UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C. 20549




Form
10-K




(Mark
One)




x
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008




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


FOR
THE TRANSITION PERIOD FROM __________ TO __________




COMMISSION   FILE NUMBER
______________________________







LATTICE
INCORPORATED


(Exact
name of registrant as specified in 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)





Registrant'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




Indicate
by check mark if the registrant is a   well-known seasoned
issuer, as defined in Rule 405 of te Securities Act


Yes o   No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o   No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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




Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained in this form, and
will not 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-K or any amendment to this Form 10-K.  o









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





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
            Smaller
      reporting company x





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


Yes o   No x




The
aggregate market value of the voting and non-voting common stock held by
non-affiliates, based on the closing price of such common stock as reported on
the OTC Bulletin Board as of June 30, 2008 was $2,032,824.




As of
April 8, 2009, the issuer had 16,829,950 outstanding shares of Common
Stock.




DOCUMENTS
INCORPORATED BY REFERENCE: NONE










TABLE OF
CONTENTS





PagePART
      IItem
      1.
                                Business
                                1Item
      1A.
                                Rick
      Factors
                                10Item
      1B.
                                Unresolved
      Staff Comments
                                14Item
      2.
                                Propreties
                                14Item
      3.
                                Legal
      Proceedings
                                15Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                15PART
      IIItem
      5.
                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchase of Equity Securities
                                15Item
      6.
                                Selected
      Financial Data
                                18Item
      7.
                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                                18Item
      7A.
                                Quantitative
      and Qualitative Disclosures About Market RiskItem
      8.
                                Financial
      Statements and Supplementary Data
                                28Item
      9.
                                Changes
      In and Disagreements with Accountants on Accountingand
      Financial Disclosure
                                28Item
      9A.
                                Controls
      and Procedures
                                28Item
      9B.
                                Other
      Information
                                28PART
      IIIItem
      10.
                                Directors,
      Executive Officers, Promoters and Corporate Governance
                                29Item
      11.
                                Executive
      Compensation
                                30Item
      12.
                                Security
      Ownership of Certain Beneficial Owners and Managementand
      Related Stockholder Matters
                                34Item
      13.
                                Certain
      Relationship and Related Transactions, and Director
      Independence
                                36Item
      13.
                                Principal
      Accountant Fees and Services
                                36Item
      14.
                                Exhibits
                                37SIGNATURES
                                41











PART I




ITEM
1. DESCRIPTION OF BUSINESS.


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.




At
December 31, 2008, 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 telecom service providers. 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.




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.





1





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;




2




·
            Configuration
      Management;




·
            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:




3




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.





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





Nexus
Call Control System




The Nexus
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 Nexus Call Control System is capable of handling thousands of call
transactions per hour and provides telecom service providers with effective
tools to manage telephone calls. The Nexus can scale handle small to large
facilities without sacrificing features or performance.





Nexus
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 Nexus calls and databases via an Ethernet Local Area
Network (LAN) or a Wide Area Network (WAN).




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





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.




4




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 Nexus family of 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 Technology Services Segment (SMEIand RTI) revenues are dependent upon
continued funding of the United States government agencies that we serve. The
portion of total company revenues contingent on government funding represented
approximately 93% of our total revenues for the twelve months ended
December 31, 2008 and 91% for the year ended December 31, 2007. 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.





5





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




6




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.
  7
  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.
 
 8
 
 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
March 31, 2009, we had 42 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.
 
 9
  As of
March 31, 2009, , our Government Services segment comprised of SMEI and
RTI  had 32 full time employees and one part time employee. None of
SMEI’s or RTI’s employees are covered by a collective bargaining agreement.
Relations with employees considered to be good.
  ITEM
1A. RISK FACTORS
 
 RISKS RELATED TO OUR  
BUSINESS
  Liquidity
Risk
 
 Our
liquidity is highly dependent on our (i) cash reserves (ii) availability on our
credit facility and (iii)our ability to achieve our current business plan . In
the event there is an unexpected downturn in our business or we are unable to
achieve our operating goals, the Company would need to modify its debt
agreements, curtail operations and obtain alternative funding in a challenging
credit environment. We generated an operating cashflow deficit of $23,583 for
2008. We had net borrowing proceeds on our line of credit of $717,928
which  increased the outstanding balance on our credit facility to
$1,458,000 as of December 31, 2008 from  $740,000  December
31 2007.  Since our borrowing capacity is limited by the level of our
eligible trade receivables, more reliance will be placed on our ability to
achieve planned operating performance to fund our debt payments coming due in
the next twelve months. We cannot give any assurance that we will be able to
achieve our planned operating goals nor give any assurance of our ability to
obtain alternative financing.
 
 We
depend on contracts with the federal government for a substantial majority of
our revenue, and our business could be seriously harmed if the government
significantly decreased or ceased doing business with us.
  We
derived 93% of our total revenue in FY2008 and 91% of our total revenue in
FY2007 from federal government contracts, either as a prime contractor or a
subcontractor. We expect that federal government contracts will continue to be
the primary source of our revenue for the foreseeable future. If we were
suspended or debarred from contracting with the federal government generally,
with the General Services Administration, or any significant agency in the
intelligence community or the DoD, or if our reputation or relationship with
government agencies were to be impaired, or if the government otherwise ceased
doing business with us or significantly decreased the amount of business it does
with us, our business, prospects, financial condition and operating results
could be materially and adversely affected.
 
 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 either as a Prime
or a subcontractor accounted for approximately $15,149,944, or 93% of revenues,
for the year ended December 31, 2008 as compared to $13,853,580, or 91% of our
sales for the year ended December 31, 2007. Our government contracts are
incrementally funded for periods ranging up to twelve months, 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
material decline in our revenues and cash flows.
 
 We
derive a significant portion of our revenues from two multi-year contract
vehicles.
  Approximately
68% of our 2008 revenues versus 20% in 2007 come from two contract vehicles
(Seaport-e and SSA Task orders) under Joint Program Manager Information Systems
(JPMIS). These contracts are multi-year contracts (Base Year plus four option
years) and are incrementally funded for interim periods up to twelve
months.  A termination or modification of these contracts would
seriously harm our business and have a material impact on
the  Company’s revenues and cash flows.
 
 10
  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.
  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;
  11
  ·
              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;
 
 12
  ·
              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 the needs of other
markets.
  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 8, 2009, we had 16,829,950 shares of common stock issued and 16,529,441
outstanding. Additionally, we have 49,178,133 shares of common stock issuable
upon conversion of our preferred stock 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.
  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
$0.06 to $0.59. 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.
  13
 
 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
1B. UNRESOLVED STAFF COMMENTS
 
 N/A
 
 ITEM
2. PROPERTIES.
 
 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.
 
 14
 
 RTI
leases a facility located at 8306 Rugby Road, Manassas VA. The facility is
comprised of 3,166 square feet of space. The lease expires on May 31, 2010. .
The Company does not utilize the space since it combined operations of SMEI and
RTI at our Herndon facility. We have engaged a broker to market the space as a
sublet.  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 REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY
SECURITIES.
 
 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 for the years ended December 31, 2008
and 2007 and the interim periods through April 8, 2009.. 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, 2009
 High
                        
                        
                        LowFirst
      Quarter ended March 31, 2009
                        
                        $
                        .15
                        
                        
                        $
                        .065Second
      Quarter ended June 30, 2009 (through April 8, 2009)
                        
                        $
                        .12
                        
                        
                        $
                        .12
 
 
 Year
Ended December 31, 2008
 High
                        
                        
                        LowFirst
      Quarter ended March 31, 2008
                        
                        $
                        .65
                        
                        
                        $
                        .28Second
      Quarter ended June 30, 2008
                        
                        $
                        .42
                        
                        
                        $
                        .25Third
      Quarter ended September 30, 2008
                        
                        $
                        .32
                        
                        
                        $
                        .20Fourth
      Quarter ended December 31, 2008
                        
                        $
                        .27
                        
                        
                        $
                        .06
 
 
 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
  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.
  15
  HOLDERS
  As of
April 8, 2009, we had 16,929,850 outstanding shares of common stock held by
approximately 291 stockholders of record. The transfer agent of our common stock
is Continental Stock Transfer and Trust Company.
  DIVIDENDS
 
 The
Company has  recorded dividends on 502,160  shares
of  5% Series B Preferred Stock.  In 2008, the Company
recorded $25,108 of dividends payable. Dividends cannot be paid as long as the
Company has an outstanding balance on its revolving line of credit.
 
 16
 
 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, 2008.
  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
      issuanceunder equitycompensation
                                        plans
      (excludingsecurities
                                        reflected
      incolumn
      (a)(a)
                                      
                                      (b)
                                      
                                      (c)Equity
      compensation plans approved by security holders
                                      7,681,0000
                                      
                                      $
                                      0.41
                                      
                                      4,158,000Equity
      compensation plans not approved by security holders
                                      -0-
                                      
                                      
                                      -0-
                                      
                                      -0-Total
                                      7,681,000
                                      
                                      $
                                      0.41
                                      
                                      4,158,000
  RECENT
SALES OF UNREGISTERED SECURITIES
  None.
 
 17
  
 ITEM
6. SELECTED FINANCIAL DATA
 
 N/A
 
 ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 thirty years.
 
 18
   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 issued 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.
 
 19
 
 RESULTS OF OPERATIONS - YEAR ENDED
DECEMBER 31, 2008 COMPARED TO THE YEAR ENDED DECEMBER 21,
2007
 
 The
following tables set forth income and certain expense items as a percentage of
total revenue:
   For the Years Ending 
      December 31,2008
                          
                          
                          2007Sales
                          
                          $
                          16,268,481
                          
                          
                          $
                          15,217,827Net
      income
                          
                          $
                          934,237
                          
                          
                          $
                          3,726,213Net
      income (loss) per common share – Diluted
                          
                          $
                          (0.04
                          )
                          
                          $
                          0.01
  OPERATING
      EXPENSES
                                            
                                            
                                            PERCENT
      OF SALES2008
                                            
                                            
                                            2007
                                            
                                            
                                            2008
                                            
                                            
                                            2007Research
      & Development
                                            
                                            
                                            518,342
                                            
                                            
                                            
                                            432,069
                                            
                                            
                                            
                                            3.2
                                            
                                            
                                            
                                            2.8
                                            %Selling,
      General & Administrative
                                            
                                            
                                            4,667,374
                                            
                                            
                                            
                                            6,113,338
                                            
                                            
                                            
                                            28.7
                                            %
                                            
                                            
                                            37.6
                                            %
  SALES:
 
 Total
Revenues for the fiscal year ended December 31, 2008 increased to
$16,268,481compared to $15,217,827 in the prior year ended December 31, 2007,
representing an increase of $1,050,654 or 6.9%.
  We
derived 93% and 91% of our revenue during the twelve months ended
December 31, 2008 and 2007, respectively, from contracts with U.S.
government agencies which we segment as Technology Services. Our Technology
Service revenues are derived from services 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.
Approximately 68% of our 2008 revenues were derived from two contract vehicles
under JPMIS, our Seaport-e and SSA contracts, which compared to approximately
20% of revenues in the previous year..
  20
   COST OF
SALES:
 
 Cost of
Sales for the fiscal year ended December 31, 2008 increased 33.5% to $11,245,484
from $8,423,090 for the prior year ended December 31, 2007. The increase in cost
of sales was attributable to a higher component of our 2008 revenues being
provided by subcontractors as opposed to in-house or direct labor. Cost of sales
in our  Goverment Services segment consists of direct labor and other
direct costs (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  to 69.1% from 55.4%
for the same period in 2007. 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 and SSA
contract vehicles which were awarded late in the 3rd quarter of
2007.  Revenues supported by subcontractors accounted for
approximately 50% of our overall revenues versus approximately 25% for 2007.
 
 RESEARCH
AND DEVELOPMENT:
 
 Research
and Development Expenses increased slightly to $518,342 for the fiscal year
ended December 31, 2008 from $432,069 in the year ended December 31, 2007.
Engineering staffing levels are comparable to 2007 levels. Management believes
that continual enhancements of the Company's products will be required to
enable  us to maintain its competitive position. We  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, fringe costs,
indirect overhead costs, accounting, consulting fees, sales commissions,
non-cash depreciation and amortization expenses, marketing, and facilities
costs. For the year ended December 31, 2008, SG&A decreased to
$4,667,374from $6,113,338 for the comparable year ended December 31, 2007,
representing a decrease of $1,445,964 or 23.7%. As a percentage of revenues,
SG&A costs for 2008 decreased to 28.7% from 40.1.6% for the year ended
December 31, 2007. The decrease in SG&A was mainly attributable to lower
fringe and indirect overhead costs, which decreased proportionately to the
decline in our direct labor costs combined with cost reductions in general and
administrative expenses. Also, in the prior year period, the company incurred
non-recurring corporate expenses of approximately $500,000 related to “one-time”
business development fees and executive hiring efforts.
 
 AMORTIZATION
& IMPAIRMENT
 
 Non-cash
amortization expense for 2008 and 2007 related to intangible assets recognized
in the purchase accounting of SMEI and RTI amounted to $1,488,228 and $1,990,164
respectively.  The decrease in 2008 is attributable to intangibles
being fully amortized in 2007. In addition, the Company recorded an impairment
charge in the 4th quarter
of 2008 totaling $5,486,342 related to the valuation of intangibles and goodwill
recorded in conjunction with the SMEI and RTI acquisitions (See Note 9 for a
full discussion)
  INTEREST
EXPENSE
 
 Interest
Expense consists of interest paid and accrued on our notes payable and
outstanding balance on our credit facility. Interest expense decreased to
$230,839 for the year ended December 31, 2008 from $494,414 for the prior year
ended December 31, 2007. Included in interest expense for 2007 was $110,618
related to the amortization of debt discount on the 2006 Barron Convertible Note
which was converted to Preferred Stock in February 2007. Excluding the effects
of the derivative expense, interest costs decreased to $230,839 from $383,796 in
2007. The decrease in interest year on year was attributed to lower interest
rates incurred on our line of credit versus the prior year rate.  We
expect interest to increase in the future due to our loan agreement with the
former RTI Shareholders and the factoring agreement with Republic Capital closed
on March 20, 2009.
 
 21
  FINANCE
EXPENSE:
 
 Finance
Expense for the year ended December 31, 2008 amounted to $0, compared to $99,279
for the year ended December 31, 2007. Finance expense in 2007 represents our
amortization of deferred financing fees that were incurred with the September
2006 Barron financing amounting. to $99,279. Financing expense for 2007 also
included damages under registration payment arrangements that we paid for delays
in the meeting registration effectiveness dates. Subsequent to December 31,
2007, the Company and the investors settled these liquidated
damages.
  DERIVATIVE
INCOME (EXPENSE):
 
 The
following table is derived from Note 10 in the accompanying financial
statements.
  Year
      ended
                                    December
      31, 2008
                                  
                                  
                                  Year
      ended
                                    December
      31, 2007Derivative
      income
                                  
                                  $
                                  3,147,958
                                  
                                  
                                  $
                                  (467,120
                                  )Conversion
      features and day-one derivative loss
                                  
                                  $
                                  --
                                  
                                  
                                  $
                                  5,438,051Warrant
      derivative
                                  
                                  $
                                  3,147,958
                                  
                                  
                                  $
                                  4,970,931
 
 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.
 
 22
  EXTINGUISHMENT
INCOME (LOSS):
 
 In 2008,
the Company recorded $2,695,025 as a gain on extinguishment for the issuance of
520,000 shares of newly issued Series C Convertible Preferred Stock in exchange
(See Note 6 the “Barron Exchange”) for the  return of Barron’s
unregistered warrants to the Company for cancellation in exchange
 
 In 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 $157,000.
 
 NET
INCOME :
 
 The
Company's net income for the year ended December 31, 2008 was $934,237 which
compared to net income of $3,726,213 for the year ended December 31, 2007. Net
income  is influenced by the matters discussed in the other sections
of this MDA However, it should be noted that our 2008 net income included
$3,147,958 compared to $4,970,932 in 2007 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 above where we discuss the material
assumptions underlying fair value adjustments and their potential effect on
income. Also included in our 2008 income was a non-cash extinguishment gain of
$2,695,025 recorded on the exchange with Barron of Preferred Series C Stock for
outstanding warrants.
 
 INCOME  APPLICABLE
TO COMMON STOCKHOLDERS:
 
 Income  applicable
to common stock gives effect to our net income , cumulative undeclared dividends
on our Series B Preferred Stock amounting to $25,108 and $50,000 for the year
ended December 31, 2008 and 2007, 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.
 
 23
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Company
has had negative trend in 2008 gross margin relative to revenues, negative
operating cash flow for 2008 and historical working capital deficiencies.
Management expects the going concern opinion to be removed upon achieving its
planned operating results for 2009.
 
 At
December 31, 2008, the Company’s current assets of $5,005,532 compared to
current liabilities of $5,407,146. Current liabilities included $200,606 of
non-cash derivative liabilities.
 
 Cash and
cash equivalents increased to $1,363,130 at December 31, 2007 from $769,915 at
December 31, 2007. Net cash used for operating activities was $23,583 for the
twelve months ended December 31, 2008 compared to net cash provided by operating
activities of $1,086,050 in the corresponding twelve months ended December 31,
2007.
  Net cash
used in investment activities was $15,560 for the twelve months ended December
31, 2008 compared to $24,916 in the corresponding period ended December 31,
2007. Purchase of Property, Plant and equipment totaled $15,560 for 2008
compared to $24,916 prior year. With revenues  focused on services,
there is not a significant requirement for capital expenditures. The capital
requirement is limited to personal computers, in-house servers and network
infrastructure.
  Net cash
provided by financing activities was $632,358 for the twelve months ended
December 31, 2008 compared to net cash used by financing activities of $683,494
in the corresponding twelve months ended December 31, 2007. The $632,358
consisted of, repayments of short term notes totaling $85,570 favorably offset
by increased net borrowings on our line of credit facility of
$717,928.
 
 24
   On March
11, 2009, Lattice Incorporated (the “Company”) entered into an Accounts
Receivable Purchase Agreement (the “Agreement”) with Republic Capital Access,
LLC (“Republic Capital”).  The Agreement shall terminate on December
31, 2009 unless otherwise extended by the parties.  The maximum amount
of receivables purchased under the Agreement shall not exceed
$2,500,000.
 
 Pursuant
to the terms of the Agreement, Republic Capital agreed to purchase certain
eligible receivables of the Company (the “Eligible Receivables”) at an initial
purchase price equal to 90% of the face amount of the Eligible Receivables (the
“Initial Purchase Price”). Within 2 days of the collection of the Eligible
Accounts (the “Residual Payment Date”), Republic Capital shall pay the Company
an amount equal to the total amount collected less the sum of (i) the Initial
Purchase Price; (ii) the Discount Factor (as defined below) owed with respect to
the purchased receivable; and (iii) the total of all accrued and unpaid Program
Access Fees.  On each Residual Payment Date, Republic Capital is
entitled to deduct from any collections an amount equal to 0.35% of the face
amount of the purchased receivable (the “Discount Factor”).  Upon
execution of the Agreement, the Company paid Republic Capital an enrollment fee
of $12,500.  Further, on each Residual Payment Date, an amount equal
to the sum of 0.0226% of the daily ending account balance for each day during
the applicable period shall be deducted from the amount collected (the “Program
Access Fee”).  In addition, pursuant to the terms of the Agreement,
the Company shall pay Republic Capital a quarterly fee equal to $2,500 if the
average account balance for each day is less than $1,500,000.On March 20, 2008,
Lattice Incorporated (the “Company”) paid off the outstanding balance on its
line of credit of $1,465,076 with Private Bank with $800,000 from its cash
reserves and the remaining $665,076 advanced by Republic Capital Access.
(“RCA”)
  Liquidity
is our ability to maintain a sufficient cash position, generate cash flows from
operating activities and have availability on our Accounts Receivable credit
facilities to meet our future 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, 2008, we had  $1,363,130 in cash and
cash equivalents. We have approximately $300,000 of principal payments on our
outstanding debt coming due in the next twelve months.  Additionally,
our interest costs will be approximately $300,000 annually assuming we maintain
the outstanding balance on our Accounts Receivable credit facility at current
levels. The Company is highly dependent on its planned cash flows from
operations and availability on its credit facility which is supported by the
level of its trade receivables. The Company’s ability to achieve its planned
operating cash flows is highly dependent on the continued issuance of periodic
funding task orders under its main contract vehicles  with JPMIS
(Seaport-e and SSA) which accounted for approximately 70% of the Company’s 2008
revenues. In the event that there is a disruption in these contract vehicles it
could materially impact the Company’s ability to continue to operate as a going
concern.
 
 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.
  25
  Basis of Financial Statement
Presentation
 
 At
December 31, 2008 the Company has a working capital deficiency of $401,614
including non-cash derivative liabilities of $201,000.  During 2008
the Company had a loss from operations of $7,137,288 of which $5,486,341 was in
impairment charge on intangibles, the balance of the loss was $1,650,947. 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. The accompanying financial statements do not
include any adjustments that may result from the outcome of this
uncertainty.
  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.
 
 26
  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.
  The
Company provides IT and business process outsourcing services under cost
reimbursable, 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 a contract has
been executed, the contract price is fixed and determinable, delivery of
services or products has occurred, and collectability of the contract price is
considered probable and can be reasonably estimated.
 
 ·
              Under
      cost reimbursable contracts, the Company is reimbursed for allowable
      costs, and paid a fee. Revenues on cost reimbursable contracts are
      recognized as
      costs are incurred plus an estimate of applicable fees earned. The
      Company considers fixed fees under cost reimbursable contracts to be
      earned in proportion of the allowable costs incurred in performance of the
      contract.  Certain cost under government contracts are subject
      to audit by the government.  Indirect costs are charged to
      contracts using provisional or estimated indirect rates, which are subject
      to later revision based on government audits.  Management
      believes that any adjustment by the government will not be material to the
      financial statements.
  ·
              Revenue
      on time and materials contracts are recognized based on direct labor hours
      expended at contract billing rates and adding other billable direct
      costs.  For fixed price contracts that are based on unit pricing or
      level of effort, the Company recognizes revenue for the number of units
      delivered in any given fiscal period.  For fixed price contracts in
      which the Company is paid a specific amount to provide a particular
      service for a stated period of time, revenue is recognized ratably over
      the service period.
  ·
              The
      Company’s contracts with agencies of the government are subject to
      periodic funding by the respective contracting agency. Funding for a
      contract may be provided in full at inception of the contract or
      ratably throughout the contract as the services are provided.  In
      evaluating the probability of funding for purposes of assessing
      collectability of the contract price, the Company considers its previous
      experiences with its customers, communications with its customers
      regarding funding status, and the Company’s knowledge of available funding
      for the contract or program. If funding is not assessed as probable,
      revenue recognition is deferred until realization is deemed
      probable.
  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 $6,030,224 (or 54.3%) of total
assets at December 31, 2008. 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.
 
 27




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
 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
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  ITEM
9A. CONTROLS AND PROCEDURES.
 
 Managements
Report on Internal Control over Financial Reporting.
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act). The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. The
Company’s internal control over financial reporting includes those policies and
procedures that:
  - pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
  - provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of our
company are being made only in accordance with authorizations of our management
and directors; and
  - provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Under the supervision and with
the participation of our management, the Company assessed the effectiveness of
the internal control over financial reporting as of December 31, 2008. In
making this assessment, we used the criteria set forth in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the results of this assessment and on those
criteria, the Company concluded that a material weakness exists in the internal
controls as of December 31, 2008.
  A
material weakness in the Company’s internal controls exists in that, beyond the
Company’s CFO there is a limited financial background amongst other executive
officers or the board of directors.  This material weakness may affect
management’s ability to effectively review and analyze elements of the financial
statement closing process and prepare financial statements in accordance with
U.S. GAAP.  In making this assessment, our management used the
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). As a result of the material weaknesses described
above, our management concluded that as of April 13, 2009, we did not maintain
effective internal control over financial reporting based on the criteria
established in Internal
Control — Integrated Framework issued by the COSO.
  This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal controls 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 that permit the company to provide
only management’s report in this annual report.
  Changes
in internal control
  There
were no changes in the small business issuer’s internal control over financial
reporting identified in connection with the company evaluation required by
paragraph (3) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred
during the small business issuer’s fiscal year that has materially affected or
is reasonably likely to materially affect the small business issuer’s internal
control over financial reporting
 
 ITEM
9B. OTHER INFORMATION.
  None.
 
 28
 
 PART III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 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
                            
                            PositionPaul
      Burgess
                            
                            43
                            
                            President,
      chief executive officer and directorJoe
      Noto
                            
                            49
                            
                            Chief
      financial officer and secretaryJeannemarie
      Devolites Davis
                            
                            52
                            
                            DirectorRobert
      E. Galbraith
                            
                            64
                            
                            DirectorDonald
      Upson
                            
                            54
                            
                            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 backed by Optical Capital
Group. 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.
 
 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.
 
 29
 
 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. 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.
  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, except that Paul Burgess filed
a Form 3 and a Form 4 late; Joe Noto filed a Form 3 and a Form 4 late; and
Robert E. Galbraith filed a Form 4 late 3 times:
 
 ITEM
11. 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.
 
 30
  SUMMARY COMPENSATION
TABLE
  The
following information is furnished for the years ended December 31, 2008, 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-EquityIncentive
      Plan Compensation
                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    NonqualifiedDeferred
      Compensation Earnings
                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    All
      Other Compensation
                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    Total
                                                                                                                                                                                                                                                                                                                                                      $Paul
      Burgess
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2008
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    225,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    621,376
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    846,376President,
      Chief
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2007
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    225,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    225,000Executive
      Officer
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2006
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    112,500
                                                                                                                                                                                                                                                                                                                                                    (3)
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    52,500
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    165,500and
      DirectorJoe
      Noto
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2008
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    150,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    30,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    310,688
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    490,688Chief
      Financial
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2007
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    150,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    30,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    180,000Officer
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2006
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    150,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    30,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    180,000Mike
      Ricciardi (4)
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2008
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    —Chief
      Operating
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2007
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    176,422
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    15,000
                                                                                                                                                                                                                                                                                                                                                    (5)
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    191,422Officer
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2006
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    41,250
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    75,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    15,000
                                                                                                                                                                                                                                                                                                                                                    (5)
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    131,250Eric
      Zelsdorf (6)
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2008
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    93,333
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    93,333Chief
      Technology
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2007
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    160,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    160,000Officer
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    2006
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    160,000
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    —
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                                                                                                                    $
                                                                                                                                                                                                                                                                                                                                                    160,000
  
 (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. The options vest annually on the anniversary date over 3
      years.
 
 (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 2006 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
      paid $210,000 as follows: $20,000 upon signing of the agreement and
      $190,000 paid in equal bi-monthly payment for 12 months. For such
      consideration the employee agreed to a non compete agreement which ended
      October 16, 2008.
  (5)
              Included
      in other compensation is $15,000 pursuant to a consulting arrangement with
      Mr. Ricciardi’s spouse. This arrangement expired March 30,
      2007.
 
 (6)
              Effective
      July 31, 2008 , Mr Zelsdorf’s empolymet termintated. He currently serves
      as a consultant to the Company.
 
 31
  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, 2008
  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
                                                                                                                                                          $
                                                                                                                                                        
                                                                                                                                                        OptionExpiration
                                                                                                                                                          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
                                                                                                                                                          $Joe
      Noto
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        200,000
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        1.00
                                                                                                                                                        
                                                                                                                                                        July,2015
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        ——
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        1,400,000
                                                                                                                                                        (a)
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        0.33
                                                                                                                                                        
                                                                                                                                                        May,2018
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —Paul
      Burgess
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        200,000
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        0.30
                                                                                                                                                        
                                                                                                                                                        May
      2014
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —200,000
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        0.50
                                                                                                                                                        
                                                                                                                                                        Oct
      2014
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —600,000
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        1.00
                                                                                                                                                        
                                                                                                                                                        Feb
      2015
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        ——
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,800,000
                                                                                                                                                        (b)
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        0.33
                                                                                                                                                        
                                                                                                                                                        May,
      2018
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        —
   (a)
              466,666
      vest May 2009, 2010 and 2011
  (b)
              933,333
      vest May 2009, 2010 and 2011
  32
 
 COMPENSATION
OF DIRECTORS
  Directors
are compensated $1,000 per in-person Director’s meeting. In addition, directors
will receive $10,000 each in annual compensation.Each director was also awarded
28,000 stock options on May 15, 2008 which vests over 3 years at a strike price
of $0.33 per share.  $18,642 represents the estimated fair value of
stock options granted.  All directors are reimbursed for their
reasonable out-of-pocket expenses incurred in connection with their duties to
us.
  EMPLOYMENT
AGREEMENTS
  On March
24, 2009 the Company renewed its Executive Employment Agreement with Paul
Burgess. Under the Executive Employment Agreement, Mr. Burgess is employed as
our Chief Executive Officer for an initial term of three years. Thereafter, the
Executive Employment Agreement shall automatically be extended for successive
terms of one year each. Mr. Burgess will be paid a base salary of $250,000 per
year under the Executive Employment Agreement Amendment. Mr. Burgess is also
eligible for an incentive bonus of not less than 40% of his base salary based on
achieving certain goals established annually by the Compensation Committee of
the Board. 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. Burgess upon at least 60 days prior notice to us.
 
 On March
24, 2009, the Company renewed its executive employment agreement with Joe Noto.
Under the Executive Employment agreement, Mr Noto is employed as our Chief
Financial Officer for a term of three years.  At an annual base salary
of $175.000. Thereafter, the Executive Employment Agreement will shall be
automatically extended for successive terms of one year each.  Mr.
Noto  is also eligible for an incentive bonus of not less than 40% of
his base salary based on achieving certain goals established annually by the
Compensation Committee of the Board. 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 60 days
prior notice to us.
 
 33
 
 ITEM
12. 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 8, 2009 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)
                                                                                  
                                                                                  
                                                                                  1,933,333
                                                                                  
                                                                                  
                                                                                  
                                                                                  10.3
                                                                                  %Robert
      Galbraith (4)
                                                                                  
                                                                                  
                                                                                  319,333
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.9
                                                                                  %Michael
      Ricciardi (5)
                                                                                  
                                                                                  
                                                                                  3,080,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  18.3
                                                                                  %Marie
      Ricciardi (5)
                                                                                  
                                                                                  
                                                                                  3,080,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  18.3
                                                                                  %Burlington
      Assembly of God (6)
                                                                                    2035
      Columbus Road
                                                                                    Burlington,
      New Jersey 08016
                                                                                  
                                                                                  
                                                                                  1,333,333
                                                                                  
                                                                                  
                                                                                  
                                                                                  7.9
                                                                                  %Joe
      Noto (3)
                                                                                  
                                                                                  
                                                                                  666,667
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.8
                                                                                  %Dragonfly
      Capital Partners, LLC (7)
                                                                                    420
      Lexington Avenue Suite 2620
                                                                                    New
      York, New York 10170
                                                                                  
                                                                                  
                                                                                  978,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.8
                                                                                  %Jeannemarie
      Devolites Davis
                                                                                  
                                                                                  
                                                                                  28,637
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Donald
      Upson
                                                                                  
                                                                                  
                                                                                  28,637
                                                                                  
                                                                                  
                                                                                  
                                                                                  *Alan
      Bashforth (9)
                                                                                  
                                                                                  
                                                                                  2,324,836
                                                                                  
                                                                                  
                                                                                  
                                                                                  12.6
                                                                                  %All
      named executive officers and directors as a group (5
    persons)
                                                                                  
                                                                                  
                                                                                  2,925,273
                                                                                  
                                                                                  
                                                                                  
                                                                                  15.4
                                                                                  %
 
 *  
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 16,829,950  shares of common
      stock outstanding as of April, 2009, together with securities exercisable
      or convertible into shares of common stock within 60 days of April, 2009
      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, 2009 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.
  34
   (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) 710,000 shares owned by Michael
      Ricciardi, (b) 1,460,000 shares owned by Marie Ricciardi, and (c) 910,000
      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.
  (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) 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 14 th
      and 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 holds  preferred stock 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.
  35
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   Director
Independence
  Of the
members of the Company’s board of directors, Jeannemarie Devolites Davis, 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
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, 2008 and 2007 were $100,000 and $75,000, respectively.
In addition $32,500 of fees were paid to our former auditor Peter C. Cosmas CPA
in connection our 2007 quarterly reviews.
  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, 2008 and 2007 were $13,500 and $7,500, respectively. These
fees related to the preparation of federal income and state franchise tax
returns.
  36
  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, 2008 and 2007.
  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.
  
 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.**
  37
  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.**
 
 38
  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)
 
 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)
 
 39
  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 - Joe 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
 
 40
 
 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 13, 2009
                  By:
                  /s/ Paul
      BurgessPaul
      BurgessPresident,
      Chief Executive Officerand
      Director
 Date:
      April 13, 2009
                    By:
                    /s/ Joe
      NotoJoe
      NotoChief
      Financial Officer and PrincipalAccounting
      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 Burgess
                                
                                
                                
                                April
      13, 2009Paul
      Burgess
                                
                                President,
      Chief Executive Officer and Director/s/
      Joe Noto
                                
                                
                                
                                April
      13, 2009Joe
      Noto
                                
                                Chief
      Financial Officer and Secretary/s/
      Robert Galbraith
                                
                                
                                
                                April
      13, 2009Robert
      Galbraith
                                
                                Director/s/
      Jeannemarie Devolites Davis
                                
                                
                                
                                April
      13, 2009Jeannemarie
      Devolites Davis
                                
                                Director/s/
      Donald Upson
                                
                                
                                
                                April
      13, 2009Donald
      Upson
                                
                                Director
  41
  Lattice
Incorporated
  Index
to Consolidated Financial Statements
 
 Report
      of Independent Registered Public Accounting Firm
                    
                    F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                    
                    F-3Consolidated
      Statements of Operations, two years ended December 31,
2008
                    
                    F-4Consolidated
      Statements of Cash Flows, two years ended December 31,
2008
                    
                    F-5Consolidated
      Statements of Changes in Shareholders' Equity, two years ended December
      31, 2008
                    
                    F-6Notes
      to Consolidated Financial Statements
                    
                    F-7
      - F-25
  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 sheets of Lattice Incorporated and its subsidiaries as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2008.  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 audits.
 
 We conducted our audits 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.  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.  An audit also includes assessing   the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide 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, 2008 and 2007, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2008, 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.
 
 Wayne,New Jersey07470
 April 13, 2009
  F-2
  LATTICE INCORPORATED AND
SUBSIDIARIES
 CONSOLIDATED BALANCE
SHEETS
 December
31,
                                      
                                      
                                      December
31,2008
                                      
                                      
                                      2007ASSETS:Current
    assets:Cash and cash
      equivalents
                                      
                                      $
                                      1,363,130
                                      
                                      
                                      $
                                      769,915Accounts
      receivable
                                      
                                      
                                      3,560,690
                                      
                                      
                                      
                                      3,839,744Inventories
                                      
                                      
                                      30,704
                                      
                                      
                                      
                                      65,846Other current
      assets
                                      
                                      
                                      51,008
                                      
                                      
                                      
                                      127,801Total current
      assets
                                      
                                      
                                      5,005,532
                                      
                                      
                                      
                                      4,803,306Property and equipmen,
      net
                                      
                                      
                                      21,090
                                      
                                      
                                      
                                      27,530Goodwill
                                      
                                      
                                      3,599,386
                                      
                                      
                                      
                                      7,629,632Other intangibles,
      net
                                      
                                      
                                      2,409,748
                                      
                                      
                                      
                                      5,354,071Other
    assetes
                                      
                                      
                                      54,459
                                      
                                      
                                      
                                      118,623Total
assets
                                      
                                      $
                                      11,090,215
                                      
                                      
                                      $
                                      17,933,162LIABILITIES AND SHAREHOLDERS'
      EQUITYCurrent
      liabilities:Accounts
      payable
                                      
                                      $
                                      1,698,551
                                      
                                      
                                      $
                                      2,716,411Accrued
      expenses
                                      
                                      
                                      1,726,891
                                      
                                      
                                      
                                      1,252,916Due to former Stockholder's per
      Sept 19, 2006 purchase agreement
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,500,000Customer
      deposits
                                      
                                      
                                      15,000
                                      
                                      
                                      
                                      15,000Notes
    payable
                                      
                                      
                                      1,766,098
                                      
                                      
                                      
                                      1,050,254Derivative
      liability
                                      
                                      
                                      200,606
                                      
                                      
                                      
                                      7,217,099Total current
      liabilities
                                      
                                      
                                      5,407,146
                                      
                                      
                                      
                                      13,751,680Long term
      liabilities:Long term
    debt
                                      
                                      
                                      666,515
                                      
                                      
                                      
                                      -Deferred tax
      liabilities
                                      
                                      
                                      1,200,283
                                      
                                      
                                      
                                      2,661,954Total long term
      liabilities
                                      
                                      
                                      1,866,798
                                      
                                      
                                      
                                      2,661,954Minority
      interest
                                      
                                      
                                      193,280
                                      
                                      
                                      
                                      214,599Shareholders'
      equityPreferred Stock - .01 par
      valueSeries A 9,000,000 shares
      authorized 7,838,686 issued
                                      
                                      
                                      78,387
                                      
                                      
                                      
                                      78,387Series B 1,000,000 shares
      authorized 502,160 issued
                                      
                                      
                                      10,000
                                      
                                      
                                      
                                      10,000Serise C 520,000 shares
      authorized  520,000 issued
                                      
                                      
                                      5,200
                                      
                                      
                                      
                                      -Common stock - .01 par value,
      200,000,000 authorized,
                                      
                                      
                                      168,425
                                      
                                      
                                      
                                      168,42516,842,428 and 16,842,428 issued,
      16,539,441 and 16,829,848 outstanding respectivelyAdditional paid-in
      capital
                                      
                                      
                                      38,418,897
                                      
                                      
                                      
                                      36,854,901Accumulated
      deficit
                                      
                                      
                                      (34,499,822
                                      )
                                      
                                      
                                      (35,408,951
                                      )4,181,087
                                      
                                      
                                      
                                      1,702,762Common stock held in treasury, at
      cost
                                      
                                      
                                      (558,096
                                      )
                                      
                                      
                                      (397,833
                                      )Shareholders'
      equity
                                      
                                      
                                      3,622,991
                                      
                                      
                                      
                                      1,304,929Total liabilities and
      shareholders' equity
                                      
                                      $
                                      11,090,215
                                      
                                      
                                      $
                                      17,933,162
  See accompanying notes to the
consolidated financial statements.
  F-3
 
  LATTICE INCORPORATED AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF
OPERATION
  DECEMBER
31,2008
                                            
                                            
                                            2007Revenue - Technology
      Services
                                            
                                            $
                                            15,149,944
                                            
                                            
                                            $
                                            13,853,580Revenue - Technology
      Products
                                            
                                            
                                            1,118,537
                                            
                                            
                                            
                                            1,364,247Total
    Revenue
                                            
                                            
                                            16,268,481
                                            
                                            
                                            
                                            15,217,827Cost of Revenue - Technology
      Services
                                            
                                            
                                            10,817,725
                                            
                                            
                                            
                                            7,892,257Cost of Revenue - Technology
      Products
                                            
                                            
                                            427,759
                                            
                                            
                                            
                                            530,833Total cost of
      revenue
                                            
                                            
                                            11,245,484
                                            
                                            
                                            
                                            8,423,090Gross
Profit
                                            
                                            
                                            5,022,997
                                            
                                            
                                            
                                            6,794,737Operating  expenses:Selling, general and
      administrative
                                            
                                            
                                            4,667,374
                                            
                                            
                                            
                                            6,113,338Research and
      development
                                            
                                            
                                            518,342
                                            
                                            
                                            
                                            432,069Impairment loss (see Note
      7)
                                            
                                            
                                            5,486,341
                                            
                                            
                                            
                                            -Amortization
      expense
                                            
                                            
                                            1,488,228
                                            
                                            
                                            
                                            1,990,164Total operating
      expenses
                                            
                                            
                                            12,160,285
                                            
                                            
                                            
                                            8,535,571Loss from
      operations
                                            
                                            
                                            (7,137,288
                                            )
                                            
                                            
                                            (1,740,834
                                            )Other income
      (expense):Derivative
      income
                                            
                                            
                                            3,147,958
                                            
                                            
                                            
                                            4,970,932Extinguishment income (
      loss)
                                            
                                            
                                            2,695,025
                                            
                                            
                                            
                                            (157,130
                                            )Other
income
                                            
                                            
                                            977,844Interest
      expense
                                            
                                            
                                            (230,839
                                            )
                                            
                                            
                                            (494,414
                                            )Finance
    expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (99,279
                                            )Total other
      income
                                            
                                            
                                            6,589,988
                                            
                                            
                                            
                                            4,220,109Minority
      Interest
                                            
                                            
                                            21,319
                                            
                                            
                                            
                                            (79,038
                                            )Income (loss) before
      taxes
                                            
                                            
                                            (525,981
                                            )
                                            
                                            
                                            2,400,237Income taxes (benefit) (Note
      14)
                                            
                                            
                                            (1,460,218
                                            )
                                            
                                            
                                            (1,325,976
                                            )Net income
                                            
                                            
                                            934,237
                                            
                                            
                                            
                                            3,726,213Reconciliation of net income
      toincome applicable to common
      shareholders:Net income
                                            
                                            
                                            934,237
                                            
                                            
                                            
                                            3,726,213Preferred stock
      dividends
                                            
                                            
                                            (25,108
                                            )
                                            
                                            
                                            (3,004,507
                                            )Income applicable to common
      stockholders
                                            
                                            $
                                            909,129
                                            
                                            
                                            $
                                            721,706Income (loss) per common
      shareBasic
                                            
                                            $
                                            0.05
                                            
                                            
                                            $
                                            0.04Diluted
                                            
                                            $
                                            (0.04
                                            )
                                            
                                            $
                                            0.01Weighted average
      shares:Basic
                                            
                                            
                                            16,779,762
                                            
                                            
                                            
                                            16,658,343Diluted
                                            
                                            
                                            55,453,783
                                            
                                            
                                            
                                            74,201,159
  See accompanying notes to the
consolidated financial statements.
  F-4
  LATTICE INCORPORATED AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 Year Ended December
      31,2008
                                          
                                          
                                          2007Cash flow from operating
      activities:Net Income
                                          
                                          $
                                          934,237
                                          
                                          
                                          $
                                          3,726,213Adjustments to reconcile net
      income to net cash provided by (used in) operating
      activities:Derivative
      income
                                          
                                          
                                          (3,147,958
                                          )
                                          
                                          
                                          (4,970,932
                                          )Amortization of intangible
      assets
                                          
                                          
                                          1,488,228
                                          
                                          
                                          
                                          1,990,164Impairment
                                          
                                          
                                          5,486,341Deferred income
      taxes
                                          
                                          
                                          (1,460,218
                                          )
                                          
                                          
                                          (1,325,976
                                          )Amortization of debt discount
      (effective method)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          205,809Amortization of deferred
      financing
                                          
                                          
                                          -
                                          
                                          
                                          
                                          26,119Settlement of contingent
      liability-former RTI shareholders
                                          
                                          
                                          (970,150
                                          )Stock issued for
      services
                                          
                                          
                                          -
                                          
                                          
                                          
                                          40,000Financing expenses paid in
      stock
                                          
                                          
                                          -
                                          
                                          
                                          
                                          65,470Extinguishment (gain)
      loss
                                          
                                          
                                          (2,695,025
                                          )
                                          
                                          
                                          157,130Minority
      interest
                                          
                                          
                                          (21,319
                                          )
                                          
                                          
                                          79,038Interest
      derivative
                                          
                                          
                                          -
                                          
                                          
                                          
                                          110,618Share-based
      compensation
                                          
                                          
                                          308,096
                                          
                                          
                                          
                                          245,760Depreciation
                                          
                                          
                                          22,000
                                          
                                          
                                          
                                          34,573Changes in operating assets and
      liabilities:(Increase) decrease
      in:Accounts
      receivable
                                          
                                          
                                          279,054
                                          
                                          
                                          
                                          (1,427,580
                                          )Inventories
                                          
                                          
                                          35,142
                                          
                                          
                                          
                                          (1,404
                                          )Other current
      assets
                                          
                                          
                                          182,713
                                          
                                          
                                          
                                          (105,040
                                          )Other
assets
                                          
                                          
                                          64,164
                                          
                                          
                                          
                                          4,313Increase (decrease)
      in:Accounts payable and accrued
      liabilities
                                          
                                          
                                          (528,888
                                          )
                                          
                                          
                                          2,294,270Deferred
      revenue
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (62,495
                                          )Total
      adjustments
                                          
                                          
                                          (957,820
                                          )
                                          
                                          
                                          (2,640,163
                                          )Net cash provided by (used for)
      operating activities
                                          
                                          
                                          (23,583
                                          )
                                          
                                          
                                          1,086,050Cash Used in investing
      activities:Purchase of
      equipment
                                          
                                          
                                          (15,560
                                          )
                                          
                                          
                                          (24,916
                                          )Net cash used for investing
      activities
                                          
                                          
                                          (15,560
                                          )
                                          
                                          
                                          (24,916
                                          )Cash flows from financing
      activities:Financing fees in connection with
      Barron financing and Revolving Line of Credit
                                          
                                          
                                          -
                                          
                                          
                                          
                                          149,506Revolving credit facility
      (payments) borrowings, net
                                          
                                          
                                          717,928
                                          
                                          
                                          
                                          -Short term notes
      paid
                                          
                                          
                                          
                                          
                                          
                                          
                                          (833,000
                                          )Loans paid Stockholders' &
      Officers
                                          
                                          
                                          (85,570
                                          )
                                          
                                          
                                          -Net cash provided by (used in)
      financing activities
                                          
                                          
                                          632,358
                                          
                                          
                                          
                                          (683,494
                                          )Net increase (decrease) in cash
      and cash equivalents
                                          
                                          
                                          593,215
                                          
                                          
                                          
                                          377,640Cash and cash equivalents -
      beginning of period
                                          
                                          
                                          769,915
                                          
                                          
                                          
                                          392,275Cash and cash equivalents -
      end  of period
                                          
                                          $
                                          1,363,130
                                          
                                          
                                          $
                                          769,915Supplemental cash flow
      informationInterest paid in
      cash
                                          
                                          $
                                          177,987
                                          
                                          
                                          $
                                          315,470Supplemental disclosures of
      Non-Cash Investing & Financing ActivitiesPreferred stock Series C
      issued
                                          
                                          
                                          5,200Treasury
                                          
                                          
                                          (160,263
                                          )Additional paid in
      capital
                                          
                                          
                                          1,255,900Derivative
      liability
                                          
                                          
                                          (1,261,100
                                          )RTI
earn-out
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,500,000Prepaid finance cost reclassified
      as equity
                                          
                                          
                                          
                                          
                                          
                                          
                                          442,474Accrued expenses settled with
      stock warrants
                                          
                                          
                                          
                                          
                                          
                                          
                                          874,000
  See accompanying notes to the
consolidated financial statements.
  F-5
  LATTICE INCORPORATED AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHARHOLDERS'
EQUITY
 FOR THE TWO YEARS ENDED DECEMBER 31,
2008
 Preferred
      Stock
                                                                        
                                                                        
                                                                        Common
      Stock
                                                                        
                                                                        
                                                                        AdditionalPaid
      InCapital
                                                                        
                                                                        
                                                                        RetainedEarnings(Deficit)
                                                                        
                                                                        
                                                                        Treasury
      StockShares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        Shares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        Shares
                                                                        
                                                                        
                                                                        Amount
                                                                        
                                                                        
                                                                        TotalStockholders'
      equity, January 1, 2007
                                                                        
                                                                        
                                                                        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
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3,726,213
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3,726,213Coversion
      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
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        245,760Accrued
      Dividends  -SeriesB Preferred
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (50,000
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (50,000
                                                                        )100,000
      SHS issued A Bashforth Consultling
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        100,000
                                                                        
                                                                        
                                                                        
                                                                        1,000
                                                                        
                                                                        
                                                                        
                                                                        39,000
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        40,00052,599
      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
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        8,315,788Stockholders'
      equity, December 31, 2007
                                                                        
                                                                        
                                                                        8,838,686
                                                                        
                                                                        
                                                                        $
                                                                        88,387
                                                                        
                                                                        
                                                                        
                                                                        16,842,428
                                                                        
                                                                        
                                                                        $
                                                                        168,425
                                                                        
                                                                        
                                                                        $
                                                                        36,854,901
                                                                        
                                                                        
                                                                        $
                                                                        (35,408,951
                                                                        )
                                                                        
                                                                        
                                                                        12,580
                                                                        
                                                                        
                                                                        $
                                                                        (397,833
                                                                        )
                                                                        
                                                                        $
                                                                        1,304,929Net
      Income
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        934,237
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        934,237Settlement
      with former RTI - return of Preferred Series B
      SHS
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        497,840
                                                                        
                                                                        
                                                                        
                                                                        (99,568
                                                                        )
                                                                        
                                                                        
                                                                        (99,568
                                                                        )Settlement
      with former RTI - return of Common SHS
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        290,407
                                                                        
                                                                        
                                                                        
                                                                        (60,695
                                                                        )
                                                                        
                                                                        
                                                                        (60,695
                                                                        )Share-based
      compensation
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        308,096
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        308,096Barron
      Exchange
                                                                        
                                                                        
                                                                        520,000
                                                                        
                                                                        
                                                                        
                                                                        5,200
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        1,255,900
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        1,261,100Dividends
      - Series B Preferred
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (25,108
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (25,108
                                                                        )Stockholders'
      equity, December 31, 2008
                                                                        
                                                                        
                                                                        9,358,686
                                                                        
                                                                        
                                                                        $
                                                                        93,587
                                                                        
                                                                        
                                                                        
                                                                        16,842,428
                                                                        
                                                                        
                                                                        $
                                                                        168,425
                                                                        
                                                                        
                                                                        $
                                                                        38,418,897
                                                                        
                                                                        
                                                                        $
                                                                        (34,499,822
                                                                        )
                                                                        
                                                                        
                                                                        800,827
                                                                        
                                                                        
                                                                        $
                                                                        (558,096
                                                                        )
                                                                        
                                                                        $
                                                                        3,622,991
  See accompanying notes to the
consolidated financial statements.
  F-6
  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. 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 through 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 going concern
 
 At
December 31, 2008 the Company has a working capital deficiency of $401,614
including non-cash derivative liabilities of approximately
$201,000.  During 2008 the Company had a loss from operations of
$7,137,288 of which $5,486,341 was from an impairment charge on intangibles. The
balance of the loss was $1,650,947. 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. The
accompanying financial statements do not include any adjustments that may result
from the outcome of this uncertainty.
 
 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.
 
 F-7
  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(n), 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) RevenueRecognition:
 
 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 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-8
  In our
Government Services segment, our revenues are derived from IT and business
process outsourcing services under cost-plus, time-and-material, and fixed-price
contracts, which may extend up to 5 years. For fixed-price contracts, revenues
are generally recorded as delivery is made. For time-and-material contracts,
revenues are computed by multiplying the number of direct labor-hours expended
in the performance of the contract by the contract billing rates and adding
other billable direct costs. Under cost-plus contracts, revenues are recognized
as costs are incurred and include an estimate of applicable fees earned.
Services provided over the term of these arrangements may include, network
engineering, architectural guidance, database management, expert programming and
functional area expert analysis   Revenue is generally recognized when the
service is provided and the amount earned is not contingent upon any further
event.
  Our fixed
price contracts are primarily based on unit pricing (labor hours) or level of
effort. As such, the Company recognizes revenue for the number of units
delivered in any given fiscal period. Accordingly, these contracts do not fall
within the scope of SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts , where revenue
is recognized on the percentage-of-completion method using costs incurred in
relation to total estimated costs.
 
 Under
cost reimbursable contracts, the Company is reimbursed for allowable costs, and
paid a fee. Revenues on cost reimbursable contracts are recognized as costs are incurred plus
an estimate of applicable fees earned. The Company considers fixed fees under
cost reimbursable contracts to be earned in proportion of the allowable costs
incurred in performance of the contract.
  Certain
costs under government contracts are subject to audit by the government. 
Certain indirect costs are charged to contracts using provisional or estimated
indirect rates, which are subject to later revision based on government
audits.  Management believes that any adjustment by the government
will not be material to the financial statements.
  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, 2008, there was approximately $1,150,337 of
total unrecognized compensation cost related to unvested share-based
compensation awards granted. The $1,150,337 will be charged to operations over
the weighted average remaining service period.
 
 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.
 
 F-9
  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) Fair
Value of Financial Instruments
 
 On
January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
Measurements, defines fair value, establishes a three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosures requirements
for fair value measures. The carrying amounts reported in the balance sheets for
current assets and current liabilities qualified as financial instruments are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and their
current market rate of interest. The three levels are defined as
follow:
 
 ·
                  Level
      1 — inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
                  Level
      2 — inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 
 ·
                  Level
      3 — inputs to the valuation methodology are unobservable and significant
      to the fair value.
 
 As of
December 31, 2008 and December 31, 2007, the derivative liabilities amounted to
$200,606 and $7,217,099, respectively. In accordance with SFAS 157, the Company
determined that the carrying value of these derivatives approximated the fair
value using the level 1 inputs.
  n) 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.
  F-10
 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-weight age 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  quarter of the Company’s year ended December 31,
2006.
 
 o)
Recent accounting pronouncements
 
 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.
  F-11
  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.
 
 In
December  2007,  the FASB issued SFAS No.
160,  "No controlling  Interests in
consolidated  Financial  Statements,  an amendment
of ARB No. 51" ("SFAS  160").SFAS
160  introduces  significant  changes in
the  accounting  and reporting for business acquisitions and
no controlling interest ("NCI") in a subsidiary.  SFAS160 also changes
the accounting for and reporting for the deconsolidation of a
Subsidiary.  Companies  are  required to adopt the
new standard for fiscal years beginning  after January 1,
2009.  The Company is evaluating the impact of this standard and
currently  does not expect it to have
a  significant  impact on its financial position, results of
operations or cash flows.
 
 In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities-An Amendment of FASB Statement No. 133 (SFAS
161). This statement requires enhanced disclosures about an entity’s derivative
hedging activities and is effective for financial statement issued for fiscal
years and interim periods beginning after November 15, 2008, with earlier
application encouraged.  The Company will adopt SFAS 161 in the first
quarter of 2009.  Since SFAS 161 requires additional disclosures
concerning derivatives and hedging activities, adoption of SFAS 161 will not
have an impact on the Company’s consolidated financial condition, results of
operations or cash flows.  The adoption of SFAS 161 will change the
Company’s disclosures for derivatives instruments and hedging activities in the
first quarter of fiscal year 2009.
 
 In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3), which amends the factors considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS 142, FSP 142-3 requires a consistent
approach between the useful life of a recognized intangibles asset under SFAS
142 and the periods of expected cash flows used to measure the fair value of an
asset under SFAS 141(R ).  The FSP also requires enhanced disclosures
when an intangible asset’s expected future cash flows are affected by an
entity’s intent and/or ability to renew or extend the arrangement. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and is applied prospectively.  Early adoption is
prohibited.  The Company does not expect the adoption of FSP 142-3 to
have a material impact on its consolidated results of operation or financial
condition.
 
 In May
2008, The FASB issued SFAS No. 162, “ The hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the united State (The GAAP
hierarchy).  The hierarchical guidance provided by SFAS No. 162 did
not have a significant impact on the company’s financial
statements.
 
 p)
 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 55 million shares and 58 million shares at December 31,
2008 and 2007, 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.
 
 F-12
  Note
2 - Settlement with former RTI Shareholders:
 
 In June
2008, the Company filed suit in New Jersey Superior Court against Michael
Ricciardi and Marie Ricciardi, former shareholders of Ricciardi Technologies,
Inc. (“RTI”), along with the Domenix Corporation, a company owned by Marie
Ricciardi and operated by her and Michael Riccardi. The defendants removed the
case to the United States District Court for the district of New Jersey, where
it was pending under the caption, Lattice, Inc. v.Marie
Ricciardi, et al.,  Civil Action No. 08 cv 3208 (the “New Jersey
Action”). The New Jersey Action sought to enforce the restrictive covenant
contained in the September 12, 2006 Stock Purchase Agreement (the “SPA”),
pursuant to which the Company purchased RTI from, inter alia,  the
Ricciardis. The restrictive covenant prohibited the former owners of RTI from
(a) competing, directly or indirectly against Lattice and RTI and/or (b)
soliciting employees or others engaged by RTI for a period of three years from
the date of the SPA. The Company sought a preliminary injunction to prevent
Marie Ricciardi, acting in concert with her husband and through Domenix, from
continuing to breach the restrictive covenant and damages in an as yet
undetermined amount for damages resulting from the breach. A hearing on
Lattice’s motion for preliminary injunction occurred on August 7,
2008.
 
 Michael
Ricciardi also filed a suit against the Company in June, 2008, in the United
States District Court for the Eastern District of Virginia under the caption
Michael Ricciardi v.
Lattice, Inc., Civil Action No. 1:08-cv-519 (the “Virginia Action”) In
the Virginia Action, Michael Ricciardi (a) disputes the Company’s claim (the
“Indemnity Claim”) that it is entitled to be paid approximately $308,000, plus
fees and costs, from the escrow created pursuant to the SPA to cover its
indemnifiable losses (a defined term under the SPA), claiming instead that the
entire escrow should be dispersed to him as the representative of the RTI
shareholders, as provided for in the SPA, and (b) asserts that a contingent $1.5
million Earn Out Payment (as such term is defined in the SPA) provided for in
the SPA is due and payable by the Company to the former shareholders of
RTI.
 
 In
September 2008, the Company and former RTI shareholders signed a settlement
agreement (the “Settlement Agreement”) whereby $150,000 of the amount held in
escrow pursuant to the SPA will be returned to the Company.  In
October 2008 we received the funds. In addition, pursuant to the Settlement
Agreement, Michael Ricciardi and Marie Ricciardi agreed to return 497,840 shares
of the Company’s preferred stock and 290,407 shares of the Company’s common
stock. Pursuant to the Settlement Agreement, the Company agreed to pay the
former shareholders of RTI the aggregate sum of $750,000 as settlement of the
Earn Out Payment, which amount shall be paid over the next twenty-four months,
consisting of interest only for the first twelve months and then twelve monthly
installments of $62,500 plus interest. Accordingly, the Company has reduced its
recorded reserve from $1.5 million and recognized $750,000 as other income. In
addition, the Company recorded income for the year ended December 31, 2008 from
the settlement in the amount of $970,000, net of $150,000 in legal
fees.
 
 Note
3 - Segment reporting
  Management
views its business as one reportable segment: Government services. The Company
evaluates performance based on profit or loss before intercompany
charges.
  Year EndedDecember
31,2008
                          
                          
                          2007Revenue:Goverment
      Services
                          
                          $
                          15,149,944
                          
                          
                          $
                          13,853,580Other
                          
                          
                          1,118,537
                          
                          
                          
                          1,364,247Total Consolidated
      Revenue
                          
                          $
                          16,268,481
                          
                          
                          $
                          15,217,827Gross
    Profit:Groverment
      Services
                          
                          $
                          4,332,219
                          
                          
                          $
                          5,193,697Corporate and
      other
                          
                          
                          690,778
                          
                          
                          
                          530,833Total
      Consoldiated
                          
                          $
                          5,022,997
                          
                          
                          $
                          5,724,530December
31,Total
    Assets:
                          
                          2008
                          
                          
                          2007Government
      Services
                          
                          $
                          10,127,333
                          
                          
                          $
                          17,166,440Corporate and
      other
                          
                          
                          962,882
                          
                          
                          
                          766,722Total Consolidated
      Assets
                          
                          $
                          11,090,215
                          
                          
                          $
                          17,933,162
  F-13
  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, 2008 and 2007.
  Note 5 - Property and
Equipment
 
 A summary
of the major components of property and equipment is as follows:
 
 December
31,2008
                                
                                
                                2007Computer, Fixtures and
      equipment
                                
                                $
                                1,674,152
                                
                                
                                $
                                1,658,592Less: accumulated
      Depreciation
                                
                                $
                                (1,653,062
                                )
                                
                                $
                                (1,631,062
                                )Total
                                
                                $
                                21,090
                                
                                
                                $
                                27,530
  F-14
  Note 6
- Notes payable
 
 Notes
payable consists of the following as:
 
 December
31,2008
                              
                              
                              2007Bank Line of Credit
      (a)
                              
                              $
                              1,458,183
                              
                              
                              $
                              740,254Note paayble- Former RTI owners
      (b)
                              
                              
                              750,000
                              
                              
                              
                              -Notes payable to stockholder (c
      )
                              
                              
                              224,430
                              
                              
                              
                              310,000Total notes
      payable
                              
                              $
                              2,432,613
                              
                              
                              $
                              1,050,254Less: current
      maturities
                              
                              
                              (1,766,098
                              )
                              
                              
                              (1,050,254
                              )Long-term
    debt
                              
                              $
                              666,515
                              
                              
                              $
                              -
  (a)
Bank line-of-credit:
  On March
7, 2008, Lattice Incorporated (the “Company”) entered into a Loan and Security
Agreement (the “Loan Agreement”) with the Private Bank of Peninsula (“Private
Bank”) pursuant to which Private Bank agreed to extend a line of credit of up to
$4.0 million to the Company. Pursuant to the Loan Agreement, the Company can
request advances on the line-of-credit, which in the aggregate cannot exceed 85%
of the Company’s eligible accounts receivable. The line-of-credit bears interest
at 3% above the Prime Rate (11.25% at December 31, 2008 since the Company
defaulted September 30, 2008). The outstanding balance at December 31, 2008 was
$1,458,182. Pursuant to the Loan Agreement, the Company is required to maintain
certain financial covenants including a minimum current ration of 0.75:1.00 and
a minimum EBITDA of $200,000. As of December 31, 2008, the Company was not in
compliance with the minimum EBITDA requirement which constitutes a default on
the line of credit. As a result of the default and in accordance with the Loan
Agreement, the interest rate on the line of credit was  increased by
5%. In addition, Private Bank is entitled to declare all amounts due under the
Loan Agreement to be immediately due and payable, which as of December 31, 2008
amount to $1,458,182. Private Bank has ceased advancing money or extending
credit to the Company.  Private Bank also has a right of set-off for
any and all balances and deposits of the Company held by Private Bank. Further,
Private Bank has the right to foreclose on the collateral, which includes all
personal property of the Company. The line of credit with Private bank matured
February 29, 2009 and the Company has closed on a new credit facility with
Republic Capital Access (see Note 19 Subsequent events) and paid the balance due
of $1,463,787 including interest .
 
 (b)
Note payable - former RTI owners:
 
 In
accordance with the Settlement Agreement with Michael Ricciard as owner
representative of the former RTI shareholders (as described in Note 2), the
Company issued a 24 month promissory note to the former RTI shareholders payable
at 10% interest only in the initial 12 months starting October 2008 and paying
principal of $62,500 plus interest per month starting with the 13th
month.
  (c)
Notes payable stockholders/officers:
  At
December 31, 2008 the Company has a short-term loan payable to a former officer
and stockholder of the Company totaling $8,000. This note bears interest of 8.0%
per annum. The note is an unsecured demand note and payable in full by April 30,
2009.
 
 At
December 31, 2008 the Company has a term note payable of $216,430 with a
director of the Company. The note bears interest at 21.5% per annum and is
payable monthly at $ 9,368 with any residual balance maturing March
2011.
 
 F-15
  Note
7 - 2006 Barron Financing Arrangement:
 
 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.
 
 Note 8 - Exchange of  
Warrants for shares of Series C
Preferred Stock
 
 On June
30, 2008, the Company entered into an agreement with Barron Partners L.P.,
pursuant to which Barron Partners agreed to return their unregistered warrants
to the Company for cancellation in exchange for 520,000 shares of newly issued
Series C Convertible Preferred Stock (the “Exchange Agreement”). The following
warrants were returned for cancellation pursuant to the Exchange
Agreement:
  -
                  Series
      A Warrants indexed to 10,544,868 shares of common stock which were
      originally issued inconjunction
      with the September 19, 2006 Barron financing-
                  Series
      B Warrants indexed to 12,500,000 shares of common stock which were
      originally issued inconjunction
      with the September 19, 2006 Barron financing-
                  Additional
      Warrants indexed to 1,900,000 shares of common stock which were originally
      issued inFebruary
      2007 as consideration for a waiver on overdue payments due to Barron
      Partners, L.P.
 
 The
Series A and B warrants did not meet all the conditions of EITF 00-19 for equity
classification so they had been recorded as derivative liabilities since
inception. The fair value of the Series A and B warrants on the transaction date
was determined to be $3,868,535 using the Black-Scholes option pricing model.
Significant assumptions used in the Black Scholes model as of the date of the
exchange included strike prices ranging from $0.275 to $0.25; a historical
volatility factor of 106.49% based upon forward terms of instruments; a
remaining term of 3.25 years; and a risk free rate of 2.91%
 
 The
Additional Warrants had achieved equity classification and they had been
recorded in equity since inception. Their fair value at their inception (and
thus their carrying value at the time of the exchange) was
$1,031,130.
 
 In
accordance with the Share Exchange Agreement, on June 30, 2008, we designated
575,000 shares of our preferred stock as Series C Convertible Preferred Stock
(“Series C Preferred”). The Series C Preferred has a par value of $0.01 and each
share of preferred stock is convertible into 10 shares of common stock at any
time, at the option of the holder. The conversion prices are subject to
anti-dilution protection for (i) traditional capital restructurings, such as
splits, stock dividends and reorganizations and (ii) sales or issuances of
common shares or contracts to which common shares are indexed at less than the
stated conversion prices. Holders of the Company’s Series C Preferred are not
entitled to dividends and the Holder has no redemption privileges. In
considering the application of Statement 133, we identified those specific terms
and features embedded in the contract that possess the characteristics of
derivative financial instruments. Those features included the conversion option
and buy-in and non-delivery puts. In evaluating the respective classification of
these embedded derivatives, we are required to determine whether the host
contract (the Series C Preferred) is more akin to a debt or equity instrument in
regards to the risks. This determination is subjective. However, in complying
with the guidance provided in EITF D-109 Determining the Nature of a Host
Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share
under Statement No. 133 we concluded, based upon the preponderance and weight of
all terms, conditions and features of the host contracts, that the Series C
Preferred was more akin to an equity instrument for purposes of considering the
clear and close relation of the embedded feature to the host contract. Based
upon this conclusion, we further concluded that (i) embedded features did not
require derivative liability classification and (ii) certain Non-delivery and
Buy-in puts which require the Company to make-whole the investor for market
fluctuation losses in the event of non-delivery of conversion shares meet the
requisite criteria of a derivative financial instrument and should be
bifurcated. Since share delivery is in the Company’s option and they have enough
authorized shares to settle their share-settleable debt, it was determined that
the value of these puts was deminimus.
 
 F-16
  Note 9 - Goodwill and other
intangible assets:
 
 The
tables below present amortizable intangible assets as of December 31, 2008 and
2007:
 
 December
      31, 2008
                    
                    Gross
      Carrying Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Impairmentcharge
                    
                    
                    Net
      CarryingAmount
                    
                    
                    WeightedAverageamortizationperiodAmortizable
      intangible assets:Customer
      relationships
                    
                    $
                    3,382,517
                    
                    
                    $
                    (1,522,129
                    )
                    
                    $
                    (1,001,645
                    )
                    
                    $
                    858,743
                    
                    
                    2
      yearsKnow
      how and processes
                    
                    
                    2,924,790
                    
                    
                    
                    (1,316,162
                    )
                    
                    
                    (451,964
                    )
                    
                    
                    1,156,664
                    
                    
                    3
      yearsCustomer
      backlog
                    
                    
                    1,388,355
                    
                    
                    
                    (1,089,430
                    )
                    
                    
                    --
                    
                    
                    
                    298,925
                    
                    
                    1.5
      yearsCustomer
      lists
                    
                    
                    279,717
                    
                    
                    
                    (181,815
                    )
                    
                    
                    (2,486
                    )
                    
                    
                    95,416
                    
                    
                    2
      yearsEmployment
      contract
                    
                    
                    165,000
                    
                    
                    
                    (165,000
                    )
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --$
                    8,140,379
                    
                    
                    $
                    (4,274,536
                    )
                    
                    $
                    (1,456,085
                    )
                    
                    $
                    2,409,748
  December
      31, 2007
                    
                    Gross
      Carrying Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Impairmentcharge
                    
                    
                    Net
      CarryingAmount
                    
                    
                    WeightedAverageamortizationperiodAmortizable
      intangible assets:Customer
      relationships
                    
                    $
                    3,382,517
                    
                    
                    $
                    (845,629
                    )
                    
                    
                    --
                    
                    
                    $
                    2,536,888
                    
                    
                    5
      yearsKnowhow
      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 $1,488,228 for the year ended December 31,
2008 and $1,990,164 for the year ended December 31, 2007.
 
 Estimated
annual intangibles amortization expense as of December 31, 2008 is as
follows:
 
 2009
                            
                            $
                            (1,009,567
                            )2010
                            
                            
                            (1,009,614
                            )2011
                            
                            
                            (390,567
                            )Total
                            
                            $
                            (2,409,748
                            )
  F-17
 For other
indefinite lived intangible assets, the impairment test consists of a comparison
of the fair value of the intangible assets to their carrying amounts. Based on a
discounted cash flow analysis, certain intangibles were determined to be
impaired as the carrying value was greater than the expected cash flows from the
assets. This analysis resulted in an impairment charge of
$1,456,085.
 
 The
following is a description surrounding the circumstances over the intangible
assets and related impairment charge:
  ·
                  Customer
      relationships and lists:The customer
      relationships are considered to have value when they represent an
      identifiable and predictable source of future cash flow to the reporting
      unit. The Company has established long term relationships with certain
      governmental agencies; however for relationships in place at the time of
      the acquisitions, there was a 49% decline in revenue from December 31,
      2007 to December 31, 2008. The fair value of customer relationships and
      lists was calculated using the income approach and the fair value was less
      than the current carrying value. Thus, an impairment charge of $1,001,645
      and $2,486 was made against customer relationships and lists, respectively
      for the period ended December 31,
2008.
 
 ·
                  Know-how
      and processes: The Company acquired certain frameworks, monitoring
      systems and know-how related to software and hardware design development,
      implementation and analysis. The Company’s know-how and processes were
      valued using the multi-period excess-earnings method, a form of the Income
      approach and the fair value represents the present value of the profit
      derived from the know-how and processes.  The fair value was
      less than the carrying value so an impairment charge of $451,964 was
      recognized for the period ended December 31,
  2008.
  SFAS 142,
“Goodwill and Other Intangibles” requires that a goodwill impairment assessment
be performed at the "reporting unit" level.   For purposes of
this assessment a reporting unit is the operating segment, .  As of
December 31, 2008, all goodwill was allocated to the Government Services Sector
which was considered one reporting unit. The goodwill impairment test is applied
using a two-step approach. In performing the first step, the Company calculated
fair values of the reporting unit using the discounted cash flows (“DCF”)
of  the reporting unit based on projected earnings in the future (the
Income Approach). Since the reportingunit carrying amount exceeded the fair value, the second step of
the goodwill impairment test was performed to measure the amount of the
impairment loss, if any. In the second step, the implied fair value of the
goodwill is estimated as the fair value of thereporting
unit used in the first step less the fair values of all net tangible and
intangible assets of thereportingunit other than goodwill. An impairment loss of $4,030,246 was
measured by the excess of the carrying amount of goodwill over its implied fair
value reduced the carrying value of goodwill to $3,599,386.
  Note 10 - Derivative
financial instruments:
 
 The
balance sheet caption derivative liabilities consist of Warrants, issued in
connection with the 2005 Laurus Financing Arrangement, the 2006 Omnibus
Amendment and Waiver Agreement with Laurus, and the 2006 Barron Financing
Arrangement. These derivative financial instruments are indexed to an aggregate
of  4,313,465 and 17,438,465 shares of the Company’s common stock as
of December 31, 2008 and December 31, 2007, respectively, and are carried at
fair value. The following tabular presentations set forth information about the
derivative instruments as December 31, 2008 December 31, 2007:
 
 Yearended
                                December
      31,2008
                              
                              
                              Yearended
                                December
      31,2007Derivative
      income(expense):Derivative
      income
                              
                              
                              
                              
                              $
                              (467,120
                              )Conversion
      features
                              
                              
                              --
                              
                              
                              $
                              5,438,051Warrant
      derivative
                              
                              $
                              3,147,958
                              
                              
                              $
                              4,970,931
 
 December
      31,
                      2008
                    
                    
                    December
      31,2007Derivative
      liabilities:Warrant
      derivative
                    
                    $
                    (
      200,606
                    )
                    
                    $
                    (7,217,099
                    )
  F-18
 The
valuation of the derivative warrant liabilities is determined using a Black
Scholes Merton Model. Freestanding derivative instruments, consisting of
warrants and options that arose from the Laurus and Barron financing are valued
using the Black-Scholes-Merton valuation methodology because that model embodies
all of the relevant assumptions that address the features underlying these
instruments. Significant assumptions used in the Black Scholes models as of
December 31, 2008 included conversion or strike prices ranging from $0.10 -
$1.10; historical volatility factors ranging from 122.18% - 127.84% based upon
forward terms of instruments; terms-remaining term for all instruments; and a
risk free rate ranging from 1.00% - 1.55%.
 
 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. The expense recorded in the year ended December 31, 2007
related to the fair value adjustments on the embedded derivative instrument from
the period from January 1, 2007 through February 2, 2007.
 
 Note 11 - Earnings Per Share
  Year Ended2008
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2007Numerator:Net income available for common
      stockholders
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              909,129
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              2,400,237Adjusted income on derivative
      warrants
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (3,147,958
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (4,970,932
                                                                                                                                                                              )Adjusted for dividends to
      convertible preferred stock
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              25,108
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,004,507Net income avcailable for common
      stockholders adjusted
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (2,213,721
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              433,812Denominator:Weighed average shares used to
      compute basic EPS
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              16,779,762
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              16,658,343Dilutive derivative
      warrants
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              4,563,453
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              28,913,153Shares indexed to convertible
      preferred stock
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              34,110,568
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              28,629,663Weighted aerage shares used to
      compute diluted EPS
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              55,453,783
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              74,201,159$
                                                                                                                                                                              (0.04
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.01
  The above
table includes only dilutive instruments and their effects on earnings per
common share.
 
 Note
12 - 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-19
  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.
 
 On June
30, 2008 the Company issued 520,000 shares of Series C Convertible preferred
stock in exchange for the cancellation of warrants.  (See Note
8)
 
 In
September 2008 in connection with a settlement agreement, with the former RTI
shareholders the Company cancelled 497,840 shares of Series B preferred stock
and 290,407 share of the Company’s common stock.
 (See
Note 2)
 
 Note
13 - 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 520,160 shares of 5% Series B
Preferred Stock in 2008. Dividends cannot be paid as long as the Company has an
outstanding balance of its revolving line of credit.
 
 F-20
  Note 14 - Income Taxes
 
 The tax
provision (benefit) for the years ended December 31, 2008 and 2007 consists of
the following:
 
 December
31,2008
                            
                            
                            2007Current
                            
                            
                            -
                            
                            
                            
                            -Deferred
                            
                            $
                            (1,460,218
                            )
                            
                            $
                            (1,325,976
                            )The components of the deferred tax
      assets (liability) as of:Net Operting
      Loss
                            
                            
                            6,555,805
                            
                            
                            
                            6,949,095Total Deferred tax
      Asset
                            
                            
                            6,555,805
                            
                            
                            
                            6,949,095Valuation allowance for Deferred
      tax assetDeferred tax
      asset
                            
                            
                            6,555,805
                            
                            
                            
                            6,949,095Deferred tax
      liability:Intangilbe
      Assets
                            
                            
                            1,086,979
                            
                            
                            
                            2,355,790Sec
      481c
                            
                            
                            113,486
                            
                            
                            
                            306,164Net deferred tax long
      term
                            
                            
                            1,200,465
                            
                            
                            
                            2,661,954Net deferred
      tax
                            
                            $
                            1,200,465
                            
                            
                            $
                            2,661,954
  As of
December 31, 2008, the Company generated a net operating loss carry forwards of
approximately $14,536,153 expiring 2010 through 2028.
 
 The
provision for income taxes reported for the year ended December 31, 2008 and
2007.
 
 F-21
  December
31,2008
                              
                              
                              2007Provision (benefit) for taxes
      using statutory rate
                              
                              
                              (178,834
                              )
                              
                              
                              816,081state taxes, net of federal tax
      benefit
                              
                              
                              (31,559
                              )
                              
                              
                              (1,320
                              )None deductable
      expense
                              
                              
                              (1,249,825
                              )
                              
                              
                              (1,800,548
                              )Changes in prior year deferred tax
      estimatesState
                              
                              
                              -
                              
                              
                              
                              (81,340
                              )Changes in prior year deferred tax
      estimatesFederal
                              
                              
                              -
                              
                              
                              
                              (244,020
                              )Provision (Benefit) for income
      taxes
                              
                              $
                              (1,460,218
                              )
                              
                              $
                              (1,311,147
                              )
  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, 2008 the company
has evaluated its tax filings with major tax jurisdiction for the calendar years
2005 through 2008. 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,
2008 pursuant to FIN 48. Additionally, no cumulative effect of an accounting
change resulted from the Company’s initial adoption of the FASB
Interpretation.
 
 Note 15 - Commitments
 
 a.
                  Employment
      agreements:
 
 On March
24, 2009 the Company renewed its Executive Employment Agreement with Paul
Burgess. Under the Executive Employment Agreement, Mr. Burgess is employed as
our Chief Executive Officer for an initial term of three years. Thereafter, the
Executive Employment Agreement shall automatically be extended for successive
terms of one year each. Mr. Burgess will be paid a base salary of $250,000 per
year under the Executive Employment Agreement Amendment. Mr. Burgess is also
eligible for an incentive bonus of not less than 40% of his base salary based on
achieving certain goals established annually by the Compensation Committee of
the Board. 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. Burgess upon at least 60 days prior notice to us.
 
 On March
24, 2009, the Company renewed its executive employment agreement with Joe Noto.
Under the Executive Employment agreement, Mr. Noto is employed as our Chief
Financial Officer for a term of three years, at an annual base salary of
$175.000. Thereafter, the Executive Employment Agreement will shall be
automatically extended for successive terms of one year each Mr. Noto is also
eligible for an incentive bonus of not less than 40% of his base salary based on
achieving certain goals established annually by the Compensation Committee of
the Board. 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 60 days prior notice to us.
 
 F-22
 
 b.
                  Operating
      Leases:
 
 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
  2009
                            
                            $
                            396,0702010
                            
                            $
                            299,720Total minimum lease
      payments
                            
                            $
                            695,790
  Total
rent expense for was $372,997 and $372,134 for the year ended December 31, 2008
and 2007 respectively.
 
 Note
16 - 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.
 
 B) 2008
Employee Stock Option Plan
  On May
15, 2008 the Company’s board of directors approved the adoption of the Company’s
2008 Incentive Stock Option Plan.. The maximum number of shares available for
issuance under the Plan is 10,000,000. The options may be granted to officers,
directors, employees or consultants of the Company and its subsidiaries at not
less than 100% of the fair market value of the date on which options are
granted. The term of each Option granted under the Plan shall be contained in a
stock option agreement between the optionee and the Company.
  In May
2008 and August 2008 the board approved the issuance of options to purchase an
aggregate of 6,309,000 shares of the Company’s common stock to various officers
and directors of the company. The Company recorded stock base compensation
expense of $308,096 for the year ended December 31, 2008 $268,764 was in
connection with the options issued in  2008 and  $39,332
from prior years’ grants.
  F-23
  The
weighted-average fair value per share of the options granted during 2008 was
estimated on the date of grant using the Black-Scholes-Merton option pricing
model; the following assumptions were used to estimate the fair value of the
options at grant date based on the following:
  December
      31,2008
                                                          
                                                          
                                                          2007Risk-Free interest
      rate
                                                          
                                                          
                                                          2.91
                                                          %
                                                          
                                                          
                                                          4.27
                                                          %Expected dividend
      yield
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Expected stock price
      volatility
                                                          
                                                          
                                                          106.49
                                                          %
                                                          
                                                          
                                                          131.00
                                                          %Expected
    life
                                                          
                                                          10 years
                                                          
                                                          
                                                          10 yearsWeighted average fair value of
      options granted
                                                          
                                                          $
                                                          0.30
                                                          
                                                          
                                                          $
                                                          -
 
 WeightedaverageNumber
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Number
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                remaining
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Weightedof Options
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                of Options
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                contractual
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                AverageAvailable
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Outstanding
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Term
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Exercise
    PriceBalance January 1,
      2007
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                467,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                1,372,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                $
                                                                                                                                                                                1.00Options graned under
      plan
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -Options expried under
      plan
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -Balance January 1,
      2008
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                467,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                1,372,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                $
                                                                                                                                                                                1.002008 Plan
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                10,000,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -Options graned under Plan in
      2008
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                (6,309,000
                                                                                                                                                                                )
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                6,309,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                0.33Balance December 31,
      2008
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                4,158,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                7,681,000
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                9.30
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                $
                                                                                                                                                                                0.41
  F-24
  Information
pertaining to options outstanding at December 31, 2008 is as
follows:
  Options
      Outstanding
                                                                    
                                                                    Options
      ExercisableWeightedAverage
                                                                    
                                                                    Weighted
                                                                    
                                                                    
                                                                    
                                                                    WeightedRange of
                                                                    
                                                                    
                                                                    
                                                                    Remaining
                                                                    
                                                                    Average
                                                                    
                                                                    
                                                                    
                                                                    AverageExercise
                                                                    
                                                                    Number
                                                                    
                                                                    Contractual
                                                                    
                                                                    Exercise
                                                                    
                                                                    Number
                                                                    
                                                                    ExercisePrice
                                                                    
                                                                    Outstanding
                                                                    
                                                                    Life
                                                                    
                                                                    Price
                                                                    
                                                                    Exercisable
                                                                    
                                                                    Price$.30-$1.80
                                                                    
                                                                    7,681,000
                                                                    
                                                                    9.3 years
                                                                    
                                                                    $ 0.41
                                                                    
                                                                    1,335,000
                                                                    
                                                                    $ 0.81
  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 2008 or 2007.
 
 Note
17 - 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,
2008and 2007were $92,192 and $86,964, respectively.
 
 Note
18 - Major Customers and Concentrations
 
 Our
government service segment’s primary  "end-user" customer is the U.S.
Department of Defense (DoD) which accounted for approximately 93% and 91% of our
total revenues for 2008 and 2007 respectively. Accounts receivable at December
31, 2008 and 2007 was $3,335,667 and $3,642,889 respectively.
 
 The
Company has two contract vehicles that account
for   68%  and  20 %  of its sales
in 2008 and 2007 respectively.  Accounts receivable at December 31,
2008 and 2007 was $2,614,776 and $904,143  respectively.
 
 Note
19 - Subsequent events
 
 On March
11, 2009, Lattice Incorporated (the “Company”) entered into an Accounts
Receivable Purchase Agreement (the “Agreement”) with Republic Capital Access,
LLC (“Republic Capital”).  The Agreement shall terminate on December
31, 2009 unless otherwise extended by the parties.  The maximum amount
of receivables purchased under the Agreement shall not exceed
$2,500,000.
  Pursuant
to the terms of the Agreement, Republic Capital agreed to purchase certain
eligible receivables of the Company (the “Eligible
Receivable”)  without recourse, at an initial purchase price equal to
90% of the face amount of the Eligible Receivables (the “Initial Purchase
Price”). Within 2 days of the collection of the Eligible Accounts (the “Residual
Payment Date”), Republic Capital shall pay the Company an amount equal to the
total amount collected less the sum of (i) the Initial Purchase Price; (ii) the
Discount Factor (as defined below) owed with respect to the purchased
receivable; and (iii) the total of all accrued and unpaid Program Access
Fees.  On each Residual Payment Date, Republic Capital is entitled to
deduct from any collections an amount equal to 0.35% of the face amount of the
purchased receivable (the “Discount Factor”).  Upon execution of the
Agreement, the Company paid Republic Capital an enrollment fee of
$12,500.  Further, on each Residual Payment Date, an amount equal to
the sum of 0.0226% of the daily ending account balance for each day during the
applicable period will be deducted from the amount collected (the “Program
Access Fee”).  In addition, pursuant to the terms of the Agreement,
the Company paid Republic Capital a quarterly fee equal to $2,500 if the average
account balance for each day is less than $1,500,000.
  F-25