Unassociated Document

0001144204-09-020153.txt : 20090413 0001144204-09-020153.hdr.sgml : 20090413 20090413161749 ACCESSION NUMBER: 0001144204-09-020153 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090413 DATE AS OF CHANGE: 20090413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Lattice INC CENTRAL INDEX KEY: 0000350644 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 222011859 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10690 FILM NUMBER: 09746769 BUSINESS ADDRESS: STREET 1: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 BUSINESS PHONE: 8564240068 MAIL ADDRESS: STREET 1: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 FORMER COMPANY: FORMER CONFORMED NAME: SCIENCE DYNAMICS CORP DATE OF NAME CHANGE: 19920703 10-K 1 v146012_10k.htm Unassociated Document

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 1934
FOR 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. Employer
incorporation 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 o
Non-accelerated filer o	Smaller reporting company x

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

Yes o No x

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

		Page
PART I
Item 1.	Business	1
Item 1A.	Rick Factors	10
Item 1B.	Unresolved Staff Comments	14
Item 2.	Propreties	14
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities	15
Item 6.	Selected Financial Data	18
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes In and Disagreements with Accountants on Accounting
	and Financial Disclosure	28
Item 9A.	Controls and Procedures	28
Item 9B.	Other Information	28

PART III
Item 10.	Directors, Executive Officers, Promoters and Corporate Governance	29
Item 11.	Executive Compensation	30
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	34
Item 13.	Certain Relationship and Related Transactions, and Director Independence	36
Item 13.	Principal Accountant Fees and Services	36
Item 14.	Exhibits	37

SIGNATURES		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.

Technical and Management Consulting Services

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

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

Aquifer Software

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

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

·	Reduction in application development time, cost and risk;

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

·	Increased richness of user experience;

·	Elimination of security concerns inherent with Web browser vulnerabilities;

·	Decreased server software and hardware costs; and

·	Optimization of network resources for best performance.

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

·	Data Access;

·	Role-based User Profiles;

·	Flexible Security Model including strong encryption;

·	Configuration Management;

·	Event Management;

·	Integration Gateways; and

·	Secure Client.

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

Sales and Marketing

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

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

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

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

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

Business Development

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

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

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

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

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.

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.

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:

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

Ricciardi Technologies, Inc. (“RTI”)

About Ricciardi Technologies Inc.

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

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

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

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

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

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

Research and Development

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

Intellectual Property

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

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

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

Customer Support

Lattice Incorporated

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

SMEI

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

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.

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.

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;

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;

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.

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.

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		Low
First Quarter ended March 31, 2009	$	.15	$	.065
Second Quarter ended June 30, 2009 (through April 8, 2009)	$	.12	$	.12

Year Ended December 31, 2008

	High		Low
First Quarter ended March 31, 2008	$	.65	$	.28
Second Quarter ended June 30, 2008	$	.42	$	.25
Third Quarter ended September 30, 2008	$	.32	$	.20
Fourth Quarter ended December 31, 2008	$	.27	$	.06

Year Ended December 31, 2007

	High		Low
First Quarter ended March 31, 2007	$	.90	$	.36
Second Quarter ended June 30, 2007	$	.51	$	.30
Third Quarter ended September 30, 2007	$	.51	$	.36
Fourth 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.

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.

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 issuance under equity compensation plans (excluding securities reflected in column (a)
	(a)	(b)		(c)
Equity compensation plans approved by security holders	7,681,0000	$	0.41	4,158,000

Equity 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.

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.

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.

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			2007
Sales	$	16,268,481		$	15,217,827

Net income	$	934,237		$	3,726,213

Net income (loss) per common share – Diluted	$	(0.04	)	$	0.01

	OPERATING EXPENSES				PERCENT OF SALES
	2008		2007		2008			2007

Research & 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..

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.

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, 2007
Derivative income	$	3,147,958	$	(467,120	)
Conversion features and day-one derivative loss	$	--	$	5,438,051
Warrant 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.

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.

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.

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.

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.

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.

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 Framework issued 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.

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	Position

Paul Burgess	43	President, chief executive officer and director
Joe Noto	49	Chief financial officer and secretary
Jeannemarie Devolites Davis	52	Director
Robert E. Galbraith	64	Director
Donald 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.

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.

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-Equity Incentive Plan Compensation $		Nonqualified Deferred Compensation Earnings $		All Other Compensation $			Total $

Paul Burgess	2008	$	225,000			—		—	$	621,376		—		—		—		$	846,376
President, Chief	2007	$	225,000			—		—		—		—		—		—		$	225,000
Executive Officer	2006	$	112,500	(3)	$	52,500		—		—		—		—		—		$	165,500
and Director

Joe Noto	2008	$	150,000		$	30,000		—	$	310,688		—		—		—		$	490,688
Chief Financial	2007	$	150,000		$	30,000		—		—		—		—		—		$	180,000
Officer	2006	$	150,000		$	30,000		—		—		—		—		—		$	180,000

Mike Ricciardi (4)	2008	$	—			—		—		—		—		—	$	—		$	—
Chief Operating	2007	$	176,422			—		—		—		—		—	$	15,000	(5)	$	191,422
Officer	2006	$	41,250			—		—	$	75,000		—		—	$	15,000	(5)	$	131,250

Eric Zelsdorf (6)	2008	$	93,333			—		—		—		—		—		—		$	93,333
Chief Technology	2007	$	160,000			—		—		—		—		—		—		$	160,000
Officer	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.

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 $		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested #		Market Value of Shares or Units of Stock That have not vested $		Equity Incentive Plan Awards: Number of Unearned Shares Units or Other Rights That Have Not Vested #		Equity Incentive Plan Awards Market or Payout Value of Unearned Shares Units or Other Rights That have not Vested $
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

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.

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.

(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.

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.

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.

Exhibit
Number		Description
2.1

2.2		Stock Purchase Agreement dated December 16, 2004 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on December 22, 2004)

2.3		Amendment No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 11, 2005)

2.4		Stock purchase agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as the Owner Representative and Science Dynamics Corporation, dated as of September 12, 2006.**

3.1		Certificate of Incorporation (Incorporated by reference to the Company's registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)

3.2		Amendment to Certificate of Incorporation dated October 31, 1980 (Incorporated by reference to the Company's registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)

3.3		Amendment to Certificate of Incorporation dated November 25, 1980 (Incorporated by reference to the Company's registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)

3.4		Amendment to Certificate of Incorporation dated May 23, 1984 (Incorporated by reference to the Company's registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)

3.5		Amendment to Certificate of Incorporation dated July 13, 1987 (Incorporated by reference to the Company's registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)

3.6		Amendment to Certificate of Incorporation dated November 8, 1996 (Incorporated by reference to the Company's registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)

3.7		Amendment to Certificate of Incorporation dated December 15, 1998 (Incorporated by reference to the Company's registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001)

3.8		Amendment to Certificate of Incorporation dated December 4, 2002 (Incorporated by reference to the Company's information statement on Schedule 14C filed with the Securities and Exchange Commission on November 12, 2002)

3.9		By-laws (Incorporated by reference to the Company's registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981)

3.10		Restated Certificate of Incorporation (Incorporated by reference to the Registration Statement On Form SB-2. file with the Securities and Exchange Commission on February 12, 2007)

4.1		Secured Convertible Term Note dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

4.2		Common Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

4.3		Second Omnibus Amendment to Convertible Notes and Related Subscription Agreements of Science Dynamics Corporation issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on March 2, 2005)

4.4		Form of warrant issued to Barron Partners LP**

4.5		Promissory Note issued to Barron Partners LP**

4.6		Form of warrant issued to Dragonfly Capital Partners LLC**

4.7		Secured Promissory Note issued to Michael Ricciardi**

4.8		Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund LTD to Purchase up to 3,000,000 share of Common Stock of Lattice Incorporated.**

4.9		Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice Incorporated**

4.10		Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase 14,583,333 Shares Of Common Stock of Lattice Incorporated.

4.11		Second Amended and Restated Secured Term Note from Lattice Incorporated to Laurus Master Fund, LTD.

10.1		Executive Employment Agreement Amendment made as of February 14, 2005 by and between Science Dynamics Corporation and Paul Burgess (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 2, 2005)**

10.2		Stock Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as Owner Representative and Lattice Incorporated, dated September 12, 2006.**

10.3		Omnibus Amendment and Waiver between Lattice Incorporated and Laurus Master Fund, LTD, dated September 18, 2006.**

10.3		Agreement dated December 30, 2004 between Science Dynamics Corporation and Calabash Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 25, 2005)

10.4		Employment Agreement dated January 1, 2005 between Science Dynamics Corporation, Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 25, 2005)

10.5		Executive Employment of dated March 7, 2005 by and between Science Dynamics Corporation and Joe Noto (Incorporated by reference to the 10-KSB filed on April 17, 2006)

10.7		Sub-Sublease Agreement made as of June 22, 2001 by and between Software AG and Systems Management Engineering, Inc. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.8		Securities Purchase Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.9		Master Security Agreement dated February 11, 2005 among Science Dynamics Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.10		Stock Pledge Agreement dated February 11, 2005 among Laurus Master Fund, Ltd., Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.11		Subsidiary Guaranty dated February 11, 2005 executed by M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.12		Registration Rights Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.13		Microsoft Partner Program Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.14		AmberPoint Software Partnership Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005)

10.15		Securities Agreement between Science Dynamics Corporation and Barron Partners LP, dated September 15, 2006**

10.16		Employment Agreement between Science Dynamics Corporation and Michael Ricciardi**.

10.17		Amendment to Employment Agreement - Paul Burgess**

10.18		Amendment to Employment Agreement - 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 Act

31.2		Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

32.1		Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

32.2		Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

99.1		Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006**

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

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 Burgess
		Paul Burgess
		President, Chief Executive Officer and Director



Date: April 13, 2009	By:	/s/ Joe Noto
		Joe Noto
		Chief Financial Officer and Principal Accounting Officer

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

Signature	Title	Date

/s/ Paul Burgess		April 13, 2009
Paul Burgess	President, Chief Executive Officer and Director

/s/ Joe Noto		April 13, 2009
Joe Noto	Chief Financial Officer and Secretary

/s/ Robert Galbraith		April 13, 2009
Robert Galbraith	Director

/s/ Jeannemarie Devolites Davis		April 13, 2009
Jeannemarie Devolites Davis	Director

/s/ Donald Upson		April 13, 2009
Donald Upson	Director

Lattice Incorporated

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007		F-3

Consolidated Statements of Operations, two years ended December 31, 2008		F-4

Consolidated Statements of Cash Flows, two years ended December 31, 2008		F-5

Consolidated Statements of Changes in Shareholders' Equity, two years ended December 31, 2008		F-6

Notes 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 Jersey 07470

April 13, 2009

F-2

LATTICE INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2008			2007
ASSETS:
Current assets:
Cash and cash equivalents	$	1,363,130		$	769,915
Accounts receivable		3,560,690			3,839,744
Inventories		30,704			65,846
Other current assets		51,008			127,801
Total current assets		5,005,532			4,803,306

Property and equipmen, net		21,090			27,530
Goodwill		3,599,386			7,629,632
Other intangibles, net		2,409,748			5,354,071
Other assetes		54,459			118,623
Total assets	$	11,090,215		$	17,933,162

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,698,551		$	2,716,411
Accrued expenses		1,726,891			1,252,916
Due to former Stockholder's per Sept 19, 2006 purchase agreement					1,500,000
Customer deposits		15,000			15,000
Notes payable		1,766,098			1,050,254
Derivative liability		200,606			7,217,099
Total current liabilities		5,407,146			13,751,680
Long term liabilities:
Long term debt		666,515			-
Deferred tax liabilities		1,200,283			2,661,954
Total long term liabilities		1,866,798			2,661,954

Minority interest		193,280			214,599

Shareholders' equity
Preferred Stock - .01 par value
Series A 9,000,000 shares authorized 7,838,686 issued		78,387			78,387
Series B 1,000,000 shares authorized 502,160 issued		10,000			10,000
Serise C 520,000 shares authorized 520,000 issued		5,200			-
Common stock - .01 par value, 200,000,000 authorized,		168,425			168,425
16,842,428 and 16,842,428 issued, 16,539,441 and 16,829,848 outstanding respectively
Additional paid-in capital		38,418,897			36,854,901
Accumulated deficit		(34,499,822	)		(35,408,951	)
		4,181,087			1,702,762
Common stock held in treasury, at cost		(558,096	)		(397,833	)
Shareholders' equity		3,622,991			1,304,929
Total 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			2007

Revenue - Technology Services	$	15,149,944		$	13,853,580
Revenue - Technology Products		1,118,537			1,364,247
Total Revenue		16,268,481			15,217,827

Cost of Revenue - Technology Services		10,817,725			7,892,257
Cost of Revenue - Technology Products		427,759			530,833
Total cost of revenue		11,245,484			8,423,090

Gross Profit		5,022,997			6,794,737

Operating expenses:
Selling, general and administrative		4,667,374			6,113,338
Research and development		518,342			432,069
Impairment loss (see Note 7)		5,486,341			-
Amortization expense		1,488,228			1,990,164
Total operating expenses		12,160,285			8,535,571

Loss from operations		(7,137,288	)		(1,740,834	)

Other income (expense):
Derivative income		3,147,958			4,970,932
Extinguishment income ( loss)		2,695,025			(157,130	)
Other income		977,844
Interest expense		(230,839	)		(494,414	)
Finance expense		-			(99,279	)
Total other income		6,589,988			4,220,109

Minority Interest		21,319			(79,038	)

Income (loss) before taxes		(525,981	)		2,400,237

Income taxes (benefit) (Note 14)		(1,460,218	)		(1,325,976	)

Net income		934,237			3,726,213

Reconciliation of net income to
income applicable to common shareholders:
Net income		934,237			3,726,213
Preferred stock dividends		(25,108	)		(3,004,507	)
Income applicable to common stockholders	$	909,129		$	721,706

Income (loss) per common share
Basic	$	0.05		$	0.04
Diluted	$	(0.04	)	$	0.01

Weighted average shares:
Basic		16,779,762			16,658,343
Diluted		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			2007

Cash flow from operating activities:
Net Income	$	934,237		$	3,726,213

Adjustments 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			1,990,164
Impairment		5,486,341
Deferred income taxes		(1,460,218	)		(1,325,976	)
Amortization of debt discount (effective method)		-			205,809
Amortization of deferred financing		-			26,119
Settlement of contingent liability-former RTI shareholders		(970,150	)
Stock issued for services		-			40,000
Financing expenses paid in stock		-			65,470
Extinguishment (gain) loss		(2,695,025	)		157,130
Minority interest		(21,319	)		79,038
Interest derivative		-			110,618
Share-based compensation		308,096			245,760
Depreciation		22,000			34,573
Changes 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			4,313
Increase (decrease) in:
Accounts payable and accrued liabilities		(528,888	)		2,294,270
Deferred revenue		-			(62,495	)
Total adjustments		(957,820	)		(2,640,163	)
Net cash provided by (used for) operating activities		(23,583	)		1,086,050
Cash 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		-			149,506
Revolving 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			377,640
Cash and cash equivalents - beginning of period		769,915			392,275
Cash and cash equivalents - end of period	$	1,363,130		$	769,915

Supplemental cash flow information
Interest paid in cash	$	177,987		$	315,470
Supplemental disclosures of Non-Cash Investing & Financing Activities
Preferred stock Series C issued		5,200
Treasury		(160,263	)
Additional paid in capital		1,255,900
Derivative liability		(1,261,100	)
RTI earn-out					1,500,000
Prepaid finance cost reclassified as equity					442,474
Accrued 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				Additional Paid In Capital			Retained Earnings (Deficit)			Treasury Stock
	Shares			Amount			Shares		Amount		Additional Paid In Capital			Retained Earnings (Deficit)			Shares		Amount			Total

Stockholders' 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								3,726,213

Coversion of 40,000 SHS SeriesA Preferred		(40,000	)		(400	)		100,000		1,000		(600	)										-

Dragonfly warrants reclassed to equity upon Note Conversion												462,517											462,517

Share-based compensation												245,760											245,760

Accrued Dividends -SeriesB Preferred															(50,000	)							(50,000	)

100,000 SHS issued A Bashforth Consultling								100,000		1,000		39,000											40,000

52,599 SHS of Series A issued liquidated damages - Reg Filing		52,599			526							65,223											65,749

Stock Dividends -Preferred SeriesA EBITDA Ratchet												2,954,507			(2,954,507	)							-

Conversion of Barron Convertible Debt		7,826,087			78,261							8,237,527											8,315,788

Stockholders' equity, December 31, 2007		8,838,686		$	88,387			16,842,428	$	168,425	$	36,854,901		$	(35,408,951	)		12,580	$	(397,833	)	$	1,304,929

Net Income															934,237								934,237

Settlement 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											308,096

Barron Exchange		520,000			5,200							1,255,900			-								1,261,100

Dividends - 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:

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) Revenue Recognition:

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.

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 Ended
	December 31,
	2008		2007
Revenue:
Goverment Services	$	15,149,944	$	13,853,580
Other		1,118,537		1,364,247

Total Consolidated Revenue	$	16,268,481	$	15,217,827

Gross Profit:
Groverment Services	$	4,332,219	$	5,193,697
Corporate and other		690,778		530,833
Total Consoldiated	$	5,022,997	$	5,724,530

	December 31,
Total Assets:	2008		2007
Government Services	$	10,127,333	$	17,166,440
Corporate and other		962,882		766,722
Total 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			2007
Computer, Fixtures and equipment	$	1,674,152		$	1,658,592

Less: 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			2007
Bank Line of Credit (a)	$	1,458,183		$	740,254
Note paayble- Former RTI owners (b)		750,000			-
Notes payable to stockholder (c )		224,430			310,000
Total notes payable	$	2,432,613		$	1,050,254
Less: 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.

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 in conjunction with the September 19, 2006 Barron financing
	-	Series B Warrants indexed to 12,500,000 shares of common stock which were originally issued in conjunction with the September 19, 2006 Barron financing
	-	Additional Warrants indexed to 1,900,000 shares of common stock which were originally issued in February 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			Impairment charge			Net Carrying Amount		Weighted Average amortization period
Amortizable intangible assets:
Customer relationships	$	3,382,517	$	(1,522,129	)	$	(1,001,645	)	$	858,743	2 years
Know how and processes		2,924,790		(1,316,162	)		(451,964	)		1,156,664	3 years
Customer backlog		1,388,355		(1,089,430	)		--			298,925	1.5 years
Customer lists		279,717		(181,815	)		(2,486	)		95,416	2 years
Employment 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			Impairment charge		Net Carrying Amount		Weighted Average amortization period
Amortizable intangible assets:
Customer relationships	$	3,382,517	$	(845,629	)		--	$	2,536,888	5 years
Knowhow and processes		2,924,790		(731,198	)		--		2,193,592	5 years
Customer backlog		1,388,355		(918.610	)		--		469,745	3.64 years
Customer lists		279,717		(125.871	)		--		153,846	5 years
Employment 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 reporting unit 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 the reporting unit used in the first step less the fair values of all net tangible and intangible assets of the reporting unit 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:

	Year ended December 31, 2008		Year ended December 31, 2007
Derivative income(expense):
Derivative income			$	(467,120	)
Conversion features		--	$	5,438,051
Warrant derivative	$	3,147,958	$	4,970,931

	December 31, 2008			December 31, 2007

Derivative 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 Ended
	2008			2007
Numerator:
Net income available for common stockholders	$	909,129		$	2,400,237
Adjusted income on derivative warrants		(3,147,958	)		(4,970,932	)
Adjusted for dividends to convertible preferred stock		25,108			3,004,507

Net income avcailable for common stockholders adjusted	$	(2,213,721	)	$	433,812

Denominator:
Weighed average shares used to compute basic EPS		16,779,762			16,658,343
Dilutive derivative warrants		4,563,453			28,913,153
Shares indexed to convertible preferred stock		34,110,568			28,629,663

Weighted 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			2007

Current		-			-
Deferred	$	(1,460,218	)	$	(1,325,976	)

The components of the deferred tax assets (liability) as of:

Net Operting Loss		6,555,805			6,949,095

Total Deferred tax Asset		6,555,805			6,949,095
Valuation allowance for Deferred tax asset
Deferred tax asset		6,555,805			6,949,095

Deferred tax liability:
Intangilbe Assets		1,086,979			2,355,790
Sec 481c		113,486			306,164

Net deferred tax long term		1,200,465			2,661,954
Net 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			2007

Provision (benefit) for taxes using statutory rate		(178,834	)		816,081
state 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 estimates
State		-			(81,340	)
Changes in prior year deferred tax estimates
Federal		-			(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

Employment agreements:

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

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	$	396,070
2010	$	299,720

Total 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			2007
Risk-Free interest rate		2.91	%		4.27	%
Expected dividend yield		-			-
Expected stock price volatility		106.49	%		131.00	%
Expected life	10 years			10 years
Weighted average fair value of options granted	$	0.30		$	-

						Weighted
						average
	Number			Number		remaining		Weighted
	of Options			of Options		contractual		Average
	Available			Outstanding		Term		Exercise Price
Balance January 1, 2007		467,000			1,372,000		-	$	1.00

Options graned under plan		-			-		-		-
Options expried under plan		-			-		-		-

Balance January 1, 2008		467,000			1,372,000		-	$	1.00

2008 Plan		10,000,000			-		-
Options graned under Plan in 2008		(6,309,000	)		6,309,000		-		0.33

Balance 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 Exercisable
		Weighted
		Average	Weighted		Weighted
Range of		Remaining	Average		Average
Exercise	Number	Contractual	Exercise	Number	Exercise
Price	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

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

EX-31.1 2 v146012_ex31-1.htm Unassociated Document

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Paul Burgess, certify that:

1. I have reviewed this annual report on Form 10-K of Lattice, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



Dated: April 13, 2009	By:	/s/ Paul Burgess
		Paul Burgess
		Chief Executive Officer

EX-31.2 3 v146012_ex31-2.htm Unassociated Document

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Joe Noto, certify that:

1. I have reviewed this annual report on Form 10-K of Lattice, Inc.;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.