**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-QSB/A**





(Mark
      One)





x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED MARCH 31, 2007




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





FOR
      THE
      TRANSITION PERIOD FROM __________ TO __________


COMMISSION
      FILE NUMBER ________________________________





**LATTICE
      INCORPORATED**


(Name
      of
      small business issuer in its charter)




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





**7150
      N. Pennsauken, New Jersey 08109**


(Address
      of principal executive offices)





Issuer’s
      telephone Number: **(856)
      910-1166**





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





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: As of May 21, 2007, the issuer had 16,629,848
      outstanding shares of Common Stock, $.01 par value per share.





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







**LATTICE
      CORPORATION**


**MARCH
      31, 2007 QUARTERLY REPORT ON FORM 10-QSB**




**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements
            2Item
                2.
            Management’s
                Discussion and Analysis or Plan of Operation
            14Item
                3.
            Controls
                and Procedures
            19**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                3.
            Defaults
                Upon Senior Securities
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20Item
                5.
            Other
                Information
            20Item
                6.
            Exhibits
                and Reports on Form 8-K
            20**SIGNATURES**
            21




**EXPLANATORY
      NOTE:**





**This
      Amendment No. 2 to our Quarterly Report on Form 10-QSB gives effect to the
      correction in our financial statements of an error in our previous filing that
      resulted in the incorrect treatment of our automatic conversion of our Barron
      Debt as an extinguishment in our statement of operations rather than as a
      traditional conversion that resulted in a reclassification of (i) the related
      compound derivative and (ii) the debt carrying value both to stockholders’
equity. The accompanying financial statements have been restated for this error,
      which resulted in an increase in our net loss for the three months ended March
      31, 2007 from ($102,497) to ($1,494,507) and an increase in our loss per common
      share for the three months ended March 31, 2007 from ($0.00) to ($0.09). This
      restatement did not result in any changes to our assets or liabilities as of
      March 31, 2007. In addition, the Company has received comments from the Staff
      of
      the Securities and Exchange Commission in connection this and certain other
      reports that it has filed under the Securities Exchange Act of 1934, as amended
      and the Securities Act of 1933. The aforementioned error arose from our
      consideration of these comments. In addition, certain disclosures have been
      enhanced as a result of our consideration of the comments. We intend to fully
      respond to, and properly address, all comments received. While we believe this
      amendment embodies all comments and suggestions by the Staff, they have not
      approved our filings and, accordingly, additional changes may be
      required.**







**PART
      I - FINANCIAL INFORMATION**





**LATTICE
      INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




March 31, 2007
            
            December 31, 2006(Unaudited, Restated)
            
            (Restated)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            240,739
            
            $
            392,275Accounts
                receivable - net
            
            
            3,087,553
            
            
            2,412,164Inventories
            
            
            65,674
            
            
            64,442Other
                current assets
            
            
            129,741
            
            
            698,514Total
                current assets
            
            
            3,523,707
            
            
            3,567,395Property
                and equipment, net
            
            
            33,061
            
            
            37,187Goodwill
            
            
            2,547,866
            
            
            2,547,866Other
                intangibles, net
            
            
            6,823,807
            
            
            7,344,235Other
                assets
            
            
            96,701
            
            
            122,935Total
                assets
            
            $
            13,025,142
            
            $
            13,619,618LIABILITIES
                AND SHAREHOLDERS' EQUITY (DEFICIT)Current
                liabilities:Accounts
                payable
            
            $
            983,671
            
            $
            892,773Accrued
                expenses
            
            
            940,013
            
            
            1,736,754Customer
                deposits
            
            
            15,000
            
            
            15,000Deferred
                revenue
            
            
            33,874
            
            
            62,495Notes
                payable
            
            
            1,607,178
            
            
            1,998,189Derivative
                liability
            
            
            13,047,396
            
            
            19,873,782Total
                current liabilities
            
            
            16,627,132
            
            
            24,578,993Deferred
                tax liabilities
            
            
            406,162
            
            
            406,162Minority
                interest
            
            
            182,604
            
            
            135,561Shareholders'
                equity - (deficit)Preferred
                  stock - .01 par value10,000,000
                  shares authorized 8,826,087 and 1,000,000 issued
            
            
            83,761
            
            
            10,000Common
                stock - .01 par value, 200,000,000 shares authorized, 16,642,428
                and16,642,428
                issued 16,629,848 and 16.629.848 outstandingin
                2007 and 2006 respectively
            
            
            166,425
            
            
            166,425Additional
                paid-in capital
            
            
            35,022,426
            
            
            24,850,967Accumulated
                deficit
            
            
            (39,065,535
            )
            
            (36,130,657
            )(3,792,923
            )
            
            (11,103,265
            )Common
                stock held in treasury, at cost
            
            
            (397,833
            )
            
            (397,833
            )Shareholder’
                deficit
            
            
            (4,190,756
            )
            
            (11,501,098
            )Total
                liabilities and shareholders' deficit
            
            $
            13,025,142
            
            $
            13,619,618





See
      accompanying notes.


2





**LATTICE
      INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(UNAUDITED)





Three Months Ended March 31,2007
            
            2006(Restated)Sales
                - Technology services
            
            $
            2,887,079
            
            $
            917,917Sales
                - Technology products
            
            
            289,402
            
            
            423,890Total
                sales
            
            
            3,176,481
            
            
            1,341,807Cost
                of Sales - Technology services
            
            
            1,383,262
            
            
            478,248Cost
                of Sales - Technology products
            
            
            89,192
            
            
            154,120Total
                cost of sales
            
            
            1,472,454
            
            
            632,368Gross
                profit
            
            
            1,704,027
            
            
            709,439Operating
                costs and expenses:Selling,
                general and administrative
            
            
            1,649,152
            
            
            504,606Research
                and development
            
            
            109,041
            
            
            109,1341,758,193
            
            
            613,740Operating
                (loss) income
            
            
            (54,166
            )
            
            95,699Other
                income (expense):Derivative
                income (expense)
            
            
            (845,365
            )
            
            —Extinguishment loss
            
            
            (157,130
            )
            
            —Interest
                expense
            
            
            (385,803
            )
            
            (129,890
            )Finance
                expense
            
            
            (5,000
            )
            
            (8,043
            )Total
                other income (expenses)
            
            
            (1,393,298
            )
            
            (137,933
            )Loss
                before minority interest
            
            
            (1,447,464
            )
            
            (42,234
            )Minority
                interest
            
            
            (47,043
            )
            
            (7,442
            )Net
                loss
            
            $
            (1,494,507
            )
            $
            (49,676
            )Reconciliation
                of net loss to loss applicable to common shareholders:Net
                loss
            
            $
            (1,494,507
            )
            $
            (49,676
            )Preferred
                stock dividends
            
            
            (12,500
            )
            
            —$
            (1,507,007
            )
            $
            (49,676
            )Loss
                per common share:Basic
            
            $
            (0.09
            )
            $
            (0.01
            )Diluted
            
            $
            (0.09
            )
            $
            (0.01
            )Weighted
                average shares –
                Basic and
                diluted
            
            
            16,629,848
            
            
            8,984,150





See
      accompanying notes.


3





**LATTICE
      INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(UNAUDITED)




Three Months Ended March 31,2007
            
            2006(Restated)Cash
                flows from operating activities:Net
                loss
            
            $
            (1,494,507
            )
            $
            (49,676
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Derivative
                (income) expense
            
            
            845,365
            
            
            —Amortization
                intangible assets
            
            
            520,428
            
            
            56,690Amortization
                of debt discount (effective method)
            
            
            205,809
            
            
            —Amortization
                of financing expense
            
            
            118,207
            
            
            44,223Extinguishment
                loss
            
            
            157,130
            
            
            —Minority
                interest
            
            
            47,043
            
            
            7,442Share
                based payments
            
            
            61,440
            
            
            —Depreciation
            
            
            4,125
            
            
            20,940Changes
                in operating assets and liabilities:(Increase)
                decrease in:Accounts
                receivable
            
            
            (675,389
            )
            
            (320,390
            )Inventories
            
            
            (1,232
            )
            
            4,106Other
                current assets
            
            
            8,090
            
            
            (37,049
            )Other
                assets
            
            
            26,235
            
            
            (2,100
            )Increase
                (decrease) in:Accounts payable and  accrued expenses
            
            
            180,911
            
            
            154,883Customer deposits
            
            
            —
            
            
            16,111Deferred
                revenue
            
            
            (28,621
            )
            
            —Total
                adjustments
            
            
            1,469,541
            
            
            (55,144
            )Net
                cash provided by (used in) operating activities
            
            
            (24,966
            )
            
            (104,820
            )Cash
                flows from financing activities:Payments
                on notes payable
            
            
            (45,000
            )
            
            —Revolving
                credit facility (payments) borrowings, net
            
            
            (81,570
            )
            
            166,591Net
                cash (used in) provided by financing activities
            
            
            (126,570
            )
            
            166,591Net
                increase (decrease) in cash and cash equivalents
            
            
            (151,536
            )
            
            61,771Cash
                and cash equivalents - beginning of period
            
            
            392,275
            
            
            53,997Cash
                and cash equivalents - end of period
            
            $
            240,739
            
            $
            115,768Supplemental
                Information:Interest
                paid in cash
            
            $
            40,315
            
            $
            54,527




See
      accompanying notes


4




**LATTICE
      INCORPORATED AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(unaudited)





**Note
      1- Organization and summary of significant accounting
      policies**





**a)
      Organization:**





Lattice
      Incorporated (the “Company”) was incorporated in the State of Delaware May 1973
      and commenced operations in July 1977. The Company began as a provider of
      specialized solutions to the telecom industry. Throughout its history the
      Company has adapted to the changes in this industry by reinventing itself to
      be
      more responsive and open to the dynamic pace of change experienced in the
      broader converged communications industry of today. Currently the Company
      provides advanced solutions for several vertical markets. The greatest change
      in
      operations is in the shift from being a component manufacturer to a solution
      provider focused on developing applications through software on its core
      platform technology. To further its strategy of becoming a solutions provider,
      the Company acquired a majority interest in “SMEI” in February 2005. With the
      SMEI acquisition, approximately 90% of the Company’s revenues are derived from
      solution services. In September 2006 the Company purchased all of the issued
      and
      outstanding shares of the common stock of Ricciardi Technologies Inc. (“RTI”).
      RTI was founded in 1992 and provides software consulting and development
      services for the command and control of biological sensors and other Department
      of Defense requirements to the United States federal governmental agencies
      either directly or though prime contractors of such governmental agencies.
      RTI’s
      proprietary products include SensorView, which provides clients with the
      capability to command, control and monitor multiple distributed chemical,
      biological, nuclear, explosive and hazardous material sensors. With the SMEI
      and
      the RTI acquisitions, approximately 90% of the Company’s revenues are derived
      from solution services. In January 2007, we changed our name from Science
      Dynamics to Lattice Incorporated.




**b)
      Basis of presentation:**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Item 310 of Regulation SB.
      Accordingly; they do not include all of the information and footnotes required
      by generally accepted accounting principles for complete financial statements.
      For further information, refer to the financial statements and footnotes thereto
      included in the Company's annual report for Form 10-KSB for the year ended
      December 31, 2006. In the opinion of management, all adjustments (consisting
      of
      normal recurring accruals) considered necessary for a fair presentation have
      been included. Operating results for the three month period ended March 31,
      2007
      are not necessarily indicative of the results that may be expected for the
      year
      ended December 31, 2007.





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.





**c)
      Principles of consolidation:**





The
      accompanying condensed consolidated financial statements included the accounts
      of the Company and all if its subsidiaries in which a controlling financial
      interest is maintained. We consider a controlling financial interest to reflect
      unimpaired ownership in a majority of the voting common shares of a subsidiary.
      We consider the effects of minority rights in determining our consolidation
      rights; there are no minority participation rights related to our consolidated
      subsidiaries. All significant inter-company accounts and transactions have
      been
      eliminated in consolidation. The minority interests in our consolidated net
      income (loss) are reflected as a component of minority interest in the
      accompanying statement of operations. During the periods presented, minority
      interest represents the minority interest in the income of our 86% owned
      subsidiary, Systems Management Engineering Inc. (“SMEI ”).





**d)
      Use of estimates:**





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


5





**e)
      Share-based payments:**





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
      Standards (“SFAS”) No. 123(R), *Accounting
      for Share-based payments* ,
      to
      account for compensation costs under its stock option plans and other
      share-based arrangements. Prior to January 1, 2006, the Company utilized the
      intrinsic value method under Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      Statement 123R requires all share-based payments to employees, including grants
      of employee stock options, to be recognized in the financial statements based
      on
      their fair values. For purposes of estimating far value of stock options, we
      use
      the Black-Scholes-Merton valuation technique. For the three months ended March
      31, 2007 and 2006, share-based payment expense was $61,440 and $0.00
      respectively. As of March 31, 2007, there was approximately $312,000 of total
      unrecognized compensation cost related to unvested share-based compensation
      awards granted under the equity compensation plans which does not include the
      effect of future grants of equity compensation, if any. $312,000 will be
      amortized over the weighted average remaining service period of two years.
      See
      Note 7 for more information.





**f)
      Depreciation, amortization and long-lived assets:**





Property,
      plant and equipment - These assets are recorded at cost and increased by the
      cost of any significant improvements after purchase. The Company depreciates
      the
      cost over the assets' estimated useful lives using the straight-line method.





Goodwill
      - Goodwill represents the difference between the purchase price of an acquired
      business and the fair value of the net assets acquired. Goodwill is not
      amortized. Rather, the Company tests goodwill for impairment annually (or in
      interim periods if events or changes in circumstances indicate that its carrying
      amount may not be recoverable) by comparing the fair value of each reporting
      unit, as measured by discounted cash flows, to the carrying value to determine
      if there is an indication that potential impairment may exist. One of the most
      significant assumptions is the projection of future sales. The Company reviews
      its assumptions when goodwill is tested for impairment and, makes appropriate
      adjustments, if any, based on facts and circumstances available at that
      time.




Identifiable
      intangible assets - These assets are recorded at cost. Intangible assets with
      finite lives are reviewed on an annual basis and amortized evenly over their
      estimated useful lives using the straight-line method. Intangible assets with
      indefinite lives are not amortized but are subjected to impairment tests along
      with goodwill, as described above.





At
      least
      annually, the Company reviews all long-lived assets for impairment. When
      necessary, charges are recorded for impairments of long-lived assets for the
      amount by which the present value of future cash flows, or some other fair
      value
      measure, is less than the carrying value of these assets.





**g)
      Derivative financial instruments and registration payment
      arrangements:**





Derivative
      financial instruments, as defined in Financial Accounting Standard No. 133, *Accounting
      for Derivative Financial Instruments and Hedging Activities* (“FAS
      133”), consist of financial instruments or other contracts that contain a
      notional amount and one or more underlying variables (e.g. interest rate,
      security price or other variable), require no initial net investment and permit
      net settlement. Derivative financial instruments may be free-standing or
      embedded in other financial instruments. Further, derivative financial
      instruments are initially, and subsequently, measured at fair value and recorded
      as liabilities or,
      in
      rare instances, assets. The Company generally does not use derivative financial
      instruments to hedge exposures to cash-flow, market or foreign-currency risks.
      However, the Company has entered into various types of financing arrangements
      to
      fund its business capital requirements, including convertible debt and other
      financial instruments indexed to the Company’s own stock. These contracts
      require careful evaluation to determine whether derivative features embedded
      in
      host contracts require bifurcation and fair value measurement or, in the case
      of
      freestanding derivatives (principally warrants) whether certain conditions
      for
      equity classification have been achieved. In instances where derivative
      financial instruments require liability classification, the Company is required
      to initially and subsequently measure such instruments at fair value.
      Accordingly, the Company adjusts the fair value of these derivative components
      at each reporting period through a charge to income until such time as the
      instruments require classification in stockholders’ equity. See Note 5 for
      additional information.





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


6





During
      December 2006, the Financial Accounting Standards Board issued FASB Staff
      Position (FSP) EITF 00-19-2, *Accounting
      for Registration Payment Arrangements* ,
      which
      amended FAS 133. The FASB Staff Position specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement, whether issued as a separate agreement or
      included as a provision of a financial instrument or other agreement, should
      be
      separately recognized and measured in accordance with FASB Statement No. 5,
      Accounting for Contingencies (“FAS 5”). FAS 5 provides for the recognition of
      registration payments when they are both probable of being incurred and
      reasonably estimable. The Company adopted EITF 00-19-2 in the fourth fiscal
      quarter of the Company’s year ended December 31, 2006. Accordingly, during the
      fourth quarter of 2006, the Company recorded a contingent liability of $874,000
      related to the liquidated damages as estimated and calculated under FAS 5.
      As
      more fully discussed in Note 4(b), our liability was settled during the first
      quarter of this current fiscal year.





**h)
      Recent accounting pronouncements:**





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      (“FAS
      159”). FAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. The objective is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. FAS 159 is
      effective for fiscal years beginning after November 15, 2007. The Company does
      not believe that FAS 159 will have any material effect on its financial
      statements.




**i)
      Earnings per common share:**





The
      Company calculates earnings per share in accordance with Statements on Financial
      Accounting Standards No. 128, Earnings Per Share (“FAS 128”). Basic earnings per
      common share is based on the weighted-average number of common shares
      outstanding in each year and after preferred stock dividend requirements,
      whether or not declared or paid. Diluted earnings per common share assume that
      any dilutive convertible debentures and convertible preferred shares outstanding
      at the beginning of each year were converted at those dates, with related
      interest, preferred stock dividend requirements and outstanding common shares
      adjusted accordingly. It also assumes that outstanding common shares were
      increased by shares issuable upon exercise of those stock options for which
      market price exceeds exercise price, less shares that could have been purchased
      by the Company with related proceeds. See Note 8 for the components of the
      earnings per common share computation.





**Note
      2 - Business acquisition:**




On
      September 19, 2006, the Company closed on its Stock Purchase Agreement with
      Ricciardi Technologies Inc. (“RTI”) and the holders of all of the outstanding
      common stock of RTI. The Company completed the acquisition of 19,685 shares
      of
      the outstanding common stock of RTI which shares constitute 100% of the issued
      and outstanding shares of capital stock of RTI on a fully diluted basis. As
      consideration for such shares of RTI the Company paid (i) $3,500,000 in cash,
      and issued (ii) 5,000,000 shares of common stock, (iii)a $500,000 promissory
      note payable in full twelve months from the closing, and (iv)1,000,000 shares
      of
      the Company's Series B Convertible Preferred stock. Each share of Series B
      Preferred Stock will automatically convert into common stock on September 18,
      2007, at the conversion rate of 8 1/3 shares of common stock, subject to
      adjustment in the event of stock dividends, splits and other distributions.
      The
      Company may at any time until September 18, 2007 redeem the Series B Preferred
      Stock at a redemption price of $0.50 per share. To secure the indemnification
      obligations of the former RTI stockholder, a portion of the purchase price,
      consisting of $350,000 and 5,833,333 shares of common stock was placed in escrow
      for a period of 18 months. The common stock issued was valued based upon an
      average of five days preceding and five days following the date that the Company
      and RTI agreed to all significant terms of the Agreement, and such terms were
      publicly disseminated.





As
      part
      of the purchase price the Company agreed to pay the former RTI stockholders
      up
      to an additional $1,500,000 depending on RTI's EBITDA for the twelve-month
      period ending on the first anniversary of the Closing date. If RTI's EBITDA
      is
      at least $2,250,000 but less than $2,500,000, the former RTI stockholders
      receive $750,000 and if the EBITDA for such twelve month period is at least
      $2,500,000, they will receive $1,500,000.





Pursuant
      to the RTI agreement the Company delivered to the RTI employee’s incentive stock
      options to purchase 200,000 shares of common stock at an exercise price of
      $0.60. In addition, during the two years following the closing, the Company
      shall grant the RTI employees an additional 50,000 shares in each year of the
      two year period at an exercise price equal to the market price on the date
      of
      issuance. These options have a three year vesting period and a ten year
      life.


7





The
      total
      purchase price amounted to $7,820,617 and was allocated as follows, based upon
      the fair value of assets acquired and liabilities assumed:





AmountCategoryCurrent
                assets
            
            $
            1,230,027Property
                and equipment
            
            
            1,473Intangible
                assets
            
            
            7,490,612Deposits
            
            
            9,406Current
                liabilities
            
            
            (910,901
            )$
            7,820,617





Intangible
      assets acquired consisted of the following:





LifeCustomer
                relationships
            
            
            5
            
            $
            3,382,517Know
                how and processes
            
            
            5
            
            
            2,924,790Goodwill
            
            
            —
            
            
            484,033Contractual
                backlog
            
            
            1
            
            
            534,272Employment
                contract
            
            
            1
            
            
            165,000$
            7,490,612




The
      Company recorded amortization of $463,738 for the three months ended March
      31,
      2007 related to the intangible assets listed above. The Company believes that
      the expansion into this business affords it an opportunity for synergy, thus
      justifying the amount of goodwill attributed to the acquisition of RTI. Due
      to
      certain limitations imposed by the Internal Revenue Service, the Company does
      not expect goodwill to result in any deductible amounts in the near
      future.




**Note
      3- Segment reporting:**





Management
      views its business as two operating units, Technology Products and Technology
      Services.




Three Months Ended
                  March 31, 2007
            
            Three MonthsEnded
                  March 31, 2006RevenueTechnology
                Services
            
            $
            2,887,079
            
            $
            917,917Technology
                Products
            
            
            289,402
            
            
            423,890Total
                Consolidated Revenue
            
            $
            3,176,481
            
            $
            1,341,807Gross
                ProfitTechnology
                Products
            
            $
            1,503,817
            
            $
            439,669Technology
                Services
            
            
            200,210
            
            
            269,770Total
                Gross Profit
            
            $
            1,704,027
            
            $
            708,439




**Note 4
      - Notes payable:**





Notes
      payable consists of the following as of March 31, 2007 and December 31,
      2006:





2007
            
            2006Revolving
                credit facility**(a)**
            
            
            509,178
            
            $
            590,749Notes
                Payable - Stockholders/Officers**(b)**
            
            
            848,000
            
            
            893,000Short
                term notes payable**(c)**
            
            
            250,000
            
            
            250,000Convertible
                note**(d)**
            
            
            —
            
            
            264,440Total
                notes payable
            
            
            1,607,178
            
            
            1,998,189Less
                current maturities, associated with notes payable
            
            
            (1,607,178
            )
            
            (1,998,189
            )Long-term
                debt
            
            $
            —
            
            $
            —




8





**(a)
      Revolving Line of credit:**




On
      November 10, 2006, the Company secured a Line of Credit facility with Greater
      Bay Business Funding ("GBBF") for $2,000,000. The line is primarily secured
      by
      the Company's accounts receivables. The Advance Rate is 85% of qualifying
      accounts receivable. Interest on the line is at of Prime (currently 8.25%),
      plus
      6.0%. Upon securing the line with GBBF, the Company repaid in full and closed
      out the credit facility with Presidential Financial Group. The total outstanding
      balance on this facility as of March 31, 2007 and December 31, 2006 was $509,178
      and $590,749 respectively. Additionally, the Company incurred an up-front fee
      of
      $20,000 which is being amortized on the straight-line method, due to the
      immaterial amount involved, over the twelve month term of the facility. As
      of
      March 31, 2007, $11,667 remains unamortized.




**(b)
      Notes payable stockholders/officers:**




The
      Company has a short-term loan payable to a former officer and stockholder of
      the
      Company amounting to $75,000. This note bears interest of 8.0% per annum. The
      note is an unsecured demand note.




At
      December 31, 2006 the Company has a short term note payable of $250,000 with
      a
      director of the Company. This note is collateralized by proceeds from the future
      sale of the New Jersey Net Operating Loss in 2006, upon approval from the State
      of NJ. In the event the Company is not approved for this program, the Company
      will repay this note and accrued interest from operating cash flows. The note
      bears interest at 20.0% per annum and is payable at its maturity date of
      December 31, 2007.




As
      part
      of the RTI acquisition the Company issued a note in the amount of $500,000
      to
      the former stockholders of RTI as part of the purchase price. The note is
      payable in September 2007 and bears an interest rate of 10.0% per
      annum.





**(c)
      Short term notes:**





On
      September 18, 2006, the Company entered into an Omnibus Amendment and Waiver
      Agreement with Laurus Master Fund, LTD (“Laurus”). Under the terms of the
      amendment, in exchange for full and complete satisfaction of the $2,000,000
      note, the Company i) paid Laurus $500,000 ii) issued a seven-year warrant to
      purchase up to 1,458,333 shares of common stock for an exercise price of $0.1
      per share and iii) entered into a Term Note for $250,000 with Laurus. The Term
      Note bears interest at a rate per annum equal to the prime rate published in
      The
      Wall Street Journal from time to time, plus 3%, but shall not be less than
      8%.
      Interest payments are due monthly, in arrears, commencing on August 1, 2006
      and
      ending on the maturity date which is September 18, 2007. The Company estimated
      the fair value of the warrants on the inception date, and subsequently, using
      the Black-Scholes-Merton technique because that technique embodies all the
      assumptions (including volatility, expected terms, and risk free rates) that
      are
      necessary to fair value freestanding warrants.




**(d)
      2006 Barron Financing Arrangement:**





On
      September 19, 2006, the Company entered into a financing arrangement that
      provided for the issuance of $4,500,000, 6.0% Convertible Promissory Notes,
      due
      May 31, 2007, and warrants to purchase 25,000,000 shares of common stock.
      Proceeds, which were net of $404,851 in cash financing costs, amounted to
      $4,045,149. The Convertible Promissory Note was convertible into Preferred
      Stock
      at $.575; however, if a Restated Certificate of Incorporation was not filed
      within 150 days, then for each month, the conversion price would be reduced
      by
      6%. Upon filing of the Restated Certificate of Incorporation, the note provided
      for automatic conversion of the face value into Series B Preferred Stock. The
      Company concluded that the conversion feature embedded in the note was not
      afforded either the FAS133 exemption as a “Conventional Convertible” instrument
      or the FAS133 exemption for derivative instruments indexed to a company’s own
      stock due to the variable conversion feature; that is, the variable conversion
      feature results in the presumption that the Company would have insufficient
      common shares to settle all of its share-indexed obligations. Since share
      settlement was not considered to be in the Company’s control, certain other
      non-exempt freestanding derivative instruments (principally warrants to purchase
      common stock) were considered tainted (that is, the aforementioned presumption
      puts their share settlement presumably beyond the Company’s control, also) and
      in accordance with Emerging Issues Task Force Consensus EITF 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in
      a
      Company’s Own Stock* , they
      were reclassed from stockholder’s equity to liabilities at their fair value of
      approximately $523,000.





Proceeds
      from this financing arrangement were allocated to the fair value of the
      conversion option and warrants, based upon their fair values because
      share-settlement of these instruments was not considered to be within the
      Company’s control. There was no basis in the proceeds following the allocation
      to the derivative financial instruments to allocate to the Convertible Notes
      Payable. Thus, they were initially recorded a zero value and are subject to
      amortization over the term using the effective interest method.


9





The
      following table illustrates the components of the initial allocation of the
      net
      proceeds:




Financial
                instrument or account:Warrant
                derivative, at fair value
            
            $
            13,895,090Compound
                derivative, at fair value
            
            
            8,113,451Deferred
                financing costs
            
            
            (867,357
            )Convertible
                notes payable
            
            
            —Day-one
                derivative loss
            
            
            (17,096,035
            )$
            4,045,149





The
      derivative warrants were issued in two traunches, each having terms of five
      years. The traunches have exercise prices of $0.50 and $1.20, respectively.
      The
      Company recorded the derivative warrants at fair value using the
      Black-Scholes-Merton Technique because this technique embodies all of the
      assumptions necessary to fair value non-complex instruments. The compound
      derivative comprises certain derivative features embedded in the host
      convertible note payable contract including the variable conversion feature,
      anti-dilution protections and certain redemption features. These instruments
      were combined into one compound derivative and bifurcated from the host
      instrument at fair value. The Company applied the Monte-Carlo valuation
      technique to fair value this derivative because Monte Carlo embodies all
      assumptions (including credit risk, interest rate risk, conversion/redemption
      behaviors) necessary to fair value complex, compound derivative financial
      instruments. Fair values of our derivative financial instruments are highly
      influenced by our trading stock price and volatility, changes in our credit
      risk
      and market interest rates. Further derivative income or expense will reflect
      changes in these underlying assumptions.





As
      reflected in the above table, proceeds were insufficient to record the
      derivative financial instruments at their fair values. Accordingly, the Company
      was required to recognize a day-one derivative loss in its statement of
      operations in the amount of $17,096,035. This charge was recorded in the
      Company’s third fiscal quarter of its year ended December 31, 2006.




The
      Restated Certificate of Incorporation was filed on February 2, 2007, at which
      time, the conversion rate on the Convertible Promissory Notes became fixed
      at
      $.575 and the bifurcated conversion option no longer required separate
      derivative classification and accounting under FAS 133. However, we were
      required to adjust the derivative value to fair values on the date of this
      event
      and recognize the adjustments in income. Based on the guidance of EITF 06-07, *Issuers
      Accounting for a Previously Bifurcated Conversion Option No Longer Meets the
      Bifurcation Criteria in FASB Statement No.133* ,
      when a
      previously bifurcated conversion option no longer requires bifurcation, the
      Company is required to immediately adjust the derivative to fair value and
      reclass that amount to stockholder’s equity. Application of this standard
      resulted in reclassification of the fair value of the embedded conversion
      feature on the event date (amounting to $7,223,234) to paid in capital. The
      warrants continue to require classification as derivative warrants because,
      notwithstanding the Company’s re-established ability to share settle all of its
      share-indexed financial instruments, the warrants continue to fail certain
      other
      requirements for equity classification (principally the requirement of payment
      of penalties in the event of non-filing of reports with the Securities and
      Exchange Commission; a requirement under the arrangement presumed not to be
      within the control of the Company).





Generally,
      under EITF 06-07, the host debt instrument remains subject to continued
      amortization using the effective method following the reclassification of the
      embedded conversion feature to stockholder’s equity However, in accordance with
      the terms of the agreement, the convertible note automatically converted into
      Preferred Stock upon the filing of the Restated Certificate of Incorporation.
      Based on the guidance of APB 26, *Early
      Extinguishment of Debt* and a
      related Accounting Interpretation of APB Opinion No. 26, the carrying amount
      of
      the debt, including the unamortized discount was credited to the capital
      accounts upon conversion to reflect the stock issued and no gain or loss was
      recognized. Adoption of this guidance resulted in reclassification of $27,776
      to
      the capital accounts.





On
      February 7, 2007, the Company entered into a letter agreement with Barron 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. Significant assumptions used in the model
      included: exercise price of $.50; volatility factor of 126.43%; 5 year term
      to
      expiration; and a risk free rate of 4.73%. Since the warrants met the eight
      conditions for equity classification provided in EITF 00-19, the fair value
      of
      these warrants was classified as equity. As discussed in Note 1, the Company
      had
      an accrued liability amounting to $874,000 for liquidating damages and,
      accordingly, the difference between the fair value of the warrants and the
      carrying amount of the liability was recognized as a loss on extinguishment
      of
      approximately $151,000.


10





**Note
      5 - Derivative financial instruments:**





The
      balance sheet caption derivative liability at December 31, 2006 consists of
      (i)
      embedded conversion features and (ii) the Warrants issued in connection with
      the
      2005 Laurus Financing Arrangement, the 2006 Omnibus Amendment and Waiver
      Agreement with Laurus. Derivative liabilities at March 31, 2007 consist of
      the
      warrants issued in connection with the 2005 Laurus Financing Arrangement, the
      2006 Omnibus Amendment and Waiver Agreement and the 2006 Barron Financing
      Arrangement. These derivative financial instruments are indexed to an aggregate
      of 27,358,333 and 6,307,242 shares of the Company’s common stock as of March 31,
      2007 and 2006, respectively, and are carried at fair value. The following
      tabular presentations set forth information about the derivative instruments
      for
      the quarter ended March 31, 2007 and 2006:





Quarter ended
              March 31, 2007
            
            Quarter ended
              March 31, 2006Derivative
                income (expense)Conversion
                features
            
            $
            (467,120
            )
            $
            -Warrant
                derivative
            
            $
            (378,245
            )
            $
            -





March 31, 2007
            
            March 31, 2006LiabilitiesCompound
                derivative
            
            $
            -
            
            $
            (255,462
            )Warrant
                derivative
            
            $
            (13,047,396
            )
            $
            (207,000
            )




Freestanding
      derivative instruments, consisting of warrants that arose from the Laurus and
      Barron financings are valued using the Black-Scholes-Merton valuation
      methodology because that model embodies all of the relevant assumptions that
      address the features underlying these instruments. Significant assumptions
      used
      in the Black Scholes models included: exercise or strike prices ranging from
      $0.10 - $1.25; volatility factors ranging from 82.61% - 139.49% based upon
      forward terms of instruments; remaining term for all instruments; and a risk
      free rate ranging from 4.92% - 5.03%.





Embedded
      derivative instruments consist of multiple individual features that were
      embedded in the convertible debt instruments. The Company evaluated all
      significant features of the hybrid instruments and, where required under current
      accounting standards, bifurcated features for separate report classification.
      These features were, as attributable to each convertible note, aggregated into
      one compound derivative financial instrument for financial reporting purposes.
      The compound embedded derivative instruments were valued using the Flexible
      Monte Carlo methodology because that model embodies certain relevant assumptions
      (including, but not limited to, interest rate risk, credit risk, and
      Company-controlled redemption privileges) that are necessary to value these
      complex derivatives.





**Note 6
      - Stockholders’ equity:**




On
      August
      28, 2006, the Company designated 9,000,000 shares as Series A Convertible
      Preferred Stock (“Series A Preferred”) and 1,000,000, shares as Series B
      Convertible Redeemable Preferred Stock (“Series B Preferred”), each with a
      stated par value of $.01 per share.




The
      Series A Preferred shares do not have voting rights or cumulative dividends.
      The
      preferred shares are convertible into the Company’s common stock at a fixed
      conversion price of $.23 per common share, subject to adjustment in certain
      instances, including the issuance by the Company of common stock at a price
      less
      $.23 per share. In the event the Company’s EBITDA for the year ended December
      31, 2006 is less than $.019 per share or if the Company’s EBITDA for the year
      ended December 31, 2007 is less than $.0549 on a fully-diluted basis, then
      the
      conversion price will be reduced by the percentage shortfall, up to a maximum
      of
      30%. Each share of Series A Preferred is convertible into 25 shares of the
      Company’s common stock and will be automatically converted into common stock
      upon a change in control or liquidation, at an amount equal to $.575 per share.
      The Series A Preferred stock ranks senior to holders of common stock with
      respect to payment of dividends and amounts upon liquidation, dissolution or
      winding up of the Company. If the Company does not deliver conversion shares
      in
      accordance with the terms of the agreement, the Company will be required to
      pay
      liquidating damages of $50 per trading day for each $5,000 of conversion value.
      These damages will increase to $100 per trading day after three trading days
      and
      $200 per trading day after six trading days.




The
      Series B Preferred shares do not have voting rights unless a vote is required
      by
      law in connection with a merger, consolidation or sale of substantially all
      of
      the Company’s assets. The holders of the Series B Preferred shares are entitled
      to receive an annual dividend of $.05 per share, payable quarterly, commencing
      November 1, 2006. The Series B Preferred stock ranks senior to holders of common
      stock with respect to payment of dividends and amounts upon liquidation,
      dissolution or winding up of the Company. One year from the date the Certificate
      of Designation is filed, the preferred stock will automatically convert into
      common stock at a rate of 8 1/3 shares of common stock for every share of Series
      B Preferred Stock. The Company has the right to redeem the Series B Preferred
      Stock, any time prior to one year from the date the Certificate of Designation
      is filed with the Secretary of State, at $.50 per share.   No dividends
      have been declared on the Series B Preferred Stock.


11





On
      February 2, 2007 the Company affected a one-for-ten reverse stock split
      restating the common shares from 166,424,280 to 16,642,428. All reference to
      shares has been restated to reflect the reverse.





On
      February 2, 2007 the Company filed a restated certificate of incorporation
      with
      the State of Delaware; upon the effectiveness, the principal and interest due
      on
      the Barron note was automatically converted into 7,826,087 shares of the
      Company's Series A Preferred Stock as is determined by dividing the principal
      amount of the note by the Conversion Price, which initially is
      $.575.




**Note
      7-Share-based payments:**




**a)
      2002 Employee stock option plan:**





On
      November 6, 2002 the stockholders approved the adoption of The Company's 2002
      Employee Stock Option Plan. Under the Plan, options may be granted which are
      intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of
      the
      Internal Revenue Code of 1986 (the"Code") or which are not ("Non-ISOs") intended
      to qualify as Incentive Stock Options thereunder. The maximum number of options
      made available for issuance under the Plan are two million (2,000,000) options.
      The options may be granted to officers, directors, employees or consultants
      of
      the Company and its subsidiaries at not less than 100% of the fair market value
      of the date on which options are granted. The term of each Option granted under
      the Plan shall be contained in a stock option agreement between the Optionee
      and
      the Company.





On
      January 1, 2006 the Company adopted Statement of Financial Accounting Standards
      ("FAS") No.123 (Revised 2004), "Share Based Payment," ("FAS 123R"), using the
      modified prospective method. In accordance with FAS 123R, the Company measures
      the cost of employee services received in exchange for an award of equity
      instruments based on the grant-date fair value of the award. That cost is
      recognized over the period during which an employee is required to provide
      services in exchange for the award - the requisite service period. The Company
      determines the grant-date fair value of employee share options using the
      Black-Scholes option-pricing model.





Under
      the
      modified prospective approach, FAS 123R applies to new awards and to awards
      that
      were outstanding on January 1, 2006 that are subsequently modified, repurchased
      or cancelled. Under the modified prospective approach, compensation cost
      recognized for the first quarter of fiscal 2006 includes compensation cost
      for
      all share-based payments granted prior to, but not yet vested on, January 1,
      2006, based on the grant-date fair value estimated in accordance with the pro
      forma provisions of FAS 123, and compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of FAS 123R.
      Prior periods were not restated to reflect the impact of adopting the new
      standard.





Number of
            
            Number of
            
            Weighted-Options
            
            Options
            
            AverageAvailable
            
            Outstanding
            
            Exercise PriceBalance
                January 1, 2007
            
            
            467,000
            
            
            1,371,000
            
            $
            1.00Options
                granted under Plan
            
            
            —
            
            
            —Options
                expired
            
            
            —
            
            
            —Balance
                March 31, 2007
            
            
            467,000
            
            
            1,371,000
            
            $
            1.00




No
      options were issued during the three months ended March 31, 2007 and
      2006.





The
      weighted-average fair value per share of the options granted during 2007 and
      2006 was estimated on the date of grant using the Black-Scholes-Merton option
      pricing model; the following assumptions were used to estimate the fair value
      of
      the options at grant date based on the following:




2007
            
            2006Risk-Free
                interest rate
            
            
            4.65
            %
            
            4.92
            %Expected
                dividend yield
            
            
            
            
            
            —Expected
                stock price volatility
            
            
            156
            %
            
            156
            %Expected
                option life
            
            
            10
                years
            
            
            10
                years




12





**Note
      8 –
      Restatement:**




We
      have
      restated our financial statements for the following matters.




(i)
            We
                have restated our financial statements to treat the automatic conversion
                of the Barron debt on February 2, 2007 as a conversion of indebtedness
                under its original terms (See Note 4(d)). We previously accounted
                for the
                conversion as an extinguishment. This restatement had the effect
                of
                increasing our net loss by ($2,230,719), or ($0.13) per common
                share.




(ii)
            We
                have restated our financial statements to treat the issuance of 1,900,000
                warrants issued to Barron on February 7, 2007 as consideration for
                the
                settlement of liquidated damages liabilities (See Note 4(d)). We
                previously allocated a portion of the fair value of the warrants
                to
                derivative expense. This restatement had the effect of decreasing
                our net
                loss by $838,709, or $0.05 per common
                share.




The
      combined effect of these restatements resulted in a net increase in our net
      loss
      by ($1,392,010) or ($0.08) per common share. These restatements did not have
      an
      effect on our total assets or liabilities. The following table illustrates
      the
      restatement.




Net Loss
            
            Loss per
              Common ShareNet
                loss, as reported
            
            $
            (102,497
            )
            $
            (0.00
            )Correction
                for Barron conversion accounting
            
            
            (2,230,719
            )
            
            (0.13
            )Correction
                for warrant consideration accounting
            
            
            838,709
            
            
            0.05Net
                loss, as restated
            
            $
            (1,494,507
            )
            $
            (0.09
            )




In
      addition to the above matters, we have provided in our amended statement of
      operations for the three-months ended March 31, 2007 a reconciliation of our
      net
      loss, as restated above, to our loss applicable to common shareholders’. The
      reconciliation provides for the presentation of cumulative, undeclared preferred
      stock dividends (amounting to $12,500) as a reduction to our net loss to arrive
      at loss per common share.


13




**2.**  **Management’s
        Discussion and Analysis or Plan of Operation.**
  **GENERAL
        OVERVIEW**
 
 Lattice
        Incorporated was incorporated in the State of Delaware in May 1973 and commenced
        operations in July 1977. We have been developing and delivering secure
        technologically advanced communication solutions for over twenty-five years
        and
        recently expanded our product offering to include IT solutions with the
        acquisition of 86% of Systems Management Engineering, Inc. ("SMEI") on February
        14, 2005. In September 2006, pursuant to a Stock Purchase Agreement, dated
        as of
        September 12, 2006 (the "RTI Agreement"), the Company purchased all of the
        issued and outstanding shares of the common stock of Ricciardi Technologies
        Inc.
        ("RTI"). RTI was founded in 1992 and provides software consulting and
        development services for the command and control of biological sensors and
        other
        Department of Defense requirements to United States federal governmental
        agencies either directly or though prime contractors of such governmental
        agencies RTI's proprietary products include SensorView, which provides clients
        with the capability to command, control and monitor multiple distributed
        chemical, biological, nuclear, explosive and hazardous material sensors.
        RTI is
        headquartered in Manassas, Virginia. The purchase of RTI's common stock was
        completed on September 19, 2006.
  We
        intend
        to continue the expansion of our sales efforts both within the federal
        government secure software solutions space and commercial accounts. We continue
        to build upon our recent success in these markets by expanding our marketing
        efforts through our direct sales strategy. Our strong contract backlog has
        given
        us an opportunity to expand our existing revenue base. With regards to our
        acquisition strategy, we will continue to pursue profitable companies with
        proprietary products and services we can sell to our existing customers and
        which have synergies with our existing business.
 
 The
        information in this report contains forward-looking statements within the
        meaning of the Private Securities Litigation Reform Act of 1995. This Act
        provides a "safe harbor" for forward-looking statements to encourage companies
        to provide prospective information about themselves so long as they identify
        these statements as forward looking and provide meaningful cautionary statements
        identifying important factors that could cause actual results to differ from
        the
        projected results. All statements other than statements of historical fact
        made
        in this report are forward looking. In particular, the statements herein
        regarding industry prospects and future results of operations or financial
        position are forward-looking statements. Forward-looking statements reflect
        management's current expectations and are inherently uncertain. Our actual
        results may differ significantly from management's expectations.
 
 The
        following discussion and analysis should be read in conjunction with the
        financial statements and notes thereto included elsewhere in this report
        and
        with our annual report on Form 10-KSB for the fiscal year ended December
        31,
        2006. 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.
 
 **RESULTS
        OF OPERATIONS**
 
 THREE
        MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
        2006
  SALES:
 
 Total
        sales for the three months ended March 31, 2007 increased by $1,834,674 or
        137%
        to $3,176,481 compared to $1,341,807 for the three months ended March 31,
        2006.
        This consisted of service revenues of $2,887,079 (91% of Total Revenues)
        and
        product revenues of $289,402 (9% of Total Revenues). Included in the increase
        were revenues of $1,396,491 attributable to the acquisition of “RTI” which
        closed in September 2006.
 
 GROSS
        MARGIN:
 
 Gross
        margin for the three months ended March 31, 2007 was $1,704,027, an increase
        of
        $994,588 or 141% compared to the $709,439 for three months ended March 31,
        2006.
        Our overall gross margin percentage increased to 53.7% from 52.9% for the
        same
        period in 2006. This was attributable to an improvement in the gross margin
        percentage for our services segment to 52.1% from 47.9% combined with an
        increase in the gross margin percentage for our technology products segment
        to
        69.2% from 63.7% for the three months ended March 31, 2006. The increase
        in
        service margins was primarily a result of a shift towards higher margin fixed
        price contracts.
 
 RESEARCH
        AND DEVELOPMENT EXPENSES:
 
 Research
        and development expenses consist primarily of salaries and related personnel
        costs, and consulting fees associated with product development.
 
 For
        the
        three months ended March 31, 2007, research and development expenses decreased
        to $109,041 as compared to $109,134 for the three months ended March 31,
        2006.
 
 14
  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.
  For
        the
        three months ended March 31, 2007 SG&A expenses increased to $1,649,152
        compared to $504,606 for the comparative three months ended March 31, 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 $520,428 .
 
 INTEREST
        EXPENSE:
 
 Interest
        Expense increased to $385,803 for the three months ended March 31, 2007 compared
        to $129,890 for the three months ended March 31, 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. 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.
 
 Three months
                ended
                March 31, 2007
              
              Three months
                ended
                March 31, 2006Derivative
                  income (expense)Conversion
                  features
              
              $
              (467,120
              )
              $
              (394,836
              )Warrant
                  derivative
              
              $
              (378,245
              )
              $
              (138,000
              )
 
 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 of 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 estimates and assumption changes.
  It
        should
        be noted that during February 2007, the Company was able to reclassify the
        conversion feature in the above table to stockholders’ equity. Accordingly, no
        further fair value adjustments will arise from this feature. However, the
        warrants continue to require liability classification and fair value
        measurement. As noted in the preceding paragraph, the effects on our future
        income will be affected, possibly significantly, by the changes in the
        assumptions underlying our valuation techniques.
  15
  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 $157,130.
 
 NET
        INCOME (LOSS):
 
 The
        Company's net loss for the three months ended March 31, 2007 was $1,494,507
        compared to a net loss of $49,676 for the three months ended March 31, 2006.
        Net
        income is influenced by the matters discussed in the other sections of this
        MD&A. However, it should be noted that net income included $845,365 of
        derivative loss which represents the increase in fair value of derivative
        liabilities (principally compound derivatives that were bifurcated from hybrid
        convertible securities and non-exempt warrants). See Derivative Income (Expense)
        above where we discuss the material assumptions underlying fair value
        adjustments and their potential effect on income
 
 INCOME
        (LOSS) APPLICABLE TO COMMON STOCKHOLDERS:
 
 Loss
        applicable to common stock gives effect to cumulative undeclared dividends
        on
        the Company’s Series B Preferred Stock amounting to $12,500 and $0 for the three
        months ended March 31, 2007 and 2006, respectively. Loss applicable to common
        stockholders’ serves as the numerator in our basic earnings per common share
        calculation. The Company 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 March 31, 2007 amounts to $13,103,425
        compared to a deficiency of $4,361,484 as of March 31, 2006. The increase
        in the
        deficiency is largely attributable to the increase of $12,640,963 related
        to our
        derivative liabilities. This increase 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 March 31, 2007, the remaining
        derivative balance of $13,047,396 relates to certain warrants that do not
        achieve equity classification under current accounting standards. Other
        components of the Company’s working capital and changes there in are discussed
        as follows:
 
 For
        the
        three month period ended March 31, 2007, cash and cash equivalents decreased
        to
        $240,739 from $392,275 at December 31, 2006. Net cash used by operating
        activities was $24,966 for the three months ended March 31, 2007 compared
        to net
        cash used by operating activities of $104,820 in the corresponding three
        month
        period ended March 31, 2006. This consisted of a net loss of $1,494,507,
        an
        increase in our accounts receivable of $675,389, an increase in inventories
        of
        $1,232, a decrease in deferred revenue of 28,621 offset by a decrease in
        other
        current assets of $8,090, a decrease in other assets of $26,235, an increase
        in
        the Company's accounts payable and accrued expenses of $180,911, favorably
        offset by net non-cash items (depreciation, amortization of intangibles,
        amortization of debt discount, derivative interest, minority interest expense,
        financing cost, share based payments and extinguishment loss) amounting to
        $1,959,547.
 
 Net
        cash
        used by financing activities was $126,570 for the three months ended March
        31,
        2007 compared to net cash provided by financing of $166,591 in the corresponding
        three months ended March 31, 2006.
 
 Total
        current assets at March 31, 2007 were $3,523,707 compared to current liabilities
        totaling $16,627,132 (including non-cash derivative liabilities of
        $13,047,396).
 
 The
        current maturities of our short-term notes at March 31, 2007 totaled $1,607,178
        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.
 
 16
 
 **OFF
        BALANCE SHEET ARRANGEMENTS:**
 
 We
        do not
        have any off balance sheet arrangements that are reasonably likely to have
        a
        current or future effect on our financial condition, revenues, results of
        operations, liquidity or capital expenditures.
 
 **SENSITIVE
        ESTIMATES:**
 
 The
        Company’ financial statements have been prepared in accordance with accounting
        principles generally accepted in the United States (US GAAP). The preparation
        of
        these financial statements requires management to make estimates and assumptions
        that affect the reported amounts in the financial statements and accompanying
        notes. These estimates form the basis for judgments made about the carrying
        values of assets and liabilities that are not readily apparent from other
        sources. Estimates and judgments are based on historical experience and on
        various other assumptions that the Company believes are reasonable under
        the
        circumstances. However, future events are subject to change and the best
        estimates and judgments routinely require adjustment. US GAAP requires estimates
        and judgments in several areas, including those related to impairment of
        goodwill and equity investments, revenue recognition, recoverability of
        inventory and receivables, the useful lives long lived assets such as property
        and equipment, the future realization of deferred income tax benefits and
        the
        recording of various accruals. The ultimate outcome and actual results could
        differ from the estimates and assumptions used.
  **Derivative
        Financial Instruments:**
 
 Derivative
        financial instruments are initially recorded at fair value and subsequently
        adjusted to fair value at the close of each reporting period. The Company
        estimates fair values of derivative financial instruments using various
        techniques (and combinations thereof) that are considered to be consistent
        with
        the objective measuring of 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 assumptions (including trading volatility, estimated
        terms
        and risk free rates) necessary to fair value these instruments. For complex
        derivative instruments, such as embedded conversion options, the Company
        generally uses the Flexible Monte Carlo valuation technique because it embodies
        all of the requisite assumptions (including credit risk, interest rate risk
        and
        exercise/conversion behaviors) that are necessary to fair value these more
        complex instruments. For forward contracts that contingently require net-cash
        settlement as the principal means of settlement, the Company projects and
        discounts future cash flows applying probability-weightage to multiple possible
        outcomes. Estimating fair values of derivative financial instruments, requires
        the development of significant and subjective estimates that may, and are
        likely
        to, change over the duration of the instrument with related changes in internal
        and external market factors. In addition, option-based techniques are highly
        volatile and sensitive to changes in the trading market price of our common
        stock, which has a high-historical volatility. Since derivative financial
        instruments are initially and subsequently carried at fair values, our income
        (loss) will reflect the volatility in these estimate and assumption
        changes.
 
 **Revenue
        Recognition:**
 
 Revenue
        is recognized when all significant contractual obligations have been satisfied
        and collection of the resulting receivable is reasonably assured. Revenue
        from
        product sales is recognized when the goods are shipped and title passes to
        the
        customer.
 
 The
        company applies the guidance of SOP-97.2, "Interim Guidance for Conducting
        Aggregate Exposure and Risk Assessments," with regards to its software products.
        Under this guidance, the Company determined that its product sales do not
        contain multiple deliverables for an extended period beyond delivery where
        bifurcation of multiple elements is necessary. The software is embedded in
        the
        products sold and shipped. Revenue is recognized upon delivery, installation
        and
        acceptance by the customer. PCS (post contract customer support) and upgrades
        are billed separately and when rendered or delivered and not contained in
        the
        original arrangement with the customer. Installation services are included
        with
        the original customer arrangement but are rendered at the time of delivery
        of
        the product and invoicing.
 
 The
        Company provides IT and business process outsourcing services under
        time-and-material, fixed-price contracts, which may extend up to 5 years.
        Services provided over the term of these arrangements may include, network
        engineering, architectural guidance, database management, expert programming
        and
        functional area expert analysis   Revenue is generally recognized when the
        product or service is provided and the amount earned is not contingent upon
        any
        further event.
  **Impairments
        of long-lived assets:**
 
 At
        least
        annually, the Company reviews all long-lived assets with determinate lives
        for
        impairment. Long-lives assets subject to this evaluation include property
        and
        equipment and intangible assets that amount to $6,856,868 (or 52%) of total
        assets at March 31, 2007. The Company considers the possibility that impairments
        may exist when indicators of impairment are present. In the event that
        indicators are identified or, if within management’s normal evaluation cycle,
        the Company establishes the presence of possible impairment by comparing
        asset
        carrying values to undiscounted projected cash flows. The preparation of
        cash
        flow projections requires management to develop many estimates about the
        Company’s performance. These estimates include consideration of revenue streams
        from existing customer bases, the potential increase and decrease in customer
        sales activity and potential changes in the Company’s direct and indirect costs.
        In addition, if the carry values of long-lived assets exceed undiscounted
        cash
        flow, the Company would estimate the impairment based upon discounted cash
        flow.
        The development of discount rates necessary to develop this cash flow
        information requires additional assumptions, including the development of
        market
        and risk adjusted rates for discounting cash flows. While management utilizes
        all available information in developing these estimates, actual results are
        likely to be different from those estimates.
 
 17
  Goodwill
        represents the difference between the purchase price of an acquired business
        and
        the fair value of the net assets of businesses the Company has acquired.
        Goodwill is not amortized. Rather, the Company tests goodwill for impairment
        annually (or in interim periods if events or changes in circumstances indicate
        that its carrying amount may not be recoverable) by comparing the fair value
        of
        each reporting unit, as measured by discounted cash flows, to the carrying
        value
        of the reporting unit to determine if there is an indication that potential
        impairment may exist. One of the most significant assumptions underlying
        this
        process is the projection of future sales. The Company reviews its assumptions
        when goodwill is tested for impairment and makes appropriate adjustments,
        if
        any, based on facts and circumstances available at that time. While management
        utilizes all available information in developing these estimates, actual
        results
        are likely to be different than those estimates.
 
 **Item
        3.**  **Controls
        and Procedures.**
 
 During
        the quarter, we encountered some problems in integrating RTI’s IT systems which
        as a result limited the CFO function from gaining full access to financial
        systems detailed information. We have since resolved these issues to where
        full
        access to financial information has been restored. Additionally, the detailed
        information supporting RTI’s book of record was subsequently reviewed and we
        concluded that there were no material effects to the Company’s financial
        statements as included with the 10QSB/A for the fiscal quarter ended March
        31,
        2007 as filed.
  **PART
        II**
 
 **Item
        1.**  **Legal
        Proceedings.**
 
 We
        are
        not a party to any pending legal proceeding, nor is our property the subject
        of
        a pending legal proceeding, that is not in the ordinary course of business
        or
        otherwise material to the financial condition of our business. None of our
        directors, officers or affiliates is involved in a proceeding adverse to
        our
        business or has a material interest adverse to our business.
 
 **Item
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds.**
  Not
        applicable
 
 **Item
        3.**  **Defaults
        Upon Senior Securities.**
 
 Not
        applicable.
 
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders.**
 
 Not
        applicable.
 
 **Item
        5.**  **Other
        Information.**
 
 Not
        applicable.
 
 **Item
                  6.**
              **Exhibits.**
 
 **Exhibit
                  Number**
              
              **Description**3.10
              
              Restated
                  Certificate of Incorporation (Incorporated by reference to the
                  Registration Statement on Form SB-2 filed on February 12,
                  2007.)31.1
              
              Certification
                  by Chief Executive Officer, required by Rule 13a-14(a) or Rule
                  15d-14(a)
                  of the Exchange Act.31.2
              
              Certification
                  by Chief Financial Officer, required by Rule 13a-14(a) or Rule
                  15d-14(a)
                  of the Exchange Act.32.1
              
              Certification
                  by Chief Executive Officer, required by Rule 13a-14(b) or Rule
                  15d-14(b)
                  of the Exchange Act and Section 1350 of Chapter 63 of Title 18
                  of the
                  United States Code.32.2
              
              Certification
                  by and Chief Financial Officer, required by Rule 13a-14(b) or Rule
                  15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
                  Title 18
                  of the United States Code.
 
 18
  **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **LATTICE INCORPORATED**
  Date:
                  September 13, 2007
              By:
              /s/
                  Paul BurgessPaul
                  BurgessPresident,
                  Chief Executive Officer and
                  Director
  Date:
                  September 13, 2007
              By:
              /s/
                  Joe NotoJoe
                  NotoChief
                  Financial Officer and Principal Accounting
                  Officer
  19