10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011.

COMMISSION FILE NUMBER 000-10690

LATTICE INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

Delaware	22-2011859
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

7150 N. Park Drive, Pennsauken, New Jersey	08109
(Address of principal executive offices)	(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No o

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

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

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 12, 2011, there were 29,094,080 outstanding shares of the Registrant's Common Stock, $.01 par value.

EXPLANATORY NOTE

Lattice Incorporated is filing this Amendment No. 1 (the “Amendment No. 1”) to its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011, which was originally filed on August 15, 2011 (the “Original Filing”) for the sole purpose of furnishing Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to this report provides the consolidated financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language). As required by Rule 405(a)(2)(ii) of Regulation S-T, Exhibit 101 was required to be furnished by amendment within 30 days of the original filing.

No other changes have been made to the Original Filing. This Amendment No.1 does not reflect events that may have occurred subsequent to the Original Filing date, and does not modify or update in any way disclosures made in the Form 10-Q for the fiscal quarter ended June 30, 2011.

Pursuant to Rule 406T of Regulation S-T, the interactive data files contained in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

Item 6. Exhibits

Exhibit Number	Description
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
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*These exhibits were previously filed with our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on August 10, 2011.

**XBRL  (eXtensbile Business Reporting Language) interactive data files are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.

SIGNATURES

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

DATE: September 14, 2011

		LATTICE INCORPORATED
	BY:	/s/ PAUL BURGESS
		PAUL BURGESS
		CHIEF EXECUTIVE OFFICER
		(PRINCIPAL EXECUTIVE
		OFFICER), SECRETARY AND
		DIRECTOR
DATE: September 14, 2011
	BY:	/s/ JOE NOTO
		JOE NOTO
		CHIEF FINANCIAL OFFICER
		(PRINCIPAL ACCOUNTING
		OFFICER)

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CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares Issued	29,667,475	22,942,427
Common stock, shares Outstanding	29,364,488	22,639,450
Series A Preferred Stock [Member]
Preferred stock , par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock , shares authorized	9,000,000	9,000,000
Preferred stock , shares Issued	7,530,681	7,530,681
Preferred stock , shares Outstanding	7,530,681	7,530,681
Series B Preferred Stock [Member]
Preferred stock , par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock , shares authorized	1,000,000	1,000,000
Preferred stock , shares Issued	1,000,000	1,000,000
Preferred stock , shares Outstanding	502,160	502,160
Series C Preferred Stock [Member]
Preferred stock , par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock , shares authorized	520,000	520,000
Preferred stock , shares Issued	520,000	520,000
Series D Preferred Stock [Member]
Preferred stock , par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock , shares authorized	636,400	636,400
Preferred stock , shares Issued	590,910	590,910

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Revenue	$ 3,194,686	$ 3,373,737	$ 6,461,437	$ 7,114,794
Cost of Revenue	1,994,506	1,981,885	4,095,874	4,549,436
Gross Profit	1,200,180	1,391,852	2,365,563	2,565,358
Operating expenses:
Selling, general and administrative	1,563,005	1,090,745	2,690,087	2,288,822
Research and development	167,969	144,799	320,230	300,330
Impairment Loss - Note 1	1,575,000		1,575,000
Amortization expense and depreciation expense	104,728	172,136	209,455	281,272
Total operating expenses	3,410,702	1,407,680	4,794,772	2,870,424
Loss from operations	(2,210,522)	(15,828)	(2,429,209)	(305,066)
Other income (expense):
Derivative expense	254,708	(13,726)	(18,209)	(109,673)
Extinguishment ( loss)				(130,055)
Other income
Interest expense	(98,689)	(94,069)	(237,118)	(175,840)
Total other income	156,019	(107,795)	(255,327)	(415,568)
Non-controlling interest	3,147	3,147	6,294	6,294
Loss before taxes	(2,051,356)	(120,476)	(2,678,242)	(714,340)
Income taxes (benefit)	(85,504)	(61,440)	(171,008)	(122,880)
Net loss	(1,965,852)	(59,036)	(2,507,234)	(591,459)
Reconciliation of net loss to loss applicable to common shareholders:
Net loss	(1,965,852)	(59,036)	(2,507,234)	(591,459)
Preferred stock dividends	(6,277)	(6,277)	(12,554)	(12,554)
Loss applicable to common stockholders	$ (1,972,129)	$ (65,313)	$ (2,519,788)	$ (604,014)
Loss per common share
Basic (in dollars per share)	$ (0.08)	$ 0.00	$ (0.10)	$ (0.03)
Diluted (in dollars per share)	$ (0.08)	$ 0.00	$ (0.10)	$ (0.03)
Weighted average shares:
Basic (in dollars)	25,459,225	22,639,450	24,211,686	21,631,755
Diluted (in dollars)	25,459,225	22,639,450	24,211,686	21,631,755

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 12, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	Lattice INC
Entity Central Index Key	0000350644
Trading Symbol	lttc
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		29,094,080
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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Cummings Creek CLR Acquisition

6 Months Ended

Jun. 30, 2011

Cumming Creek Clr Acquisition [Abstract]

Cummings Creek / CLR Acquisition

Note 7 – Cummings Creek / CLR Acquisition

On May 16, 2011, we entered into a Contribution and Exchange Agreement  (“Contribution Agreement”) with Ralph Alexander (“Alexander”) pursuant to which Alexander, as sole stockholder, contributed all the outstanding shares of Cummings Creek Capital, Inc. (“Cummings Creek”), a Delaware corporation, to Lattice in exchange for 2,500,000 shares of restricted common stock  and the Company’s assumption of certain promissory notes totaling $699,300 included in liabilities assumed. Cummings Creek holds 100% of the outstanding shares of CLR Group Ltd., (“CLR Group”)   a government service contractor, with a principal place of business located in O'Fallon, Illinois.

Lattice Government Services (“LGS”), entered into an Employment Agreement with Alexander.   Alexander will serve as chief executive officer of LGS for initial annual compensation of $210,000, as well as other  benefits.   He may be entitled to additional bonus compensation based upon performance.

The transaction was accounted for under the purchase method of accounting. The Company purchased $739,656 in assets including $59,518 in cash and assumed $1,100,773 in liabilities and recorded goodwill of $847,552. This is a preliminary purchase price allocation, which is subject to adjustment. The following unaudited pro-forma information for the six months ended June 30, 2011 is presented as if the acquisition took place as of January 1, 2011:

                                                     Six Months Ended June  30,  2011

 NET SALES                                       $   7,662,741

Net (Loss)                                            $   (2,533,301)                                                 

Net Income (loss) per common share Basic and

      Diluted                                           $         (0.10)

Weighted average shares outstanding Basic

       And Diluted                                   24,211,686

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Notes payable

6 Months Ended

Jun. 30, 2011

Notes Payable [Abstract]

Notes payable

Note 3 - Notes payable

Notes payable consists of the following as of June 30, 2011 and December 31, 2010:

	June 30, 2011			December 31, 2010
Bank line-of-credit (a)	$	156,214		$	259,826
Note Payable –  (b)		-			531,000
Notes payable to Stockholder/director (c)		145,514			159,260
Capital lease payable (d)		27,398			53,054
Note Payable (e)		1,250,000			1,250,000
Notes payable Cummings Creek/CLR  (f)		641,725			-
Note  Payable – stockholder (g)		200,000			-
Total notes payable		2,420,851			2,253,140
Less current maturities		(1,713,113	)		(885,592	)
Long-term debt	$	707,738		$	1,367,548

(a) Bank Line-of-Credit

On July 17, 2009, the Company and its wholly-owned subsidiary, Lattice Government Services (formally “RTI”), entered into a Financing and Security Agreement (the “Action Agreement”) with Action Capital Corporation (“Action Capital”). 

Pursuant to the terms of the Action Agreement, Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables of the Company (the “Acceptable Accounts”).  The maximum amount eligible to be advanced to the Company by Action Capital under the Action Agreement is $3,000,000.  The Company will pay Action Capital interest on the advances outstanding under the Action Agreement equal to the prime rate of Wachovia Bank, N.A. in effect on the last business day of the prior month plus 1%.  In addition, the Company will pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month.

In addition, pursuant to the Action Agreement, the Company granted Action Capital a security interest in certain assets of the Company including all, accounts receivable, contract rights, rebates and books and records pertaining to the foregoing (the “Action Lien”). On June 11, 2010, Action Capital and I. Wistar Morris entered into an agreement under which $1,250,000 of the collateral otherwise securing advances covered by the Action Agreement are subordinated to a new security interest securing an additional loan from Morris.

The outstanding balance owed on the line at June 30, 2011  and December 31, 2009 was $156,214 and $259,826 respectively. At June 30, 2011 our interest rate was approximately 13.25%.

(b) Note Payable

In  February 2010 (“effective date”) the former RTI shareholders  assigned their interest in the note to a third party, at which time the Company amended  the terms of the note  to pay interest only and extend the maturity for 18 months with a balloon payment on August 19, 2012. The holder has a call option on the principal balance of $531,000 which includes $31,000 in deferred financing fees after twelve months from the effective date upon written notification 45 days in advance. The call option was exercised and the note was paid in full during the quarter ended March 31, 2011. The balance at June 30, 2011 and December 31, 2010 was $0 and  $531,000 respectively.

(c) Notes Payable Stockholders/Director

The Company has a term note payable with a director of the Company totaling $145,514 and $159,260 at June 30, 2011 and December 31, 2010, respectively. The note bears interest at 21.5% per annum. During  December 2010, the  note was amended  to flat monthly payments of $6,000 until maturity  December 31, 2013, at which time any remaining interest and or principal will be paid.

(d) Capital Lease Payable

On June 16, 2009 Lattice entered an equipment lease financing agreement with Royal Bank America Leasing  to purchase approximately $130,000 in equipment for our communication services. The terms of which included monthly payments of $5,196 per month over 32 months and a  $1.00 buy-out at end of the lease term. As of June 30, 2011 and December 31, 2010, the outstanding balance was $27,398 and $53,055, respectively.

(e) Note Payable

On June 11, 2010, Lattice closed on a Note Payable for $1,250,000.  The net proceeds to the Company were $1,100,000. The $150,000 is being amortized over the life of the note as additional interest expense. The note matures June 30, 2012 and payment of principal will be due at that time in the lump sum value of $1,250,000 including  any unpaid interest. Until maturity, Lattice is required to make quarterly interest payments (calculated in arrears)  at 12% stated interest with the first quarter interest payment of $37,500 due September 30, 2010 and $37,500 due each quarter end thereafter until the final payment comes due June 30, 2012 totaling $1,287,500 including the final interest payment. The note is secured by certain receivables totaling $1,250,000. Concurrent with the note, an intercreditor agreement was signed between Action Capital and Holder where Action Capital has agreed to subordinate the Action Lien on certain government contracts, task orders and accounts receivable totaling $1,250,000. As of the date of this filing, the Company is current with all interest payments.

(f)  Notes payable Cummings Creek / CLR

In conjunction wth the Cumming Creek Capital / CLR acquisition,  Lattice assumed  notes totaling $699,300 comprised of  three notes each  with the   former principles of CLR Group.The notes  bear interest on the unpaid principal amount  until paid in full, at a rate of four percent (4.0%) per annum payable quarterly.   The Company will pay the unpaid principal amount  as follows: beginning on May 31, 2011,  the Company will make equal payments of principal  on the first day of each calendar quarter  totaling $58,275 (i.e., January 1, April 1, July 1 and October 1), until February 15, 2014.  The Company paid the initial quarterly principal payments totaling $58,275 on May 31, 2011.  Accordingly, the unpaid balance of the notes totaled $641,725  at June 30, 2011.

(g) – Note Payable – stockholder

During the quarter, we issued a two year  promissory note payable for $200,000 to a shareholder of the Company.  The Note bear s interest of 12% per year  The Company is required to pay interest  quarterly on a calendar basis starting  with a pro-rata interet payment on June 30, 2011. On May 15, 2013  the maturity date, the principal amount of $200,000 will be due along with any unpaid and accrued interest.

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Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events [Abstract]

Subsequent Events

Note 9 - Subsequent Events

Pursuant to Financial Accounting Standards Board Accounting Standards Codification 855-10, we have evaluated all events or transactions that occurred from July 1, 2011 through the filing with the SEC.  

On August 3, 2011 the board granted 145,000 stock options to various employees at a price of $0.10 per share vesting over three years.

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Litigation

6 Months Ended

Jun. 30, 2011

Loss Contingency [Abstract]

Litigation

Note 8- Litigation

From time to time, lawsuits are threatened or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party. Although there can be no assurance as to the ultimate disposition of these matters, it is our management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations, liquidity or financial condition of our company. There were no liabilities of this type at June 30, 2011.

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Organization and summary of significant accounting policies

6 Months Ended

Jun. 30, 2011

Accounting Policies [Abstract]

Organization and summary of significant accounting policies

Note 1 - Organization and summary of significant accounting policies

a) Organization

Lattice Incorporated (the “Company”) was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solution provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI” in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice Government Services, Inc, (“LGS”)  (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992 and provides software consulting and development services for the command and control of biological sensors and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors.  In December 2009 we changed RTI’s name to Lattice Government Services Inc.  In January 2007, we changed our name from Science Dynamics Corporation to Lattice Incorporated.

b) Basis of Presentation going concern

At June 30, 2011 the Company has a working capital deficiency of $1,536,540 including non-cash derivative liabilities of $214,000.  This compared to a working capital deficiency of $1,417,449 at December 31. 2010. For the six months ended June 30, 2011, the Company had a loss from operations of  $2,429,209 of which $180,000 was from non-cash amortization and $1,575,000 was from the impairment of goodwill .  During the quarter, we raised $275,000 of equity through the sale of Series D Preferred and common stock to be used for working capital and to fund the expansion of our communication services segment. The Company’s working capital deficiency in conjunction with the Company’s history of operating losses raises doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon management’s ability to increase operating cashflows, maintain continued availability on its line of credit and the continued ability to obtain alternative financing when needed to fund capital requirements and/or debt repayments coming due in the next twelve months. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty. 

c) Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements as of June 30, 2011 and for the six  months ended June 30, 2011 are unaudited.   In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair representation of the consolidated financial position and the consolidated results of operations.   The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.  The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year end December 31, 2010 appearing in Form 10-K filed on March 31, 2011.

d) Principles of consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis.

e) Use of estimates

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

f) Share-based payments

On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board  Accounting Standards Codification 718-10, Accounting for Share-based payments, to account for compensation costs under its stock option plans and other share-based arrangements.  ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. At June 30, 2011, there was no unrecognized compensation cost related to unvested share-based compensation awards granted. For the six months ended June 30, 2010 share-based compensation was $194,750 compared to $262,550 in the prior year period.

g) Reclassifications

Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for the period ended June 30, 2010. The reclassification had no effect on previously reported Net income.

Such reclassifications were limited to the statement of Operations presentation and did not impact the Net  (Loss). Specially, the Company reclassified revenues from “Revenue – Technology Services and Revenue – Technology Products to “Revenue”, with prior periods updated to conform to this presentation.

h) Revenue Recognition

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

Government claims: Unapproved claims relate to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,525,000 as of June 30, 2011. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts are not expected to be realized within one year.

Additional revenue recognition policies are stated in our 10K filed March 31, 2011.

i) Segment Reporting

FASB ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting.  The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.  The Company operates in two segments for the six months ended June 30, 2011.

j)  Depreciation, amortization and long-lived assets:

Long-lived assets include:

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

Goodwill - Goodwill represents the difference between the purchase price of an acquired business and the fair value of the net assets acquired and the liabilities assumed at the date of acquisition. Goodwill is not amortized. The Company tests goodwill for impairment annually (or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows, to the carrying value to determine if there is an indication that potential impairment may exist. Absent an indication of fair value from a potential buyer or similar specific transactions, the Company believes that the use of this income approach method provides reasonable estimates of the reporting unit’s fair value. Fair value computed by this method is arrived at using a number of factors, including projected future operating results, economic projections and anticipated future cash flows. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. There are inherent uncertainties, however, related to these factors and to management’s judgment in applying them to this analysis. Nonetheless, management believes that this method provides a reasonable approach to estimate the fair value of the Company’s reporting units.

The income approach, which is used for the goodwill impairment testing, is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. Management believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit's industry. The income approach is based on a reporting unit's five year projection of operating results and cash flows that is discounted using a build up approach. The projection is based upon management's best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future capital expenditures and changes in future working capital requirements based on management projections.

In May 2011 the Company determined that the loss of prime status on the SPAWAR government contract coupled with the curtailment of funding of the direct labor during the quarter and going forward  may have an impact on the carrying amount of goodwill and other intangibles. Accordingly, the Company performed an impairment test of goodwill and other intangibles and determined that goodwill was impaired and has recorded an impairment loss during the quarter of $1,575,000.

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.

k) Recent accounting pronouncements

No new accounting pronouncements issued or effective during the period has had or is expected to have a material impact on the financial statements.

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Derivative financial instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments [Abstract]

Derivative financial instruments

Note 4 - Derivative financial instruments

The balance sheet caption derivative liabilities consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 2,158,333 and 2,358,333 shares of the Company’s common stock as of June 30, 2011 and December 31, 2010 and are carried at fair value. The balance at June 30, 2011 and December 31, 2010 was $214,317 and $228,108 respectively.

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Major Customers and Concentrations

6 Months Ended

Jun. 30, 2011

Major Customers and Concentrations [Abstract]

Major Customers and Concentrations

Note 5 - Major Customers and Concentrations

Our government service segment’s primary “end-user” customer is the U.S. Department of Defense (DoD).  For the six months ended June 30, 2011 and 2010 our government services revenues, contractually based,  accounted for 63% and 75% of the Company’s total revenue. Accounts receivable for these contracts at June 30, 2011 and December 31, 2010 was $2,938,951 and $2,755,000 respectively.

Included in the government segment are two contract vehicles with the Navy Space and Navel Warfare Command (SPAWAR) in San Diego that account for  53%  and  68% of its revenues in the six months ended June 30, 2011 and 2010 respectively and 37% and 69% of its revenues for the three months ended June 30, 2011 and 2010 respectively. Accounts receivable for these contracts at June 30, 2011 and 2010 was $1,411,000 and $1,968,000 respectively. In May 2011, the SPAWAR contract vehicles were awarded to another prime contractor with whom we have a teaming agreement.

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Common and Preferred Stock

6 Months Ended

Jun. 30, 2011

Common and Preferred Stock [Abstract]

Common and Preferred Stock

Note 6 –Common and Preferred Stock

a) Sale of Series D convertible preferred stock:

On February 14, 2011, we entered into a securities purchase agreement with Barron Partners LP in which Barron Partners LP purchased 454,546 shares of par value $0.01 Series D Convertible Preferred Stock (“Series D Preferred”) for proceeds of $1,000,000.

Each Series D Preferred share is convertible into 20 common shares of the Company’s common stock at a price of $0.11 per share. The conversion price is subject to anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations and (ii) anti-dilution for sales of common shares and common linked contracts below the initial conversion price.

Holders of the Company’s Series D Preferred are not entitled to dividends and the Holder has no voting rights. However, so long as any shares of Series D Preferred Stock are outstanding, the Company is subject to limitations on certain actions unless pre-approved by holders of 75% of the shares of the Series D Preferred stock then outstanding. Upon liquidation, dissolution or windup, each share of Series D Preferred Stock shall entitle its holder to receive $2.20 out of the assets of the Company, prior to any distribution to any class of junior securities.

We evaluated the Series D Preferred for classification. The Preferred Stock is redeemable, at the holder’s option, upon a liquidation event. The redemption features do not rise to the level of “unconditionally” redeemable for purposes of liability classification.

In considering the application of ASC 815, 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, anti-dilution protection, and buy-in and non-delivery puts.  Generally, embedded terms and features that both (i) meet the definition of derivatives and (ii) are clearly and closely related to the host contract in terms of risks, do not require bifurcation and separate measurement. In order to develop these conclusions, we first evaluated the Preferred Stock to determine if the hybrid contract, with all features included, was more akin to an equity instrument or a debt instrument. Significant indicators of equity were the non-existence of a fixed and determinable redemption provision and the non-existence of any dividend feature. The preponderance and weight of these indicators led us to the conclusion that the hybrid contract was more akin to an equity instrument. Accordingly, the conversion option does not require bifurcation because its risks and the risks of the hybrid are clearly and closely related. The non-delivery and buy-in put, conversely, do require bifurcation because their risks and the risks of the host are not clearly and closely related. The value of these puts was deminimus at inception but will be re-evaluated each reporting period.

Further consideration of the classification of the Series D Preferred as either equity or mezzanine was required. Generally, redeemable instruments, where redemption is either stated or outside the control of management, require classification outside of stockholders’ equity. The Series D Preferred is classified as equity because it is redeemable only upon ordinary liquidation events and the occurrence of events that are solely within management’s control.

ASC 470-20-25 provides that embedded beneficial conversion features present in convertible securities (including preferred stock) should be valued separately at issuance. The conversion price of the Preferred Stock is $0.11 which gave rise to a beneficial conversion feature. The beneficial conversion feature, which is recorded a component of paid-in capital, was calculated by multiplying the linked common shares (9,090,909 common shares) times the spread between the trading market price of $0.20 and the conversion price of $0.11, or $818,182. ASC 480 provides for redeemable preferred stock to be accreted to its redemption value over the longer of the term to maturity, which is not present in the Series D Preferred, or the date of the first conversion. Since the Series D Preferred is convertible on the issuance date, the financial instrument was accreted to its redemption amount at inception.

The following table illustrates (i) how the proceeds arising from the Series D Preferred financing were allocated on the financing inception:

Classification
Series D preferred stock (equity)	$	181,818
Beneficial conversion feature		818,182
Derivative liabilities		--
Gross proceeds	$	1,000,000

The following table illustrates the activity with respect to the Series D Preferred from the inception dates to June 30, 2011:

Initial allocation of Series D Preferred (equity)	$	181,818
Accretion to redemption value		818,182
Series D preferred stock	$	1,000,000

The Company incurred approximately $48,000 in cost associated with the sale of the preferred stock for net proceeds of approximately $952,000.

On March 28, 2011, the Company entered into a securities purchase agreement with Barron Partners LP  pursuant to which Barron purchased an additional 90,910 shares of Series D Convertible Preferred Stock for $200,000.    Each Series D Share is convertible into 20 common shares of Company’s common stock at $0.11 per share, subject to adjustment and limitations.  Since these shares were not designated until April 12, 2011, the $200,000 was classified as other current liability in the Balance Sheet at March 31, 2011 and has been reclassified to equity in the quarter ended June 30, 2011.

On May 16, 2011, the Company entered into a securities purchase agreement with Barron Partners LP pursuant to which Barron purchased an additional 45,455 shares of Series D Convertible Preferred Stock for $100,000.  Each Series D Share is convertible into 20 common shares of company’s common stock at $0.11 per share, subject to adjustment and limitations. $100,000 was classified as equity.

b) Sale of Common Stock:

During March and April 2011, the Company  entered into several stock purchase agreements with investors for private placements of 4,632,727 shares of restricted common stock.   These private placements raised $509,600 from thirteen accredited investors for issuances of restricted common shares at $.11 per share,.

c) Warrants

   During March 2011 Laurus exercised 200,000 cashless warrants for 123.077 shares of the Company’s common stock. These warrants were previously carried as a derivative liability.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flow from operating activities:
Net loss	$ (2,507,234)	$ (591,459)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Derivative expense	18,209	109,673
Impairment Loss - Note 1	1,575,000
Amortization of intangible assets	274,456	344,272
Deferred income taxes	(171,008)	(122,880)
Extinguishment loss		130,055
Minority interest	(6,294)	(6,294)
Share-based compensation	194,750	262,550
Depreciation	72,554	29,489
(Increase) decrease in:
Accounts receivable	158,657	469,515
Other current assets	7,172	16,582
Other assets		6,997
Increase (decrease) in:
Accounts payable and accrued liabilities	(603,452)	(53,854)
Deferred revenues	(67,879)
Customer advances	125,267	154,225
Total adjustments	1,577,432	1,340,330
Net cash provided by (used for) operating activities	(929,802)	748,871
Cash Used in investing activities:
Purchase of intangibles		(1,300,000)
Acquired cash - CLR	59,518
Purchase of equipment	(263,582)	(30,427)
Net cash used for investing activities	(204,064)	(1,330,427)
Cash flows from financing activities:
Revolving credit facility (payments) borrowings, net	(103,612)	(45,714)
Payments on captial equipment lease	(25,658)	(19,169)
Payments Notes payable	(589,275)
Proceeds from issuance of securities, net	1,937,461	1,350,000
Loans paid director	(13,746)	(80,441)
Net cash provided by (used in) financing activities	1,205,170	1,204,676
Net increase (decrease) in cash and cash equivalents	71,304	623,120
Cash and cash equivalents - beginning of period	324,149	212,616
Cash and cash equivalents - end of period	395,454	835,736
Supplemental cash flow information
Interest paid in cash	218,618	172,168
Taxes paid
Supplemental disclosures of Non-Cash Investing & Financing Activities
Proceeds from Factoring agreement paid directly to Private Bank Facility
Exercise of warrants
Common Stock	1,231
Derivative liabilities	(31,999)
Additonal paid in capital	30,768
Conversion of preferred shares into common		(14,370)
Conversion of preferred shares into common		51,322
Additonal paid in capital		(36,951)
Exchange of warrants for preferred series A
Derivative liabilities		87,785
Additional paid in Capital		453,840
Deferred financing fees		150,000
Purchase of Cummings Creek/CLR
Common Stock	25,000
Additional paid in Capital	$ 522,000

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Segment reporting

6 Months Ended

Jun. 30, 2011

Segment Reporting [Abstract]

Segment reporting

Note 2- Segment reporting

Management views its business as two reportable segments: Government Services and Communication Services. The Company evaluates performance based on profit or loss before intercompany charges.  

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Revenues:
Government Services	$	1,997,406	$	2,519,118	$	4,253,232	$	5,430,953
Communication Serivices		1,197,280		854,620		2,208,205		1,683,842
Total Consolidated Revenues	$	3,194,686	$	3,373,738	$	6,461,437	$	7,114,795
Gross Profit:
Government Services	$	748,604	$	1,137,065	$	1,551,050	$	2,104,242
Communication Serivices		451,576		301,030		814,514		461,116
Total Consolidated	$	1,200,180	$	1,438,095	$	2,365,564	$	2,565,358

	June 30,  2011		December 31,  2010
Total Assets:
Government Services	$	6,251,622	$	7,061,465
Communication Services		2,667,353		2,083,732
Total Consolidated Assets	$	8,918,975	$	9,145,197

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CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 395,454	$ 324,149
Accounts receivable	3,578,091	3,059,342
Inventories	22,051	22,052
Other current assets	239,417	246,589
Total current assets	4,235,013	3,652,132
Property and equipment, net	451,056	258,258
Goodwill	2,871,938	3,599,386
Other intangibles, net	1,314,456	1,588,909
Other assetes	46,512	46,512
Total assets	8,918,975	9,145,197
Current liabilities:
Accounts payable	2,040,420	2,066,862
Accrued expenses	1,489,063	1,717,271
Deferred revenues		67,879
Customer deposits	229,136	103,869
Notes payable	1,713,113	885,592
Deferred tax liabilities	85,504
Derivative liability	214,317	228,108
Total current liabilities	5,771,553	5,069,581
Long term liabilities:
Long term debt	707,738	1,367,548
Deferred tax liabilities	0	256,512
Total long term liabilities	707,738	1,624,060
Total liabilities	6,479,291	6,693,641
Shareholders' equity
Common stock - .01 par value, 200,000,000 authorized, 29,667,475 and 22,942,427 issued, 29,364,488 and 22,639,450 outstanding, respectively	30,983	229,425
Additional paid-in capital	42,286,245	39,853,503
Accumulated deficit	(39,813,144)	(37,293,357)
Stockholders' Equity before Treasury Stock	2,874,500	2,880,078
Stock held in treasury, at cost	(558,096)	(558,096)
Equity Attributable to shareholders of Lattice Incorporated	2,316,404	2,321,982
Equity Attributable to noncontrolling interest	123,280	129,574
Total liabilities and shareholders' equity	8,918,975	9,145,197
Series A Preferred Stock [Member]
Shareholders' equity
Preferred Stock, Value, Issued	75,307	75,307
Series B Preferred Stock [Member]
Shareholders' equity
Preferred Stock, Value, Issued	10,000	10,000
Series C Preferred Stock [Member]
Shareholders' equity
Preferred Stock, Value, Issued	5,200	5,200
Series D Preferred Stock [Member]
Shareholders' equity
Preferred Stock, Value, Issued	$ 5,909