of
        these warrants was classified as equity. The Company had an accrued liability
        amounting to $874,000 for liquidating damages and, accordingly, the difference
        between the fair value of the warrants and the carrying amount of the liability
        was recognized as a loss on extinguishment of $157,130.
 
 F-15
  
 **Note
        7-Goodwill and other intangible assets**:
 
 The
        table
        below presents amortizable intangible assets as of December 31, 2007
        .
 
 2007
              
              Gross
                  Carrying
                Amount
              
              Accumulated
                Amortization
              
              Net
                  Carrying
                Amount
              
              Weighted
                  Average amortization periodAmortizable
                  intangible assets:Customer
                  relationships
              
              $
              3,382,517
              
              $
              (845,629
              )
              $
              2,536,888
              
              
              5
                  yearsKnow
                  how and processes
              
              
              2,924,790
              
              
              (731,198
              )
              
              2,193,592
              
              
              5
                  yearsCustomer
                  backlog
              
              
              1,388,355
              
              
              (918,610
              )
              
              469,745
              
              
              3.64
                  yearsCustomer
                  lists
              
              
              279,717
              
              
              (125,871
              )
              
              153,846
              
              
              5
                  yearsEmployment
                  contract
              
              
              165,000
              
              
              (165,000
              )
              
              --
              
              
              1
                  year$
              8,140,379
              
              $
              (2,786,308
              )
              $
              5,354,071
 
 Total
        intangibles amortization expense was $1,990,164 for the year ended December
        31,
        2007.
 
 Estimated
        annual intangibles amortization expense as of December 31, 2007 is as
        follows:
 2008
              
              1,579,7672009
              
              1,579,7672010
              
              1,523,0772011
              
              
              579,9152012
              
              
              91,545Total
              
              $
              5,354,071
  The
        aggregate amount of goodwill acquired was $7,629,632 as of December 31, 2007.
        Under SFAS No. 142, “Goodwill and Other Intangibles”, goodwill and other
        indefinite-lived intangibles must be tested for impairment annually (or in
        interim periods if events indicate possible impairment). The Company tested
        goodwill for impairment as of year-end 2007 and 2006 and no impairment was
        indicated.
  SFAS
        142
        requires that a goodwill impairment assessment be performed at the "reporting
        unit" level. At December 31, 2007, the Company had one reporting unit, which
        was
        consistent with the Technology Services sector, which had a significant amount
        of goodwill. Under the provisions of SFAS 142, this reporting unit was tested
        for impairment as of December 31, 2007.
  Even
        though the Company determined that there was no goodwill impairment as of
        the
        December 31, 2007 annual assessment, the future occurrence of a potential
        indicator of impairment, such as a significant adverse change in legal factors
        or business climate, an adverse action or assessment by a regulator,
        unanticipated competition, a material negative change in relationships with
        significant customers, strategic decisions made in response to economic or
        competitive conditions, loss of key personnel or a more-likely-than-not
        expectation that a reporting unit or a significant portion of a reporting
        unit
        will be sold or disposed of, would require an interim assessment for some
        or all
        of the reporting units prior to the next required annual assessment on December
        31, 2008.
  **Note
        8 - Derivative financial instruments:**
 
 The
        balance sheet caption derivative liabilities consist of (i) embedded conversion
        features and (ii) the Warrants, issued in connection with the 2005 Laurus
        Financing Arrangement, the 2006 Omnibus Amendment and Waiver Agreement with
        Laurus, and the 2006 Barron Financing Arrangement. These derivative financial
        instruments are indexed to an aggregate of 49,287,620 and 46,923,550 shares
        of
        the Company’s common stock as of December 31, 2007 and 2006, respectively, and
        are carried at fair value. The following tabular presentations set forth
        information about the derivative instruments as of December 31, 2007 and
        for the year ended December 31, 2007 and 2006:
  Derivative
                  income (expense)
              
              Year
                  ended
                December
                  31, 2007
              
              Year
                  ended
                December
                  31, 2006Conversion
                  features
              
              $
              (467,120
              )
              
              (13,858,526
              )Warrant
                  derivative
              
              $
              5,438,051
              
              
              105,231$
              4,970,931
              
              
              (13,573,295
              )
 
 Liabilities
              
              December
                  31, 2007Compound
                  derivative
              
              $
              (—
              )Warrant
                  derivative
              
              $
              (7,217,099
              )Total
              
              $
              (7,217,099
              )
  Freestanding
        derivative instruments, consisting of warrants and options that arose from
        the
        Laurus and Barron financing are valued using the Black-Scholes-Merton valuation
        methodology because that model embodies all of the relevant assumptions that
        address the features underlying these instruments. Significant assumptions
        used
        in the Black Scholes models as of December 31, 2007 included conversion or
        strike prices ranging from $0.1 - $1.10; volatility factors ranging from
        112.73%
        - 131.27% based upon forward terms of instruments; terms-remaining term for
        all
        instruments; and a risk free rate ranging from 3.45% - 4.27%.
 
 Embedded
        derivative instruments consist of multiple individual features that were
        embedded in the convertible debt instruments. The Company evaluated all
        significant features of the hybrid instruments and, where required under
        current
        accounting standards, bifurcated features for separate report classification.
        These features were, as attributable to each convertible note, aggregated
        into
        one compound derivative financial instrument for financial reporting purposes.
        The compound embedded derivative instruments were valued using the Flexible
        Monte Carlo methodology because that model embodies certain relevant assumptions
        (including, but not limited to, interest rate risk, credit risk, and
        Company-controlled redemption privileges) that are necessary to value these
        complex derivatives.  Since the conversion feature no longer required
        bifurcation as of February 2, 2007, there was no compound derivative recorded
        as
        of December 31, 2007.
  **Note 9.
        Stockholders’ equity:**
  On
        August
        28, 2006, the Company designated 9,000,000 shares as Series A Convertible
        Preferred Stock (“Series A Preferred”) and 1,000,000, shares as Series B
        Convertible Redeemable Preferred Stock (“Series B Preferred”), each with a
        stated par value of $.01 per share.
  The
        Series A Preferred shares do not have voting rights or cumulative dividends.
        The
        preferred shares are convertible into the Company’s common stock at a fixed
        conversion price of $.23 per common share, subject to adjustment in certain
        instances, including the issuance by the Company of common stock at a price
        less
        $.23 per share. In the event the Company’s EBITDA for the year ended December
        31, 2006 is less than $.019 per share or if the Company’s EBITDA for the year
        ended December 31, 2007 is less than $.0549 on a fully-diluted basis, then
        the
        conversion price will be reduced by the percentage shortfall, up to a maximum
        of
        30%. Each share of Series A Preferred is convertible into 25 shares of the
        Company’s common stock and will be automatically converted into common stock
        upon a change in control or liquidation, at an amount equal to $.575 per
        share.
        The Series A Preferred stock ranks senior to holders of common stock with
        respect to payment of dividends and amounts upon liquidation, dissolution
        or
        winding up of the Company. If the Company does not deliver conversion shares
        in
        accordance with the terms of the agreement, the Company will be required
        to pay
        liquidating damages of $50 per trading day for each $5,000 of conversion
        value.
        These damages will increase to $100 per trading day after three trading days
        and
        $200 per trading day after six trading days.
 F-16
  The
        Series B Preferred shares do not have voting rights unless a vote is required
        by
        law in connection with a merger, consolidation or sale of substantially all
        of
        the Company’s assets. The holders of the Series B Preferred shares are entitled
        to receive an annual dividend of $.05 per share, payable quarterly, commencing
        November 1, 2006. The Series B Preferred stock ranks senior to holders of
        common
        stock with respect to payment of dividends and amounts upon liquidation,
        dissolution or winding up of the Company. One year from the date the Certificate
        of Designation is filed, the preferred stock will automatically convert into
        common stock at a rate of 8 1/3 shares of common stock for every share of
        Series
        B Preferred Stock provided that all accrued and unpaid dividends on the Series
        B
        preferred have been paid. The Company has the right to redeem the Series
        B
        Preferred Stock, any time prior to one year from the date the Certificate
        of
        Designation is filed with the Secretary of State, at $.50 per share.   No
        dividends have been declared on the Series B Preferred Stock.
 
 On
        February 2, 2007 the Company affected a one-for-ten reverse stock split
        restating the common shares from 166,424,280 to 16,642,428. All reference
        to
        shares has been restated to reflect the reverse.
 
 On
        February 2, 2007 the Company file a restated certificate of incorporation
        with
        the State of Delaware, upon the effectiveness the principal and interest
        due on
        the Barron note was automatically converted into 7,826,087 shares of the
        Company's Series A Preferred Stock as is determined by dividing the principal
        amount of the note by the Conversion Price, at $.575.
 
 In
        2007,
        the company incurred liquidated damages for not having its registration
        statement effective within 120 days from the filing date as stated in its
        registration rights agreement with Barron LP. The damages amounted to 55,599
        shares of series A Preferred stock issued to Barron to satisfy the liquidated
        damages. The Company recorded $65,749 in finance expense pertaining to these
        damages in the year ended 2007..
 
 On
        December 27, 2007, the Company received a conversion notice from Barron
        converting 40,000 shares of Preferred Series A stock to 100,000 shares of
        common. The common shares were issued and the conversion was recorded in
        the
        shareholders’ equity for the year ended 2007.
  **Note
        10- Dividends**
  On
        September 19, 2006, the Company entered into a private placement with Barron
        Partners LP (Barron), pursuant to which the Company sold Barron a convertible
        subordinated promissory note in the principal amount of $4.5 million (See
        Note
        9). As a result of the filing of our amended and restated certificate of
        incorporation with the State of Delaware, on February 2, 2007, the principal
        and
        interest due on the Barron note automatically converted into 7,826,087
        shares of Series A Convertible Preferred Stock.
 
 Under
        the
        terms of the Series A Convertible Preferred Stock Certificate of Designation,
        the conversion rate of the preferred stock was to be adjusted based on whether
        the Company met certain operating performance criteria. The criteria was
        measured based on the operating results of fiscal 2007. During fiscal 2007
        the
        initial $0.23 per share conversion rate on the preferred stock was adjusted
        downward as the Company did not achieve $0.549 pre-tax earnings per share
        from
        continuing operations and excluding non-recurring items during fiscal 2007.
        The
        adjustment was limited to a maximum of 30%.
 
 Pursuant
        to EITF 98-5 a contingent beneficial conversion feature is measured at
        commitment date but is not recognized in earnings until the contingency is
        resolved. The Company recognized an incremental deemed dividend and adjustment
        to retained earnings of $2,954,507, on December 31, 2007, representing the
        intrinsic value of the additional costs of the shares issued arising from
        the
        reduction in the preferred stock conversion rate (from $0.23 to $0.161 per
        share) arising from the effects of not attaining the 2007 operating performance
        targets.
 
 The
        Company has also recorded dividends payable on the $1,000,000 5% Series B
        Preferred Stock in 2007. Dividends can not be paid as long as the Company
        has an
        outstanding balance of its revolving line of credit.
 
 **Note
        11- Income Taxes**
 
 The
        tax
        provision consists of the following:
  December
                  31, 2007
              
              December
                  31, 2006Current
              
              
              
              
              
              -0-Deferred
              
              $
              1,325,976
              
              
              -0-
 
 
 The
        components of the deferred tax assets (liability) as of December 31,
        2007:
 
 Deferred
                  Tax Assets:
              
              2007Net
                  Operating loss carry forward
              
              $
              6,949,095Derivative
                  liability
              
              
              2,930,142Total
                  Deferred Tax Asset
              
              
              9,879,237Valuation
                  allowance forDeferred
                  tax asset
              
              
              9,879,237Deferred
                  Tax liability:Intangible
                  Assets
              
              
              2,355,790Cash
                  to accrual
              
              
              306,164Total
                  Deferred Tax Liability
              
              
              2,661,954Net
                  Deferred TaxLong
                  Term
              
              
              2,661,954Net
                  deferred tax
              
              $
              2,661,954
  As
        of
        December 31, 2007, the Company generated a net operating loss carry forwards
        of
        approximately $15,684,987 available expiring 2010-2027.
 
 There
        were certain adjustments made to goodwill resulting from a correction of
        accounting for deferred income taxes related to prior year stock acquisitions.
        See Note 2, and 14. The net effect was to increase overall goodwill by
        $3,581,766 for 2006 and 2005 acquisitions, with a corresponding increase
        to net
        deferred tax liability. There was no income statement impact resulting from
        this
        adjustment.
  The
        provision for income taxes reported for the year ended December 31,
        2007.
  Year
                  EndedDecember 31,
                  2007Provision
                  (benefit) for taxes using statutory rate
              
              $
              816,081State
                  taxes, net of federal tax benefit
              
              
              (1,320
              )Permanent
                  differences:Qualified
                  stock based compensation
              
              
              (83,558
              )Other
              
              
              (26,873
              )Derivatives
              
              
              (1,690,117
              )Changes
                  in Prior year Deferred Tax estimatesState
              
              
              (81,340
              )Changes
                  in Prior year Deferred Tax estimatesFederal
              
              
              (244,020
              )Provision
                    (Benefit) for income taxes
              
              $
              (1,325,976
              )
 
 The
        Company and its subsidiaries have adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income taxes” (FIN 48) effective January 1, 2007.
        The Company had identified its federal consolidated tax returns as a “major”
taxing jurisdiction as defined under FIN 48. At December 31, 2007 the company
        has evaluated its tax filings with major tax jurisdiction for the calendar
        years
        2004 through 2007. These years remain open and can be subjected to an
        examination. Based on its evaluation, the Company believes that its income
        tax
        filings positions and deductions would be sustained under examination and
        does
        not anticipate any adjustments that would result in a material change in
        its
        financial position. Therefore, no allowance for uncertain income tax positions,
        including interest and penalties, were required to be recorded at December
        31,
        2007 pursuant to FIN 48. Additionally, no cumulative effect of an accounting
        change resulted from the Company’s initial adoption of the FASB Interpretation.
 F-17
 
 **Note
        12- Commitments**
 
 The
        Company leases its office, sales and manufacturing facilities under
        non-cancelable operating leases with varying terms expiring in 2009 and 2010.
        The leases generally provide that the Company pay the taxes, maintenance
        and
        insurance expenses related to the leased assets.
 
 Future
        minimum lease payments required under operating leases that have initial
        or
        remaining non-
 2008
              
              265,3302009
              
              295,0682010
              
              251,342Total
                  minimum lease payments
              
              $
              811,740
  Total
        rent expense for was $372,134 and $276,575 for the year ended December 31,
        2007
        and 2006 respectively.
  **Note
        13- Private Placement - Equity Financing**
  Between
        April 14, 2006 and May 11, 2006 the Company sold 2,274,951 shares of common
        stock and 1,161,587 warrants to purchase additional shares of common stock
        to
        various accredited investors in a private placement The Company received
        $1,293,906 and exchanged $100,000 of accrued expenses for a total of $1,393,906.
        Each unit is comprised of 10 shares and 5 warrants to purchase one shares
        of
        common stock with an exercise price of $1.20 per share exercisable for five
        years. Each 100 shares of common stock and one common stock purchase warrant
        were sold for a per-unit price of $60.00, or $0.60 per share.
  F-18
  **Note
        14-Related party agreements**
  On
        October 16, 2007 the Company entered into a severance agreement with Michael
        Ricciardi the former COO of the Company, which supersedes his September 19,
        2006
        employment agreement. Per the agreement the Company will pay $210,000 as
        follows: $20,000 upon signing of the agreement and $190,000 shall be paid
        in
        equal bi-monthly payment for 12 months. For such consideration the employee
        agrees to a non- compete agreement for the next 12 months.
 
  On
        August
        28, 2006 the Company amended Mr. Paul Burgess's 2003 employment contract
        as
        follows: Mr. Burgess will receive an incentive bonus of 5% of the before
        tax net
        income of the most recent twelve month period of any acquisition closed by
        the
        Company during the term of this contract. On November 3, 2006, the Board
        of
        Directors approved a bonus in connection with the RTI acquisition and Barron's
        financing of $52,500.The bonus was recorded in general and administrative
        expenses. Mr Burgess is eligible for a bonus of $100,000 upon effective
        registration of SB2 filed February 12, 2007. As of December 31, 2007 he has
        not
        been awarded the bonus. Mr. Paul Burgess CEO & President of the Company
        waived his right to the base salary of $112,500 for the first half of 2006.
        Mr.
        Burgess salary was $225,000 and $165,000 including bonuses in 2007 and 2006
        respectively. Mr Burgess is currently renegotiating his contract.
  F-19
  On
        March
        7, 2005, the Company signed a three year employment contract with Joe Noto
        to be
        its Vice President of Finance and Administration, at an initial annual base
        salary of $130,000, He is also entitled to a cash incentive bonus equal to
        20%
        of Base Salary based on meeting predetermined company objectives. In 2007,
        Mr.
        Noto was granted a bonus of $30,000. In July 2005, he was granted 200,000
        options to purchase the Company’s stock at $1.00 per share. He will also receive
        medical, vacation and profit sharing benefits consistent with the Company's
        current policies. Effective May 12, 2005, Joe Noto assumed the position as
        Chief
        Financial Officer of the Company at an annual base salary of $150,000. Mr.
        Noto
        contract is currently being renegotiated.
  **Note
        15-Share-based payments:**
 
 **A)
        2002 Employee Stock Option Plan**
 
 On
        November 6, 2002 the stockholders approved the adoption of The Company's
        2002
        Employee Stock Option Plan. Under the Plan, options may be granted which
        are
        intended to qualify as Incentive Stock Options ("ISOs") under Section 422
        of the
        Internal Revenue Code of 1986 (the"Code") or which are not ("Non-ISOs") intended
        to qualify as Incentive Stock Options thereunder. The maximum number of options
        made available for issuance under the Plan are two million (2,000,000) options.
        The options may be granted to officers, directors, employees or consultants
        of
        the Company and its subsidiaries at not less than 100% of the fair market
        value
        of the date on which options are granted. The term of each Option granted
        under
        the Plan shall be contained in a stock option agreement between the Optionee
        and
        the Company.
 
 **2007****Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**Outstanding
                  at the beginning of the year
              
              
              1,327,000
              
              $
              1.00Granted
              
              
              -0-Forfeited
              
              
              152,800
              
              $
              0.60Outstanding
                  at the end of year end
              
              
              1,174,200
              
              $
              1.00Option
                  exercisable at year end
              
              
              957,533
              
              $
              0.60Weighted
                  average fair value of options granted during the year
              
              
              -0-Stock-Based
                  compensation expense
              
              $
              245,760
  No
        options were issued in the twelve month period ended December 31,
        2007.
 
 The
        weighted-average fair value per share of the options granted during 2006
        was
        estimated on the date of grant using the Black-Scholes-Merton option pricing
        model; the following assumptions were used to estimate the fair value of
        the
        options at grant date based on the following:
 
 F-20
  2006Risk-Free
                  interest rate
              
              
              4.65
              %Expected
                  dividend yield
              
              
              -Expected
                  stock price volatility
              
              
              156
              %Expected
                  option Life
              
              
              10
                  years
 
 **b)
        Employee Stock Purchase Plan**
 
 In
        2002
        the Company established an Employee Stock Purchase Plan. The Plan is to provide
        eligible Employees of the Company and its Designated Subsidiaries with an
        opportunity to purchase Common Stock of the Company through accumulated payroll
        deductions and to enhance such Employees' sense of participation in the affairs
        of the Company and its Designated Subsidiaries. It is the intention of the
        Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
        Section 423 of the Internal Revenue Code of 1986. The provisions of the Plan,
        accordingly, shall be construed so as to extend and limit participation in
        a
        manner consistent with the requirements of that section of the Code. The
        maximum
        number of shares of the Company's Common Stock which shall be made available
        for
        sale under the Plan shall be two million (2,000,000) shares. There are no
        shares
        issued under the plan in 2007 or 2006.
 
 **Note
        16- Benefit Plan**
 
 The
        Company has 401K plan which covers all eligible employees. The Company matches
        5% of employee contributions. Pension expense for the years ended December
        31,
        2007 and 2006 were $40,376 and $0, respectively.
 
 **Note
        17-Major Customers**
 
 With
        the
        RTI acquisition in September 2006 and the SMEI acquisition closed in February
        2005, our primary "end-user" customer is the U.S. Department of Defense (DoD)
        which accounted for approximately 91% and 77% of our total revenues for 2007
        and
        2006 respectively.
 
 **Note
        18- Correction and Restatement:**
 
 After
        analyzing the materiality of the impart arising from the weaknesses in internal
        control identified in Item 8A in accordance with the provisions of SAB 108
        ( See
        Note11 ), management concluded that the financial statements for the years
        ended
        December 31, 2006 and 2005 should be corrected to reflect the proper accounting
        related to income taxes. The impact resulting from these corrections for
        income
        tax accounting that only had a balance sheet impact was to increase net deferred
        tax liabilities by $3,082,894 and $498,872 for the years ended December 31,
        2006
        and 2005 respectively, with a corresponding net increase to goodwill.
 
 The
        accompanying consolidated statement of operations for the year ended December
        31, 2006 has been restated to correct an error related to the improper expense
        of $720,185 direct financing costs that are required to be recorded in
        stockholders’ equity. Accordingly, the accompanying restated income statement
        was higher by this amount of the restatement. There was no effect on the
        statement of cash flow.
 
 **Note
        19-Subsequent events**
 
 On
        March
        7, 2008, Lattice Incorporated (the “Company”) entered into a Loan and Security
        Agreement (the “Loan Agreement”) with the Private Bank of Peninsula (“Private
        Bank”) pursuant to which Private Bank agreed to extend a line of credit of up
        to
        $4.0 million to the Company. Pursuant to the Loan Agreement, the Company
        can
        request advances on the Line of Credit, which in the aggregate do not exceed
        85%
        of the Company’s eligible accounts. The Line of Credit bears interest at 3%
        above the Prime Rate.
 
 Upon
        execution of the new line of credit the Company paid the balance of $538,913
        on
        their former revolving line of credit.
 
 F-21