CALCULATION OF REGISTRATION FEE  

 

Title of each class of securities to be registered			Amount to be Registered (1)				Proposed Maximum Offering Price Per Security (2)			Proposed Maximum Aggregate Offering Price			Amount of Registration Fee
Common Stock, $.01 par value per share			1,529,868	(3	)	$	0.385		$	588,999		$	18.08
Common Stock, $.01 par value per share			1,955,132	(4	)	$	0.385		$	752,726		$	23.11
Total			3,485,000						$	1,341,725		$	41.19	*

(1)	Pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended, there are also registered hereunder such indeterminate number of additional shares as may be issued to the selling stockholders pursuant to the anti-dilution provisions of the warrants.

 

(2)	Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low prices as reported on the OTC Bulletin Board on September 12, 2007, which was $.385 per share.

 

(3)	Represents 1,529,868 shares of common stock issuable upon conversion of series A preferred stock.

 

(4)	Represents 1,955,132 shares of common stock issuable upon exercise of warrants.

 

*Previously paid.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) may determine.

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PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED September 13, 2007

3,485,000  Shares Of Common Stock

Lattice Incorporated

OTC Bulletin Board trading symbol: LTTC

This prospectus relates to the public offering of an aggregate of 3,485,000 shares of common stock which may be sold from time to time by the selling stockholder of Lattice Incorporated (formerly known as Science Dynamics Corporation) named in this prospectus. Of these shares, 1,529,868 shares are issuable upon conversion of Series A preferred stock, and 1,955,132 shares are issuable upon the exercise of warrants.

The shares of common stock are being registered to permit the selling stockholders to sell the shares from time to time in the public market. The selling stockholders have not engaged any underwriter in connection with the sale of their shares of common stock. The stockholder may sell the shares through ordinary brokerage transactions, directly to market makers of our shares or through any other means described in the section entitled “Plan of Distribution.” We cannot assure you that the selling stockholder will sell all or any portion of the shares offered in this prospectus.

We will pay the cost of the preparation of this prospectus which is estimated at $ 64,041.

We will not receive any proceeds from the sale by the selling stockholders of their shares of common stock other than the exercise price of the outstanding warrants if and when the warrants are exercised.

The shares of our common stock are traded on the OTC Bulletin Board. The last reported sales price for our common stock on the OTC Bulletin Board on September 12, 2007 was $0.36 per share.

The Securities offered hereby involve a high degree of risk. See “Risk Factors” beginning on page 6.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this Prospectus is _____, 2007

 

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You should rely only on the information contained in this prospectus. We have not authorized any dealer, salesperson or other person to provide you with information concerning us, except for the information contained in this prospectus. The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

TABLE OF CONTENTS

 

		Page
Prospectus Summary			3
Risk Factors			6
Forward-Looking Statements			11
Use of Proceeds			11
Selling Stockholders			11
Plan of Distribution			15
Market for Common Equity and Related Stockholder Matters			17
Management’s Discussion and Analysis and Results of Operations			18
Description of Business			34
Legal Proceedings			42
Description of Property			42
Management			43
Executive Compensation			46
Certain Relationships and Related Transactions			48
Security Ownership of Certain Beneficial Owners and Management			50
Description of Securities			51
Indemnification for Securities Act Liabilities			54
Legal Matters			55
Experts			55
Additional Information			55
Index to Consolidated Financial Statements			F-1

 

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PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements, including the notes to the financial statements appearing elsewhere in this prospectus. As used throughout this prospectus, the terms “we,” “us,” and “our” and words of like import refer to Lattice Incorporated and its subsidiaries.

Our Business

We provide information and communications technology to our customers through two divisions a technology services division and a technology products division. Our technology services division provides the federal government and private industry with engineering services together with information and communication technology solutions. Our technology products division provides customizable communication technology that enables our customers to integrate secure communications technology in both private and public networks.. In both divisions, we seek to address the growing public and private sector demand for integrated, secure, enterprise-wide e-business solutions built on industry standards that enable our technology to easily integrate with existing solutions.

 

On February 14, 2005, we acquired an 86% ownership interest in Systems Management Engineering, Inc., a Virginia corporation (“SMEI”). 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 is designed to help 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. Through SMEI, we currently support 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. Through SMEI, we provide network engineering, architectural guidance, database management, expert programming and functional area expert analysis to our Department of Defense clients. We also provide strategic consulting to support business requirements, change management, and financial analysis and metrics for several major federal government agencies.

 

Our technology products division consists of our core BubbleLink and Acquifer ^TM technology. BubbleLink is a versatile and feature rich transaction processing platform that is used to develop and enhance a variety of customizable communications applications. Aquifer is a proprietary software product used to 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 helps SMEI reduce development time and manage 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. .NET is the Microsoft’s newest development platform that enables developers to easily create Windows applications, web applications, and web services using a myriad of different programming languages, and without having to worry about low-level details like memory management and processor-specific instructions. 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.

 

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Pursuant to a stock purchase agreement dated as of September 12, 2006, between us, Ricciardi Technologies Inc. (“RTI”) and RTI’s stockholders, we purchased all of the issued and outstanding capital stock of RTI. 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 talented software and hardware engineers who practice proven design, development and implementation processes and standards.

About Us

We are a Delaware corporation, organized in May 1973 under the name Science Dynamics Corporation. On February 2, 2007, we changed our name to Lattice Incorporated. Our corporate offices are located at 7150 N. Park Drive, Suite 500, Pennsauken, N.J. 08109, telephone (856) 910-1166. Our   website is http://www.scidyn.com . Neither the information nor other statements contained on our website nor the information contained in any other websites constitutes a part of this prospectus.

Reverse Split

On February 2, 2007, we amended our certificate of incorporation, which effected a one-for-ten reverse split of our common stock. All share and per share information in this prospectus retroactively reflects the reverse split.

 

Issuance of Securities to the Selling Stockholder

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

Pursuant to the purchase agreement, our board of directors approved, subject to stockholder approval, a restated certificate of incorporation which, among other provisions, effects 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 our 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 $0.23 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.

On February 8, 2007, we entered into a letter agreement with Barron. Pursuant to the agreement, the securities purchase agreement by and between the company and Barron was amended to extend the filing date of the registration statement from 60 days from September 19, 2006 to no later than February 12, 2007. Pursuant to such agreement, we issued Barron a warrant to purchase 1,900,000 shares of our common stock at an exercise price of $0.50. The agreement also extended the date to have an independent board, and an audit committee comprised of not less than three directors, a majority of whom are independent directors, and a compensation committee to February 12, 2007.

 

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The Offering

 

Common stock offered:

The selling stockholders are offering a total of 3,485,000 shares of common stock, of which 1,529,868 shares are issuable upon conversion of the series A preferred stock and 1,955,182 shares are issuable upon the exercise of warrants. The total shares being offered by the selling stockholder represents 21% of our outstanding common stock as of August 30, 2007.

 

Limitation of Issuance of Common Stock:		The holders of the series A preferred stock and warrants issued in the September 2006 private placement, which are held by Barron Partners, cannot convert the series A preferred stock or exercise the warrants to the extent that such conversion and exercise would result in the holder and its affiliates owning more than 4.9% of our outstanding common stock.
Outstanding common stock:		16,629,848 shares 1,2
Outstanding common stock after the conversion of the series A preferred stock and exercise of warrants covered by this prospectus:		20,114,848 shares 1,3
Value of Underlying Securities:
Series A preferred		$11,739,130 4
$0.50 warrants		$7,500,000 4
$1.25 warrants		$7,500,000 4
Use of proceeds:		We will receive no proceeds from the sale of any shares by the selling stockholders. In the event that any selling stockholders exercise their warrants, we would receive the exercise prices. If all warrants covered by this prospectus are exercised at the present exercise price, we would receive approximately $1,000,000 million all of which, if and when received, would be used for working capital and other corporate purposes. The proceeds from the exercise of the warrants are subject to adjustment in the event of a change in the exercise price of the warrants. See “Use of Proceeds.”
OTCBB Symbol:		LTTC

 

1

Does not include (a) a total of 7,982,567 shares of common stock issuable upon exercise of warrants or other convertible securities held by persons other than the selling stockholder or (b) a total of 477,000 shares reserved for options, stock grants or other equity-based incentives granted or available for grant under our stock option or incentive plans.

 

2	Does not include the shares of common stock issuable upon conversion of the series A preferred stock or the exercise of the warrants held by the selling stockholder.

3

The number of shares of common stock outstanding after the offering is based on the issuance of the shares of common stock issuable upon conversion of all of the series A preferred stock and upon exercise of all of the warrants covered by this prospectus and does not include any shares issuable upon conversion of series A Preferred Stock or exercise of warrants held by Barron Partners which are not included in this Prospectus.

 

4	Values calculated based upon a closing market price of $0.60 per share on September 19, 2006 as adjusted for the one-for-ten reverse stock split.

 

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SUMMARY FINANCIAL INFORMATION

(in thousands of dollars, except per share information)

 

The following information relating to December 31, 2006 and the years ended December 31, 2006 and 2005 and June 30, 2007 and the six months ended June 30, 2007 and 2006 has been derived from our financial statements which appear elsewhere in this prospectus. All share amounts have been adjusted for the Company’s 1 for 10 reverse split of its common stock which was effected on February 2, 2007.

 

Statement of Operations Information: 

 

		Six Months Ended June 30,						Year Ended December 31,
(In thousands)		2007			2006			2006			2005
Sales - technology products		$	630		$	802			1,692			1,224
Sales - technology services			6,266			1,883			5,802			3,011
Cost of sales - technology products			212			270			554			439
Cost of sales - technology services			2,945			924			2,801			1,834
Gross profit			3,739			1,491			4,140			1,962
Operating income (loss)			(74	)		211			456			(1,007	)
Interest expense, net			(479	)		(265	)		704			509
Extinguishment (gain)			157			-			158			-
Derivative expense (income)			1,061			13			13,753			(370	)
Finance expense			14			16			2,054			27
Minority interest			(101	)		(14	)		(57	)		(94	)
Net (loss) income per common shareholder			235			(57	)		(15,559	)		(863	)
Net income (loss) per share of common stock - basic			0.01			(0.01	)		(1.31	)		(0.10	)
Weighted average shares of common stock outstanding - basic			16,642,848			9,371,901			11,888,458			8,508,529
Net income (loss) per share of common stock - diluted			(0.02	)		(0.01	)		(1.31	)		(0.10	)
Weighted average shares of common stock outstanding -diluted			64,230,056			9,499,330			11,888,458			8,508,529

 

Balance Sheet Information:

 

		June 30,			December 31,
		2007			2006
Working capital (deficiency)			(10,734	)		(21,012	)
Total assets			13,412			13,620
Total long-term debt			0			0
Total liabilities			15,812			25,121
Accumulated deficit			(35,896	)		(36,851	)
Stockholders’ deficiency			(2,400	)		(11,501	)

 

RISK FACTORS

 

Our business involves a high degree of risk. An investment in our securities involves a high degree of risk. In determining whether to purchase our securities, you should carefully consider all of the material risks described below, together with the other information contained in this prospectus before making a decision to purchase our securities. You should only purchase our securities if you can afford to suffer the loss of your entire investment.

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RISKS RELATED TO OUR  BUSINESS

 

Except for the net income generated during the six months ended June 30, 2007, we have a history of losses and expect to incur losses for the foreseeable future.

We generated net income of $1,729,550 and $235,043 for the three months ended June 30, 2007 and the six months ended June 30, 2007, respectively. Such amounts reflected derivative income of $1,906,247 and $1,060,882 for the three months and six months ended June 30, 2007, respectively. In addition, for the years ended December 31, 2006 and December 31, 2005, we incurred losses of $16,271,618 and $863,103, respectively. The loss for the three months ended March 31, 2007 includes a derivative expense of $1.7 million resulting from the our sale of a $4.5 million note and 2.5 million warrants which we issued to Barron Partners in our September 2006 private placement. It also included an extinguishment gain of $2 million resulting from the conversion of the note into the series A preferred stock. The Company’s net loss for the years ended 2006 included a derivative expense of $13.7 million and an extinguishment loss of $158,266. The Company’s net loss for the year ended December 31, 2005 included derivative income of $370,027. We cannot assure you that we will be able to operate profitably in the future.

Our independent auditors   have expressed doubt about our ability to continue as a going concern. If we do not continue as a going concern, investors could lose their entire investment.

 

In their report dated March 9, 2007, our independent auditors have expressed doubt about our ability to continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of ongoing operating losses and a lack of financing commitments in place to meet expected cash requirements. If we are unable to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible we may have to cease or curtail our operations and investors could lose their entire investment.

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.

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.

 

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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.

 

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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 of other market

 

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

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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 August 30, 2007, we had 16,629,848 shares of common stock issued and outstanding and 60,979,762 shares of common stock were issuable upon conversion of our convertible securities and warrants, including the shares offered by the selling stockholders pursuant to this prospectus. The sale or potential sale of these shares issuable pursuant to convertible securities and warrants may result is substantial dilution to the holders of common stock and these factors may have a depressive effect upon the market price of our common stock.

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

 

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

 

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

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

The public market for our common stock has historically been very volatile. Over the past two fiscal years and the interim quarterly periods through June 30, 2007, the market price for our common stock has ranged from $0.30 to $0.90. Any future market price for our shares is likely to continue to be very volatile. Further, our common stock is not actively traded, which may amplify the volatility of our stock. These factors may make it more difficult for you to sell shares of common stock.

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.

 

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Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, if we are a penny stock we will not have the benefit of this safe harbor protection in the event of any based upon an claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.

FORWARD-LOOKING STATEMENTS

USE OF PROCEEDS

We will not receive any proceeds from the sale by the selling stockholders of their common stock. If the selling stockholders exercise any warrants for cash, pursuant to which shares of our common stock are being registered pursuant to the registration statement that this prospectus is a part of, we will receive the amount of the exercise price. The maximum total exercise price is approximately $1,000,000, which we would receive only if all of the warrants were exercised for cash at their present exercise prices, which is $0.50 per share. Any proceeds which we receive from the exercise of the warrants would be used for working capital and general corporate purposes. In the event that the exercise price of the warrants is reduced as a result of our failure to meet the required level of pre-tax income per share, the total proceeds from the exercise of the warrants issued to Barron Partners LP could be reduced by up to 30%, with the result that the total proceeds would be reduced by up to approximately $600,000. We cannot assure you that any of the warrants will be exercised.

  SELLING STOCKHOLDERS

 

The following table sets forth the names of the selling stockholders, the number of shares of common stock owned beneficially by the selling stockholders as of August 30, 2007, and the number of shares of our common stock that may be offered by the selling stockholders pursuant to this prospectus. The selling stockholder is neither a broker-dealer nor an affiliate of a broker-dealer. Additionally, the selling stockholder does not have any existing short positions in our common stock. The table and the other information contained under the captions “Selling Stockholders” and “Plan of Distribution” has been prepared based upon information furnished to us by or on behalf of the selling stockholders.

 

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Name		Shares Beneficially Owned			Shares Being Sold			Shares Owned After Offering
Barron Partners, LP 1			814,863	3		3,485,000			814,863	3,4

1	Andrew B. Worden, president of the general partner of Barron Partners, has   sole voting and dispositive power over the shares beneficially owned by Barron Partners.

 

2	Of which 2,091,000 shares are issuable upon the conversion of Series Preferred Stock and 1,485,000 shares are issuable upon the exercise of warrants having an exercise price of $0.50

 

3

Because the series A preferred stock and warrants owned by Barron Partners cannot be converted or exercised, as the case may be, to the extent that the conversion of the series A preferred stock or the exercise of the warrant would result in the holder and its affiliates owning more than 4.9% of the outstanding common stock, the number of shares which would be beneficially owned by Barron Partners cannot be determined on the date of this prospectus. The number of shares shown in the table represents the maximum number of shares which Barron Partners can acquire on conversion of the series A preferred stock and exercise of the warrants, based on the 4.9% limitation, assuming all of the shares offered by the selling stockholders are sold.

 

4	Assumes all shares of common stock registered by this prospectus will be sold.

 

September 2006 Private Placement

 

On September 19, 2006, we entered into a securities purchase agreement with Barron Partners pursuant to which the Barron Partners purchased, for $4,500,000, (a) a note in the principal amount of $4,500,000, and (b) warrants to purchase up to 12,500,000 shares of the Company’s common stock at $.50 per share and 12,500,000 shares of the Company’s common stock at $1.25 per share. The closing date for the sale of the securities was September 19, 2006.

None of the selling stockholders has, or within the past three years has had, any position, office or material relationship with us or any of our predecessors or affiliates. Further, prior to the September 19, 2006 transaction, there were no prior transactions between us and the selling stockholder.

 

Pursuant to the purchase agreement, our board of directors approved, subject to stockholder approval, a restated certificate of incorporation which, among other provisions, effects a one-for-ten reverse split in the Company’s common stock, and agreed to submit the restated certificate of incorporation to the stockholders for their approval. The stockholders approved the restated certificate of incorporation on December 18, 2006 and our restated certificate of incorporation became effective on February 2, 2007. Upon the effectiveness of the restated certificate of incorporation, the principal and interest due on the note automatically converted into 7,826,087 shares of 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, which is $.23 per share, subject to adjustment.

The following table summarizes the number of shares outstanding prior to the issuance of the series A preferred stock and warrants held by persons other than the selling stockholder, affiliates of the Company, and affiliates of the selling stockholder (the “Stock Held by Non-Affiliates”); the number of shares registered for resale by the selling shareholder or affiliates of the selling shareholder in prior registration statements; the number of shares registered for resale by the selling shareholder or affiliates of the selling shareholder that continue to be held by the selling shareholder or affiliates of the selling shareholder; the number of shares that have been sold in registered resale transactions by the selling shareholder or affiliates of the selling shareholder; and the number of shares registered for resale on behalf of the selling shareholder or affiliates of the selling shareholder in the current transaction.

Stock Held by Non-Affiliates		# of Shares Previously Registered by Selling Stockholder			# of Shares Previously Registered by Selling Stockholder That Continue to be Held			# of Shares Sold in Registered Resale by Selling Stockholder			# of Shares Registered for Resale on Behalf of Selling Stockholder in the Current Transaction
11,622,439			0			0			0			3,485,000

 

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The purchase agreement as well as the certificate of designation provide for certain anti-dilution adjustments to the conversion price of the preferred stock and the exercise price of the warrants. If the Company issues common stock at a price, or warrants, options, convertible debt or equity securities with an exercise price per share which is less than the conversion price then in effect on the preferred stock, the conversion price on the preferred stock in effect from and after the date of such transaction shall be reduced to the lower price. In addition, if the Company issues common stock at a price, or warrants, options, convertible debt or equity securities with an exercise price per share which is less than the exercise price then in effect on the warrants, the exercise price in effect from and after the date of such transaction shall be is reduced to the lower price.

 

The purchase agreement as well as the certificate of designation for the series A preferred stock and warrants also provide for an adjustment in the conversion price of the note and series A preferred stock and the exercise price of the warrants if the our earnings before interest, taxes, depreciation and amortization, which is commonly referred to as EBITDA, per share is less than a specified amount per share, on a fully-diluted basis, with a maximum reduction of 30% for each year. The target EBITDA per share is $.019 for 2006 and $.0549 for 2007. The amount of reduction per year is the percentage shortfall. Thus, a 15% shortfall will result in a 15% reduction in the applicable conversion or exercise price then in effect. For purpose of determining fully-diluted, all shares of common stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are “in the money,” or (iii) such shares may be issued as a result of the 4.9% limitation. The per share amounts are adjusted in accordance with GAAP to reflect any stock dividend, split, distribution, reverse split or combination of shares or other recapitalization, including the reverse split effected by the restated certificate of incorporation.

The following table sets forth the initial conversion price of the series A preferred stock, which is issuable upon conversion of the Note, and the exercise price of the and the adjusted numbers if (a) the EBITDA per share for both 2006 and 2007 is 15% below the respective targets (a “15% shortfall”) and (b) the EBITDA per share for 2007 is 30% or more below the target (a “30% shortfall”). The number of shares reflects the number of shares of common stock issuable upon conversion of the series A preferred stock, and are based on the assumption that no preferred stock are converted into common stock until the adjustment has been made. The number of issuable upon conversion reflects the number of shares issuable upon the conversion of all of the shares of series A preferred stock that are issuable upon conversion of the note. 

 

			Conversion Price			Shares Issuable Upon Conversion			$.50 warrant Exercise Price			$1.25 warrant Exercise Price
Unadjusted		$	.23			19,565,217		$	.50		$	1.25
15% shortfall		$	.166			27,079,886		$	.361		$	.903
30% shortfall		$	.113			39,929,015		$	.245		$	.612

 

The following table sets forth the potential gain or loss to the selling shareholder as of the date of the sale of the convertible note, based upon a $0.23 conversion price on the series A preferred stock and exercises prices of $0.05 and $0.125 on the series A warrants and series B warrants respectively. The selling shareholder does not have any existing short positions in our common stock.

 

Series A Preferred		Market Price Per Share of the Underlying Shares			Conversion / Exercise Price Per Share			Total Possible Underlying Shares			Total Market  Value			Total Cost of Conversion /  Exercise			Total Possible Discount (Premium) to Market
Unadjusted		$	0.60		$	0.23			19,565,217		$	11,739,130		$	4,500,000		$	7,239,130
15% Shortfall		$	0.60		$	0.166			27,079,885		$	16,247,931		$	4,495,260		$	11,752,671
30% Shortfall		$	0.60		$	.113			39,929,015		$	23,957,409		$	2,707,187		$	21,250,222
$0.50 Warrant
Unadjusted		$	0.60		$	0.50			12,500,000		$	7,500,000		$	6,250,000		$	1,250,000
15% Shortfall		$	0.60		$	0.361			12,500,000		$	7,500,000		$	4,512,500		$	2,987,500
30% Shortfall		$	0.60		$	0.245			12,500,000		$	7,500,000		$	3,062,500		$	4,437,500
$1.25 Warrant
Unadjusted		$	0.60		$	1.25			12,500,000		$	7,500,000		$	15,625,000		$	(8,125,000	)
15% Shortfall		$	0.60		$	0.903			12,500,000		$	7,500,000		$	11,287,500		$	(3,787,500	)
30% Shortfall		$	0.60		$	0.612			12,500,000		$	7,500,000		$	7,650,000		$	(150,000	)

 

The series A preferred stock has no voting rights, except as required by law. However, so long as any shares of series A preferred stock are outstanding, we shall not, without the affirmative approval of the holders of 75% of the shares of the Series A Preferred stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the series A preferred stock or alter or amend the certificate of designation relating to the series A preferred stock, (b) authorize or create any class of stock ranking as to dividends or distribution of assets upon liquidation senior to or otherwise pari passu with the series A preferred stock, or any of preferred stock possessing greater voting rights or the right to convert at a more favorable price than the series A preferred stock, (c) amend its certificate of incorporation or other charter documents in breach of any of these provisions, (d) increase the authorized number of shares of series A preferred stock, or (e) enter into any agreement with respect to the foregoing.

 

The purchase agreement, the certificate of designation for the series A preferred stock and the warrants provide that the series A preferred stock cannot be converted and the warrants cannot be exercised to the extent that such conversion or exercise would result in the investor and its or his affiliates owning beneficially more than 4.9% of our common stock. Beneficial ownership is determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. These provisions cannot be modified.

 

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Pursuant to the purchase agreement as amended, we agreed to have appointed by February 12, 2007 such number of independent directors that would result in a majority of our directors being independent directors, that our audit committee would be composed solely of independent directors and our compensation committee would have a majority of independent directors. The purchase agreement also requires us to maintain a board of directors on which a majority of directors are independent directors and an audit committee composed solely of independent directors and a compensation committee with a majority of independent directors. Our failure to meet these requirements could result in our payment of liquidated damages.  The liquidated damages are computed in an amount equal to 20% per annum of the purchase price of the then outstanding shares of series A preferred stock, payable monthly in cash or series A preferred stock at the option of the Investor, based on the number of days that such condition exists beyond the applicable grace period; provided, however, in no event shall the total payments whether in cash or series A preferred stock exceed in the aggregate 20% of the purchase price of the shares of series A preferred stock that are outstanding as of the date on which the computation is being made.

 

We also entered into a registration rights agreement with Barron Partners.  Pursuant to an agreement dated February 8, 2007, the registration rights agreement was amended to provide that the filing date to file the registration statement required by the registration rights agreement was changed to February 12, 2007. The amendment also provides that as a result of the Commission’s interpretation of Rule 415, the Company will not be able to register all of the Registrable Securities (as defined in the registration rights agreement), and the per diem liquidated damages payable under Section 2.8 of the Registration Rights agreement was reduced to a fraction of the number provided therein, the numerator of which is the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock which are being registered and the denominator of which is the number of shares of Common Stock issuable upon conversion of all of the shares of Series A Preferred Stock issued to Barron. The amendment also provides that we shall be not subject to any liquidated damages because the Registration Statement (as defined in the registration rights agreement) was not filed within 60 days of September 19, 2006. Pursuant to the registration rights agreement, as amended, the registration statement must be declared effective within 120 days of February 12, 2007. Our failure to meet this schedule and other timetables provided in the registration rights agreement would result in the imposition of liquidated damages, which are payable through the issuance of additional shares of series A preferred stock at the rate of 575.6 shares of series A preferred stock for each day, based on the proposed registration of all of the underlying shares of common stock, with a maximum of 1,565,200 shares of series A preferred stock.

 

Pursuant to the amendment of the stock purchase agreement and the registration rights agreement between us and Barron, we agreed to issue Barron a warrant to purchase 1,900,000 shares of our common stock at $.50 per share.

The following table sets forth the total possible profit to be realized as a result of any conversion discounts for securities underlying warrants issued pursuant to the February 8, 2007 amendment to the stock purchase agreement and registration righst agreement:

$0.50 Warrant			Market Price Per Share of the Underlying Shares			Conversion / Exercise Price Per Share			Total Possible Underlying Shares			Total Market Value			Total Cost of Conversion / Exercise			Total Possible Discount (Premium) to Market
Unadjusted		$	0.62		$	0.50			1,900,000		$	1,178,000		$	950,000		$	228,000

 

The warrants issued to Barron Partners have a term of five years. The warrants provide for adjustments if we do not meet the EBITDA per share targets described above. The warrants also provide that, with certain exceptions, if we issue common stock at a price, or warrants or other convertible securities with an exercise or conversion price which is less than the exercise price of the warrants, the exercise price of the warrants will be reduced to the sales price, exercise price or conversion price, as the case may be, of such other securities.

 

In connection with this sale of the note and warrants to Barron Partners, we paid brokerage fees of $234,000 to Dragonfly, $126,000 to Colebrook Capital and $20,000 to Crescent Fund LLC. In addition, we issued to Dragonfly warrants to purchase 489,100 shares of common stock at $0.50 per share, and 489,100 shares of common stock at an exercise price of $1.25. We agreed to use our commercially reasonable efforts to include these shares in the registration statement covering the shares being offered by Barron Partners; however, there is no provision for liquidated damages in the event that we fail to register the shares as required. The following table summarizes the dollar value of each payment (inclusing the value of nay payments to be made in common stock) in connection with the series A preferred stock and warrants that we have made or will be required to make to the selling stockholder or any affiliate of the selling stockholder or any person with whom the selling stockholder has a contractual relationship:

		Brokerage Fees									Due Diligence Fees
Gross Proceeds		Dragonfly			Colebrook Capital			Crescent Fund LLC			Baron Partners LP			Net Proceeds
$4,500,000		$	234,000	(1)	$	126,000	(2)	$	20,000	(3)	$	50,000		$	4,071,000

 

(1)	Amount includes $134,000 paid in cash at closing and $100,000 of deferred payments, which were paid on November 11, 2006.
(2)	Amount includes $76,000 paid in cash at closing and $50,000 in deferred payments, which were paid on November 11, 2006.
(3)	Total payment amount of $20,000 was deferred and subsequently paid on November 11, 2006.

 

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The following table illustrates the total amount of all possible payments as disclosed in the table above and the total possible discount to the market price of the shares underlying the series A preferred stock and warrants as disclosed in the table on page 13 of this prospectus divided by the net proceeds we received from the sale of the series A preferred stock and warrants as detailed in the table above.

Total Possible Payments Made to Selling Stockholder		$	430,000
Total Possible Discount to Market of Underlying Securities		$	36,854,523
		$	37,284,523
Total Amount as a Percentage of Net Proceeds			916	%

 

PLAN OF DISTRIBUTION

The selling stockholders and any of their pledgees, donees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholder may use any one or more of the following methods when selling shares:

·	ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser;

 

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·	block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
·	sales to a broker-dealer as principal and resale by the broker-dealer of the shares for its account;
·	an exchange distribution in accordance with the rules of the applicable exchange;
·	privately-negotiated transactions, including gifts;
·	covering short sales made after the date of this prospectus;
·	to a broker-dealers who may agree to sell a specified number of such shares at a stipulated price per share;
·	through the writing of options on the shares;
·	a combination of any such methods of sale; and
·	any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 of the Securities Act of 1933, as amended (the Securities Act), if available, rather than pursuant to this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if it deems the purchase price to be unsatisfactory at any particular time.

The selling stockholders and their pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholder and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that the selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then existing market price. We cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. The selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be an “underwriters” as that term is defined under the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholder, but excluding brokerage commissions or underwriter discounts.

The selling stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. The selling stockholder has not entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into. If the selling stockholders propose to sell shares to an underwriter, we will be required to amend this prospectus to reflect the terms of the underwritten offering.

 

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The selling stockholders may pledge shares to its brokers under the margin provisions of customer agreements. If the selling stockholders defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such Act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholder or any other such person. In the event the selling stockholders is deemed an affiliated purchaser or distribution participant within the meaning of Regulation M, then the selling stockholder will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In addition, if a short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.

If a selling stockholder notifies us that it has a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreement between the selling stockholder and the broker-dealer.

 

Market Information

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

 

		Price Range
		High			Low
Fiscal 2007:
First Quarter		$	0.90			0.36
Second Quarter			0.45			0.30
Third Quarter
through August 30, 2007			0.50			0.36
Fiscal 2006
First Quarter		$	0.90			0.50
Second Quarter			0.80			0.60
Third Quarter			0.70			0.50
Fourth Quarter			0.60			0.40
Fiscal 2005:
First Quarter		$	1.60			0.50
Second Quarter			1.50			0.80
Third Quarter			0.70			0.50
Fourth Quarter			0.90			0.50

 

The market price of our common stock 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 August 30, 2007, we had approximately 313 stockholders of record. The transfer agent of our common stock is Continental Stock Transfer and Trust Company.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

Forward-Looking Statements

The information in this registration statement contains forward-looking statements. All statements other than statements of historical fact made in this registration statement 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.

 

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General Overview

We were incorporated in the State of Delaware in May 1973 and commenced operations in July 1977. We have been developing and delivering technologically advanced telecommunication solutions for over twenty-five 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.

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

Pursuant to the purchase agreement, our board of directors approved, subject to stockholder approval, a restated certificate of incorporation which, among other provisions, effects 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.

 

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We entered into a Omnibus Amendment and Waiver Agreement with Laurus Master Fund, LTD, dated September 18, 2006 for the purpose of amending, restating and waiving certain terms of (i) the Amended and Restated Secured Convertible Term Note, issued as of February 11, 2005 and amended and restated as of July 21, 2006 (as amended and restated, amended, modified and supplemented from time to time, the ”Term Note”) by the Company to Laurus, (ii) the Securities purchase agreement, dated as of February 11, 2005 (as amended, modified or supplemented from time to time, the “ purchase agreement”) by and between the us and Laurus, (iii) the Common Stock Purchase warrant, issued as of February 11, 2005 by us to Laurus (as amended and restated, amended, modified and supplemented from time to time, the ”Initial warrant”), (iv) the Common Stock Purchase warrant, issued as of November 18, 2005 by us to Laurus (as amended and restated, amended, modified and supplemented from time to time, the ”Additional   warrant”) and (v) the Forbearance Agreement, dated as of July 21, 2006 between us and Laurus.

Pursuant to the Laurus agreement, on September 19, 2006, Laurus waived each event of default that may have arisen under the Term Note and the Forbearance Agreement solely as a result of the failure by the Company to make the $32,656.25 in interest payments due to Laurus on September 1, 2006.

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

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

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

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RESULTS OF OPERATIONS

 

Three and Six Months Ended June 30, 2007 as Compared to Three and Six Months Ended June 30, 2006

 

SALES:

Total sales for the three months ended June 30, 2007 increased by $2,377,139 or 177% to $3,719,893 compared to $1,342,754 for the three months ended June 30, 2006. This consisted of service revenues of $3,378,808 (91% of Total Revenues) and product revenues of $341,085 (9% of Total Revenues). Included in the increase were revenues of $1,577,000 attributable to the acquisition of “RTI” which closed in September 2006.

Total sales for the six months ended June 30, 2007 were $6,896,374 compared to $2,684,561 for the six months ended June 30, 2006, representing an increase of $4,211,813 or 157% in sales for the six months period ended June 30, 2007. This consisted of service revenues of $6,265,887 (91% of Total Revenues) and product revenues of $630,487 (9% of Total Revenues). Included in the increase were revenues of $2,921,000 attributable to the acquisition of “RTI” which closed in September 2006.

GROSS MARGIN:

Gross margin for the three months ended June 30, 2007 was $2,035,064, an increase of $1,253,686 or 162% compared to the $781,378 for three months ended June 30, 2006. Our overall gross margin percentage decreased to 54.7% from 58.2% for the same period in 2006. This is attributable to higher component of our total revenues attributable to services (91% of revenues) compared to prior year quarter (72% of revenues). Services revenues gross margins is in the 50%+ range versus Product gross margin in the 60%+ range. The gross margin percentage for technology products for the three months ended June 30, 2007 decreased to 63.9% from 69.4% for the three months ended June 30, 2006.

Gross margin for the six months ended June 30. 2007 was $3,739,091, an increase of $2,248,274 or 151% compared to prior year. Our overall gross margin percentage decreased to 53.6% from 55.5% in 2006. The overall gross margin percentages were impacted by a shift in business mix towards services partially offset by an increase in our service margins. The improvement in services margins was primarily a result of handling a higher component of service business in-house as opposed to utilizing subcontractors.

RESEARCH AND DEVELOPMENT EXPENSES:

Research and development expenses consist primarily of salaries and related personnel costs, consulting fees associated with product development.

For the three months ended June 30, 2007, research and development expenses decreased to $96,257 as compared to $109,135 for the three months ended June 30, 2006.

Research and development expenses decreased slightly to $205,298 for the six months ended June 30, 2007 compared to $218,269 for the six months ended June 30, 2006. Management believes that continual enhancements of the Company's products will be required to enable the Company to maintain its competitive position. The Company 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 EXPENSES:

Selling, General and administrative ("SG&A") expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, depreciation and amortization of intangible assets.

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For the three months ended June 30, 2007 SG&A expenses increased to $1,958,852 compared to $556,590 for the comparative three months ended June 30, 2006. The increase was primarily due to SG&A expenses of RTI acquired September 2006 combined with amortization expenses of intangibles related to the “RTI” purchase accounting. The non-cash amortization expense in the quarter related to “RTI” intangibles was $462,000.

For the six months ended June 30, 2007 SG&A increased to $3,608,003, an increase of $2,546,806 from $1,061,197 for the comparative six months ended June 30, 2006. The increase as discussed above was primarily due to the addition of “RTI” expenses and non-cash amortization expense. The non-cash amortization expense related to the “RTI” and “SMEI” intangibles in the six month period was $1,040,856.

INTEREST EXPENSE:

Interest Expense decreased to $93,198 for the three months ended June 30, 2007 compared to $134,864 for the three months ended June 30, 2006. Interest expense for the six months ended June 30, 2007 was $479,002 compared to $264,753 for the six months ended June 30, 2006. Included in 2007 interest was non-cash amortization of debt discount of $205,809 attributable to the $4.5 million convertible debt with Barron and non cash derivative interest of $117,525. During February 2007, the Barron debt was automatically converted into preferred stock. Accordingly, in the absence of additional borrowings, we anticipate a decrease in our interest expense as a result of this conversion.

DERIVATIVE INCOME (EXPENSE):

The following table is derived from Note 5 in the accompanying financial statements.

Derivative income (expense)		Six months ended June 30, 2007			Six months ended June 30, 2006			Three months ended June 30, 2007			Three months ended June 30, 2006
Conversion features		$	( 467,120	)	$	13,445		$	-		$	13,445
Warrant derivative		$	1,528,002		$	-		$	1,906,247		$	-

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.

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

EXTINGUISHMENT LOSS:

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

 

NET INCOME (LOSS):

The Company's net income for the three months ended June 30, 2007 was $1,729,550 which compared to a net loss of $7,106 for the three months ended June 30, 2006. Net income is influenced by the matters discussed in the other sections of this MDA However, it should be noted that net income included $1,906,247 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). The Company’s net income for the six months ended June 30 2007 was $235,043 compared to a net loss of $56,782 for the six months ended June 30, 2006. Derivative income in those periods amounted to $1,060,882 and $13,445, respectively. See Derivative Income (Expense) above where we discuss the material assumptions underlying fair value adjustments and their potential effect on income

INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS:

Income applicable to common stock gives effect to cumulative undeclared dividends on the Company’s Series B Preferred Stock amounting to $25,000 and $12,500 for the six and three month periods ended June 30, 2007. 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.

LIQUIDITY AND CAPITAL RESOURCES

Going concern considerations:

The Company’s auditors have emphasized uncertainty regarding our ability to continue as a going concern in their audit reports for our years ended December 31, 2006 and 2005.

Working capital and other activities:

 

The Company’s working capital deficiency as of June 30, 2007 amounts to $10,733,000 compared to a deficiency of $21,011,000 as of June 30, 2007. The decline in the deficiency is largely attributable to the decrease by $8,733,000 of our derivative liabilities. This decrease gives effect to the reclassification of $7,223,000 of derivative liabilities to stockholders’ equity upon achieving equity classification conditions for the embedded conversion feature previously bifurcated from certain hybrid debt agreements and fair value adjustments to remaining derivative financial instruments that continue to require liability classification and fair value measurement.. As of June 30, 2007, the remaining derivative balance of $11,141,000 relates to certain warrants that do not achieve equity classification under current accounting standards. Other components of our working capital and changes there in are discussed as follows:

For the six months period ended June 30, 2007, cash and cash equivalents decreased to $272,174 from $392,275 at December 31, 2006. Net cash used by operating activities was $40,544 for the six months ended June 30, 2007 compared to net cash used by operating activities of $422,882 in the corresponding six month period ended June 30, 2006. This consisted of net income of $235,043, an increase in our accounts receivable of $1,559,695, an increase in inventories of $21,887, a decrease in deferred revenue offset by a decrease in other current assets of $36,167, a decrease in other assets of $26,380, an increase in the Company's accounts payable and accrued expenses of $603,196, favorably offset by net non-cash items (depreciation, amortization of intangibles, derivative interest, minority interest expense and financing cost) amounting to $702,747.

 

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Net cash used by financing activities was $79,557 for the six months ended June 30, 2007 compared to net cash provided by financing of $1,182,781 in the corresponding six months ended June 30, 2006. In the 2006 period, the Company successfully closed on a Private Placement of Common stock resulting in net proceeds to the Company of $1,292,000.

Total current assets at June 30, 2007 were $4,435,361 compared to current liabilities totaling $15,169,064 (including non-cash derivative liabilities of $11,141,149).

The current maturities of our short-term notes at June 30, 2007 totaled $1,654,192 compared to $1,998,189 at December 31, 2006. The Company has $1,075,000 of short term notes coming due by December 31, 2007 ($750,000 in September, 2007 and $325,000 in December 2007) (See Note 4 to the Financial Statements for a discussion of these liabilities) The Company anticipates that it will have sufficient availability on its $2.0M line of revolving credit facility to satisfy these payments.

The Company has no long term debt obligations.

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Year Ended December 31, 2006 and 2005

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

		For the Years Ending December 31,
		2006			2005
Sales		$	7,494,888		$	4,235,269
Net Loss		$	(15,551,433	)	$	(863,103	)
Net Loss Per Share		$	(1.31	)	$	(.10	)

 

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		OPERATING EXPENSES						PERCENT OF SALES
		2006			2005			2006			2005
Research & Development			435,768			431,021			5.8	%		10.2	%
Selling, General & Administrative			3,248,013			2,537,365			43.3	%		59.9	%
Total Operating Costs and Expenses		$	3,683,781		$	2,968,386			49.1	%		70.1	%

SALES:

Overall Sales for the fiscal year ended December 31, 2006 increased to $7,494,888 from $4,235,269 compared to the prior year ended December 31, 2005, representing an increase of $3,259,619, or 76.9%. The sales increase attributable to the RTI acquisition from the date acquired September 19, 2006 to December 31, 2006 was $1,683,352 or 39.7%. Excluding RTI sales, sales increased to $5,811,536 or 37.2% compared to 2005. Total Sales included revenues from Technology Products of $1,692,052 or 22.6% and Technology Services of $5,802,836 or 77.4%. Technology Product revenues increased to $1,692,052 from $1,224,042 or 38.2% mainly attributable to an increase in customer shipments. Excluding the increase in revenues attributable to the RTI acquisition, revenues from Technology Services increased to $4,119,484 from $3,011,227 in 2005 or 36.8%, mainly attributable to growth in contracts with governmental agencies and the expansion of existing contracts.

COST OF SALES:

 

DESCRIPTION OF BUSINESS

 

  Organization

We are a Delaware corporation, organized in May 1973 under the name Science Dynamics Corporation. We changed our name to Lattice Incorporated on February 2, 2007.

 

On February 14, 2005, we acquired approximately 86% of the stock of SMEI on a fully-diluted basis, for which we paid $1,655,325 in cash and issued 1,737,861 shares of common.

 

On September 10, 2006, we acquired the stock of RTI for $3,500,000, 50,000,000 shares of common stock, a $500,000 promissory note and 1,000,000 shares of series B convertible preferred stock. To secure the indemnification obligations of the former RTI stockholders, $350,000 and 583,333 shares of common stock was placed in escrow for a period of 18 months, subject to any claims that may arise under the agreement during the 18-month warranty survival period.

 

At March 31, 2007, we operated the businesses of SMEI and RTI as separate businesses. In addition to SMEI and RTI, we continue to supply call control technology to service providers offering Collect-Only calling to inmates of correctional institutions. We have been a primary supplier to a major Local Exchange Carrier and, in recent years; have expanded our customer base to include the newly emerging unregulated companies offering the same service in today’s more highly competitive telecom environment. Our Commander product line is a versatile and feature rich platform, prepared to handle the increasing demand for investigative tools and security.

 

 We are in the process of integrating our businesses and hope to complete the integration during 2007.

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.

 

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Consulting Services Division

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

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

Geospatial Information Systems

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

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

Technical and Management Consulting Services

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

 

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

Aquifer Software

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

 

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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.

 

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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.

 

Employees   

As of August 30, 2007, we had 70 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 August 30, 2007, SMEI had 25 full time employees and one part time employee. None of SMEI’s employees are covered by a collective bargaining agreement. SMEI considers relations with its employees to be good.

As of August 30, 2007, RTI had 35 full time employees. None of RTI’s employees are covered by a collective bargaining agreement. RTI considers relations with its employees to be good.

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.

 

Description of Property

 

We lease a 3,000 square foot office in an industrial park in Pennsauken, New Jersey. This space is also used to test our products and for other corporate activities. Our lease began June 1, 2003 and is for a term of three years at $2,812 per month.

 

SMEI leases a facility located at 12100 Sunset Hills Road, Reston, Virginia 20191. The facility is comprised of 7,072 square feet of office space. The lease is pursuant to a Lease Agreement dated October 1, 2005. The lease commenced October 1, 2005 and ends September 30, 2007. SMEI currently pays $16,501 per month under the lease. The lease is for two years with one two-year renewal at the then current market rate with current market escalators.

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RTI leases a facility located at 8306 Rugby Road, Manassas VA. The facility is comprised of 3,166 square feet of space. The term of the lease is 3 years with one renewal option for an additional 5 year term. We pay rent of $5,500 a month for the RTI facility.

MANAGEMENT

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		41		President, chief executive officer and director
Joe Noto		47		Chief financial officer and secretary
Eric D. Zelsdorf		40		Chief technology officer
Michael Ricciardi		47		Chief operating officer
Jeannemarie Devolites Davis		50		Director
Robert E. Galbraith		62		Director
Thomas F. Gillett		60		Director
Donald Upson		52		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, joined Lattice in March 2005 as Vice President of Finance and served in that position until May 2005 when he accepted the position of Chief Financial Officer. Prior to joining the Company, from 2002 to 2005, Mr. Noto was VP/Controller heading financial operations at Spectrotel Inc. (formerly Plan B Communications), a communications service provider. From 2000 to 2002, Mr. Noto was the Finance Director at Pivotech Systems, a communications software start-up Company. Mr. Noto holds a B.A. degree from Rutgers College and is a Certified Public Accountant of New Jersey and is a member of the American Institute of CPA’s and the New Jersey Society of CPA’s.

 

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

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Michael Ricciardi, Chief Operating Officer. Mr. Ricciardi founded RTI and served as its president and chief executive officer and led the company’s technical team and operations since its inception in 1992. He has spent his career in software development and information management in the field of distributed and embedded systems. Prior to forming RTI, Mr. Ricciardi was the founder and principle in MAR-Computer Systems Designers, which specialized in system integration services. He also had prior experience with United Technologies Defense Systems, Sperry Marine Systems, Loral Advanced Projects and CACI Distributing Systems. Ricciardi is a graduate of the S.U.N.Y at Buffalo with a double major in applied mathematic and computer science. He also earned his master’s degree in computer science from the New York Institute of Technology.

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 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.

Thomas F. Gillett, Director. Mr. Gillett has held a number of executive level positions with Qwest Communications, including President QCC (Qwest IXC), Senior Vice President for Corporate Development & Strategy and Vice President Merger Integration. Mr. Gillett has also worked at a venture capital firm, Alta Communications and held a senior position at Cable Television Laboratories. Mr. Gillett holds undergraduate and graduate degrees in Management Engineering and Management from Rensselaer Polytechnic Institute.  

Donald Upson, Director. 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 Committee 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.

We have an audit committee. The members of our audit committee are Donald Upson, Jeannemarie Devolites, Thomas F. Gillett and Robert E. Galbraith, all of whom are independent.

 

We also have a compensation committee. The members of the compensation committee are Paul Burgess, Jeannemarie Devolites Davis , Robert Galbraith, Thomas Gillett, and Donald Upson.

 

Employment and Consulting Agreements

 

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

 

(a) upon expiration of its terms;

 

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

 

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

 

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

 

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

 

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

 

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

 

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EXECUTIVE COMPENSATION

 

SUMMARY COMPENSATION TABLE

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.123 (Revised 2004), "Share Based Payment," ("SFAS 123R"), as required in the first fiscal year of the Company commencing after December 15, 2005 using the modified prospective method. The Company adopted SFAS 123 in January 2006. Accordingly amounts provided for 2005 do not reflect changes made to recently amended Regulation S-B Item 402 or SRAF 123R.   The following information is furnished for the years ended December 31, 2006 and 2005 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 en 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			2006		$	112,500	(3)		$	52,500																	$	165,500
President, Chief Executive Officer and Director			2005		$	220,833									$	420,000											$	640,833
Joseph Noto			2006		$	150,000			$	30,000			—			—											$	180,000
Chief Financial Officer			2005		$	120,967							—		$	40,000											$	160,967
Mike Ricciardi (4)			2006		$	41,250				—					$	75,000								$	15,000	(5)	$	131,250
Chief Operating Officer			2005			—				—
Eric Zelsdorf			2006		$	160,000																					$	160,000
Chief Technology Officer			2005		$	146,667																					$	146,667

 

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

 

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

(3) Mr. Burgess waived $112,500 of his 2006 compensation

 

(4) Mr. Ricciardi ’ s salary is partial year since his hire date was September 19, 2006 coinciding with the acquisition of RTI. Included in Mr. Ricciardi compensation is $15,000 pursuant to a consulting arrangement with Mr. Ricciardi ’ s spouse. This arrangement expires March 30, 2007. 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.

Name		Number of Securities Underlying Unexercised Options # Exercisable			Number of Securities Underlying Unexercised Options # Unexercisable			Equity Incentive Plan Awards: Number of Securities Underlying Underexercised Unearned Options #			Option Exercise Price $			Option Expiration Date			Number of Shares or Units of Stock That Have Not Vested #			Market Value of Shares or Units of Stock That have not vested $			Equity Incentive Plan Awards: Number of Unearned Shares Units or Other Rights That Have Not Vested #			Equity Incentive Plan Awards Market or Payout Value of Unearned Shares Units or Other Rights That have not Vested $
Joseph Noto			66,667			133,333	(1)		—		$	1.00			July 2015
Paul Burgess			200,000 200,000 400,000			— — 200,000	(2)				$ $ $	0.30 0.50 1.00			May 2014 Oct’ 2014 Feb’ 2015
Michael Ricciardi			—			125,000	(3)				$	0.60			Sept 2016

 

(1)	66,667 vests July 2007 and 66,667 vests July 2008
(2)	200,000 vests February 2008
(3)	41,667 vests September 2007, 41,667 vests September 2008 and 41,667 vests September 2009

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DIRECTOR COMPENSATION

Compensation of Directors

Effective after December 31, 2006 Directors are compensated $1,000 per in-person Director’s meeting. All directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to us.   We have paid $4,000 to our directors for service on the Board from January 1, 2007 to June 12, 2007.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

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

47

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In connection with our purchase of all of the issued and outstanding stock of RTI:

·

we paid Michael Ricciardi, our chief operating officer, $ 512,064 and issued to him 717,975 shares of common stock; 162,560 shares of series B preferred stock, which shall on September 18, 2007 automatically convert into approximately 135,466 shares of common stock; and an option to purchase 125,000 shares of our common stock at a purchase price of $0.65 per share.

 

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·		we paid Marie Richardi, Mr. Ricciardi’s spouse, $1,056,135 we issued to her 1,480,823 shares of our common stock and 335,281 shares of our Series B preferred stock, which shall on September 18, 2007 automatically convert into approximately 279,400 shares of our common stock.
·		we paid $656,082 to Michele Ricciardi and issued Marie and Michael Richardi Custodian for their minor child under the Uniform Gifts to Minors Act 208,280 shares of our Series B preferred stock which shall on September 18, 2007 automatically convert into approximately 173,566 shares of our common stock.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table provides information about shares of common stock beneficially owned as of August 30, 2007 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.

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 200,000,000 shares of common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. As of August 30, 2007, we had 16,629,848 shares of common stock outstanding and 1,000,000 shares of preferred stock outstanding.

Common Stock

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of our common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of our common stock are entitled to receive dividends ratably, if any, as may be declared from time to time by our board of directors out of funds legally available therefore. Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive ratably, our net assets available after the payment of all liabilities.

 

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Holders of our common stock have no preemptive, subscription, redemption or conversion rights, and there are no redemption or sinking fund provisions applicable to the common stock. The outstanding shares of our common stock are, and the shares offered in this offering will be, when issued and paid for, duly authorized, validly issued, fully paid and nonassessable.

Preferred Stock

We are authorized to issue 10,000,000 shares of “blank check” preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include the designations, rights and preferences including preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any such preferred stock could adversely affect the rights of the holders of common stock and, therefore, reduce the value of the common stock. The ability of the Board of Directors to issue preferred stock could discourage, delay or prevent a takeover of us. In September 2006, we filed a certificate of Designation to designate 9,000,000 shares as Series A Convertible Preferred Stock and 1,000,000 shares as Series B convertible Redeemable Preferred Stock.

Pursuant to the transaction with Barron, our board of directors approved, a restated certificate of incorporation, which was approved by our shareholders in December 2006. The restated certificate of incorporation, among other provisions, effected a one-for-ten reverse split in the Company’s common stock, and changed our name to Lattice Incorporated.

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 the Company 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 the Barron transaction we issued Barron a convertible note in the principal amount of $4,500,000 (the “Note”). Upon the filing of the restated certificate of incorporation with the State of Delaware, principal and interest due on the Note automatically converted into 7,826,087.

 

The series A preferred stock and warrants provide for an adjustment in the conversion price of the note and series A preferred stock and the exercise price of the warrants if the Company’s earnings before interest, taxes, depreciation and amortization is less than a specified amount per share, on a fully-diluted basis, with a maximum reduction of 30% for each year. The target EBITDA per share is $.019 for 2006 and $.0549 for 2007. The amount of reduction per year is the percentage shortfall. Thus, a 15% shortfall will result in a 15% reduction in the applicable conversion or exercise price then in effect. For purpose of determining fully-diluted, all shares of Common Stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are “in the money,” or (iii) such shares may be issued as a result of the 4.9% Limitation. The per share amounts are adjusted in accordance with GAAP to reflect any stock dividend, split, distribution, reverse split or combination of shares or other recapitalization, including the reverse split effected by the restated certificate of incorporation.

 

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The following table sets forth the initial conversion price of the series A preferred stock, which is issuable upon conversion of the Note, and the exercise price of the and the adjusted numbers if (a) the EBITDA per share for both 2006 and 2007 is 15% below the respective targets (a “15% shortfall”) and (b) the EBITDA per share for 2007 is 50% or more below the target (a “50% shortfall”). The number of shares reflects the number of shares of common stock issuable upon conversion of the series A preferred stock, and are based on the assumption that no notes or preferred stock are converted into common stock until the adjustment has been made. There is no adjustment in the number of shares issuable upon exercise of the warrants. The number of issuable upon conversion reflects the number of shares issuable upon the conversion of all of the shares of series A preferred stock that are issuable upon conversion of the note.

LEGAL MATTERS

 

The validity of the common stock offered hereby will be passed upon for Lattice Incorporated by Sichenzia Ross Friedman Ference LLP, New York, New York.

EXPERTS

 

The consolidated financial statements included in this prospectus have been audited by Peter C. Cosmas Co., CPAs, independent registered public accountants, as stated in their report appearing herein and are so included herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

 

Lattice Incorporated is subject to the informational requirements of the Securities Exchange Act of 1934, and in accordance therewith files reports, proxy or information statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 100 F Street N.E. Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission’s web site is http://www.sec.gov.

Lattice Incorporated has filed with the Commission a registration statement on Form SB-2 under the Securities Act of 1933 with respect to the common stock being offered hereby. As permitted by the rules and regulations of the Commission, this prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Lattice Incorporated and the common stock offered hereby, reference is made to the registration statement, and such exhibits and schedules. A copy of the registration statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at the addresses set forth above, and copies of all or any part of the registration statement may be obtained from such offices upon payment of the fees prescribed by the Commission. In addition, the registration statement may be accessed at the Commission’s web site. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.

 

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  INDEX TO FINANCIAL STATEMENTS

LATTICE INCORPORATED (FORMERLY SCIENCE DYNAMICS CORPORATION) AND SUBSIDIARIES

 

For the Three Months Ended March 31, 2007 of Lattice Inc.
Condensed Consolidated Balance Sheet as of June 30, 2007 (unaudited)		F-2
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2007 and 2006 (unaudited)		F-3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2007 and 2006 (unaudited)		F-4
Notes to condensed consolidated financial statements (unaudited)		F-5
For the Years Ended December 31, 2006 and 2005 of Lattice Inc.
Report of Independent Registered Public Accounting Firm
for the year ended December 31, 2006		F-18
Consolidated Balance Sheet as of December 31, 2006		F-19
Consolidated Statement of Income for the years ended
December 31, 2006 and 2005		F-20
Consolidated statements of Cash Flows for the years ended
December 31, 2006 and 2005		F-21
Consolidated statements of Stockholders' Equity for the years ended
December 31, 2006 and 2005		F-22
Notes to consolidated financial statements		F-23
RICCIARDI TECHNOLOGIES, INC.
For the Six Months Ended June 30, 2006 of Ricciardi Technologies, Inc.
Balance Sheet as of June 30, 2006 (unaudited)		F-44
Statements of Operations for the three months ended June 30, 2006 (unaudited)		F-45
Statements of Cash Flows for the three months ended June 30, 2006 (unaudited)		F-46
Notes to the financial statements (unaudited)		F-47
For the Years Ended March 31, 2006 and 2005 of Ricciardi Technologies, Inc.
Report of Independent Registered Public Accounting Firm
for the year ended March 31, 2006		F-50
Balance Sheet as of March 31, 2006		F-51
Statements of Operations for the years ended March 31, 2006 and 2005		F-52
Statements of Cash Flows for the years ended March 31, 2006 and 2005		F-53
Notes to the financial statements		F-54
LATTICE INCORPORATED (FORMERLY SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES)
Notes to Unaudited Pro Forma Combined Financial Statements		F-59
Statement of Operations Pro Forma for the twelve months ended December 31, 2006		F-60
Statement of Operations Pro Forma for the twelve months ended December 31, 2005		F-61

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24.    Indemnification of Directors and Officers

 

Section 145 (“Section 145”) of the Delaware General Corporation Law, as amended (the “DGCL”), permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner he or she reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In the case of an action by or in the right of the corporation, no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a present or former director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

As permitted by the DGCL, we have included in our Certificate of Incorporation a provision to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors. In addition, our By-laws require us to (i) indemnify the officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and (ii) advance expenses to the officers and directors as incurred in connection with proceedings against them for which they may be indemnified.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

Item 25.    Other Expenses of Issuance and Distribution

 

    The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered:

Nature of Expense		Amount
SEC registration fee		$	41
Accounting fees and expenses			10,000	*
Printing and filing			3,000	*
Legal fees and expenses			50,000	*
Miscellaneous			1,000	*
TOTAL			64,041	*

 

* Estimated

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Item 26.    Recent Sales of Unregistered Securities

 

On March 1, 2003, in connection with his employment agreement as Chief Operating Officer, we granted Paul Burgess an option to purchase 200,000 shares of our common stock at $.30 per share. This grant was exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

On March 31, 2003, we entered into a securities purchase agreement with Laurus Master Fund, Ltd. for (1) advances to be made to us by Laurus Master Fund, Ltd. in the aggregate principal amount of up to $1,000,000, (2) the issuance by us of a warrant exercisable to purchase 25,000 shares of common stock and (3) issuance of 8% convertible debentures in the aggregate amount of $247,500. The debentures were convertible into common stock at a conversion price equal to 85%% of the average closing price for the common stock three days prior to the closing date subject to adjustment. The offering of convertible debentures was exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. All outstanding principal and interest on these convertible debentures has been either repaid or converted into common stock.

In June 2003, one offshore investor subscribed for 400,000 shares of our common stock at $0.50 per share, for a total of $200,000 in gross proceeds to us. The shares were delivered in 2004. This transaction was exempt from registration requirements under Regulation S, promulgated under the Securities Act.

 

In April 2004 we issued 196,079 shares of common stock for settlement of $30,000 in notes payable. This issuance was exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

On October 6, 2004, in connection with Mr. Burgess’ amended employment agreement, we granted Mr. Burgess an option to purchase 200,000 shares of common stock at $.50 per share as part of his 2003 bonus. Upon the effectiveness of the agreement Mr. Burgess was granted options to purchase 600,000 shares of our common stock at $1.00 per share. This grant was exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

During December 2004, we granted 436,363 shares of common stock to Alan C. Bashforth, our former Chairman of the Board, former Secretary, former President, former Chief Executive Officer, and former acting Chief Financial Officer. Pursuant to his 2002 Employment Agreement these shares were valued at $0.30 per share. This grant was exempt from registration under Section 4(2) of the Securities Act.

 

II-2

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On December 30, 2004 in connection with a new consulting agreement with Calabash Consultancy, Ltd. we awarded Calabash Consultancy, Ltd. an option to purchase 200,000 share of our common stock at $.50. Calabash Consultancy, Ltd. is controlled by Alan C. Bashforth. Calabash was granted warrants to purchase 600,000 shares of the Company's common stock at $1.00 per share. This grant was exempt from registration under Section 4(2) of the Securities Act.

On February 10, 2005, we amended the conversion price of each of the outstanding convertible term notes held by Laurus Master Fund, Ltd. to a fixed conversion rate of $0. 50. On February 11, 2005, Laurus Master Fund, Ltd. converted $547,988.78 principal amount of convertible term notes and $223,447.28 of interest on such convertible term notes into an aggregate of 1,542,872 shares of common stock. As a result of the conversion by Laurus Master Fund, Ltd. of the term notes, all amounts outstanding under the term notes were re-paid in full. In consideration for the amendment to the conversion rate of the term notes held by Laurus Master Fund, Ltd. and the conversion by Laurus Master Fund, Ltd. of the term notes, $550,762.95 of outstanding principal and accrued and unpaid interest on a convertible note dated March 31, 2003 issued in the face amount of $1,000,000 by the Company to Laurus was also re-paid. These stock issuances were exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

In connection with the acquisition of Systems Management Engineering, Inc., we entered into a Securities purchase agreement, dated February 11, 2005, with Laurus Master Fund, Ltd. for the sale of a $2,000,000 principal amount secured convertible term note and a common stock purchase warrant to purchase 600,000 shares of common stock at a price of $1.00 per share. The sale of the secured convertible term note and the warrant were made pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. In November 2005 pursuant to an amendment and waiver agreement with Laurus, we issued Laurus a warrant to purchase 300,000 shares of our common stock at $0.75 per share.

On February 14, 2005, as partial consideration for the acquisition of 86% of the outstanding common stock of Systems Management Engineering, Inc., we issued an aggregate of 1,655,325 shares of common stock to twelve accredited investors and 82,536 shares to former SMEI employees to replace outstanding compensatory SMEI stock options. These issuances were exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

On March 7, 2005, the Company signed a three year employment contract with Joe Noto. In connection with this his employment, Mr. Noto was granted 200,000 options to purchase the Company's stock at $1.00 per share. The issuance of to Mr. Noto was exempt from registration under Section 4(2) of the Securities Act.

During May 2005, we issued an aggregate of 307,000 shares of common stock as follows: (1) 100,000 shares were issued to Dr. Greary; (2) 150,000 shares were issued to Inverbrass Ltd.; and (3) 57,000 shares were issued to Calabash Consultancy, Ltd. The total value of theses shares was $275,424. These issuances were exempt from registration under Section 4(2) of the Securities Act.

Between April 14, 2006 and May 11, 2006 the Company raised $1.4 million of gross proceeds from the sale of common stock and warrants to purchase additional shares of common stock to various accredited investors in private placement transactions. The Company sold an aggregate of 2,323,173 shares of common stock and warrants to purchase 1,161,587 shares of common stock. Each unit is comprised of 100 shares and 50 warrants to purchase one shares of common stock with an exercise price of $1.20 per share exercisable for five years. Each 100 shares of common stock and one common stock purchase warrant were sold for a per-unit price of $6.00, or $0.60 per share.

 

On September 19, 2006, we entered into a securities purchase agreement (the “purchase agreement”) with Barron Partners LP (“Barron”) pursuant to which Barron purchased, for $4,500,000, (a) a note in the principal amount of $4,500,000 (the “Note”), and (b) common stock purchase warrants (“warrants”) to purchase up to 12,500,000 shares of the Company’s common stock at $0.50 per share and 12,500,000 shares of the Company’s common stock at $1.25 per share. Upon the filing of the restated certificate of incorporation with the State of Delaware, principal and interest due on the Note automatically converted into 7,826,087 shares of the Company’s series A preferred stock . Prior to such filing, the Note is convertible at the Conversion Price at the option of the holder. 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 the Company 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 initially $.23 per share, subject to adjustment. Pursuant to a Stock purchase agreement (the “RTI Agreement”) dated as of September 12, 2006, between the Company, RTI and all of stockholders of RTI, the Company purchased all of the issued outstanding shares of the Common Stock of RTI. The RTI Agreement was executed and the closing was held on September 19, 2006 contemporaneously with the Barron private placement. On February 8, 2007, pursuant to an amendment and waiver agreement with Barron’s, we issued Barron’s a warrant to purchase 1,900,000 shares of our common stock at $0.50 per share.

II-3

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Pursuant to the RTI Agreement, 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 the assets or equity securities of the Company to a third party, and (b) 1,000,000 shares of the Company’s Series B Convertible Preferred Stock Each share of Series B Preferred Stock will automatically convert into common stock on September 18, 2007, at the conversion rate of five sixths of a share of common stock , subject to adjustment in the event of stock dividends, splits and other distributions, combinations of shares or reverse splits or other recapitalizations.

All of the above unregistered issuances of securities were made pursuant to the exemption from registration requirements provided by Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. Except as expressly set forth in this prospectus, the individuals and entities to whom we issued securities are unaffiliated with us. For each of the above sales of unregistered securities, no advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of ours or our executive officers, and transfer was restricted by us in accordance with the requirements of the Securities Act. Each of the above security holders who were not our executive officers represented that the are accredited and sophisticated investors, that they are capable of analyzing the merits and risks of their investment, and that they understand the speculative nature of their investment. Furthermore, all of the above-referenced persons had access to our Securities and Exchange Commission filings.

Item 27.    Exhibits

Exhibit Number		Description
2.1		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.*
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)

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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		Certificate of Designation of Series A Convertible Preferred Stock and Series B Convertible Redeemable Preferred Stock
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**
4.1		Form of warrant issued to Barron Partners LP*
4.2		Form of warrant issued to Barron Partners LP*

 

4.3

Form of warrant issued to Dragonfly Capital Partners LLC*

 

4.4		Promissory Note issued to Barron Partners LP*
4.5		Secured Promissory Note issued to Michael Ricciard*

 

5.1

Opinion of Sichenzia Ross Friedman Ference LLP***

 

10.1		Securities purchase agreement, between Science Dynamics Corporation and Barron Partners LP, dated September 15, 2006*.
10.2		Employment Agreement between Science Dynamics Corporation and Michael Ricciardi*.
10.3		Amendment to Employment Agreement - Paul Burges*
10.4		Amendment to Employment Agreement - Joseph Noto
10.5		Registration Rights Agreement by and among Science Dynamics Corporation and Barron Partners L.P., dated As of September 19, 2006*
10.6		Amendment to Securities Purchase Agreement and Registration Rights Agreement**

21.1		List of Subsidiaries**

 

23.1

Consent of Peter C. Cosmas Co., CPAs, independent registered public accountants - Ricciardi Technologies, Inc. opinion

 

23.2

Consent of Peter C. Cosmas Co., CPAs, independent registered public accountants - Lattice Inc. opinion

 

99. 1		Pledge and Security Agreement made by between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006*
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 Partners LP, dated September 15, 2006*

 

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

 

**Incorporated by reference to the Registration Statement on Form SB-2 which was filed on February 12, 2007

 

*** Incorporated by reference to the Registration Statement on Form SB-2 which was filed on June 14, 2007

 

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Item 28.    Undertakings

 

The undersigned Registrant hereby undertakes:

 

(1)  To file a post-effective amendment to this Registration Statement during any period in which offers or sales are being made:

 

(i)  to include any Prospectus required by Section 10(a)(3) of the Securities Act;

 

(ii)  to reflect in the Prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 462(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in “Calculation of Registration Fee” table in the effective registration statement; and

 

(iii)  to include any additional or changed material information on the plan of distribution.

 

(2)  For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

 

(3)  To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

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SIGNATURES

 

Pursuant to the requirements of the Act, the Company certifies that it has reasonable grounds to believe that it meets all of the requirement for filing on Form SB-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Pennsauken, New Jersey on June 13, 2007 .

	LATTICE INCORPORATED
Date: September 13, 2007	By:	/s/ Paul Burgess
		Paul Burgess, President and Chief Executive Officer  (Principal Executive Officer)

 

Date: September 13, 2007	By:	/s/ Joe Noto
		Joe Noto, Chief Financial Officer and Principal Accounting Officer

 

In accordance with the requirements of the Securities Act, this Registration Statement has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Paul Burgess
Paul Burgess		Director		September 13, 2007
/s/ Joe Noto
Joe Noto		Chief Financial Officer		September 13, 2007
/s/ Robert E. Galbraith *
Robert E. Galbraith		Director		September 13, 2007
Jeannemarie Devolites Davis		Director		September 13, 2007
/s/ Thomas F. Gillet *
Thomas F. Gillett		Director		September 13, 2007
/s/ Donald Upson *
Donald Upson		Director		September 13, 2007

*By:    /s/ Paul Burgess

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Paul Burgess

Attorney-in-Fact

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