**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-QSB**





(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
      CORPORATION**


(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
              13Item
                  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
 
 
 1
  **PART
        I - FINANCIAL INFORMATION**
 
 **LATTICE
        INCORPORATED (FORMALLY SCIENCE DYNAMICS CORPORATION) AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
  March
                      31, 2007
                  
                  December
                      31, 2006(unaudited)ASSETSCurrent
                      assets:Cash
                      and cash equivalents
                  
                  $
                  240,739
                  
                  $
                  392,275Accounts
                      receivable - trade
                  
                  
                  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:Customer
                      deposits
                  
                  $
                  15,000
                  
                  $
                  15,000Deferred
                      Revenue
                  
                  
                  33,874
                  
                  
                  62,495Accounts
                      payable
                  
                  
                  983,671
                  
                  
                  892,773Accrued
                      expenses
                  
                  
                  940,013
                  
                  
                  1,736,754Current
                      maturities notes payable
                  
                  
                  1,607,178
                  
                  
                  1,998,189Derivative
                      Liability
                  
                  
                  13,047,396
                  
                  
                  19,873,782Total
                      current liabilities
                  
                  
                  16,627,132
                  
                  
                  24,578,993Non-Current
                      Deferred 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
                  
                  
                  88,261
                  
                  
                  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
                  
                  
                  3,205,731
                  
                  
                  25,571,152(Deficit)
                  
                  
                  (36,953,340
                  )
                  
                  (36,850,842
                  )(3,792,923
                  )
                  
                  (11,103,265
                  )Common
                      stock held in treasury, at cost
                  
                  
                  (397,833
                  )
                  
                  (397,833
                  )Total
                      shareholders' equity (Deficit)
                  
                  
                  (4,190,756
                  )
                  
                  (11,501,098
                  )Total
                      liabilities and shareholders' Equity
                  
                  $
                  13,025,142
                  
                  $
                  13,619,618
   The
        accompanying notes are an integral part of these consolidated financial
        statements
   2
 **LATTICE
        INCORPORATED (FORMALLY SCIENCE DYNAMICS CORPORATION) AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 (UNAUDITED)
 
 Three
                    Months Ended March 31,2007
                
                2006Sales
                    - Technology Products
                
                $
                289,402
                
                $
                423,890Sales
                    - Technology Services
                
                
                2,887,079
                
                
                917,917Total
                    Sales
                
                
                3,176,481
                
                
                1,341,807Cost
                    of Sales - Technology Products
                
                
                89,192
                
                
                154,120Cost
                    of Sales - Technology Services
                
                
                1,383,262
                
                
                478,248Total
                    Cost of Sales
                
                
                1,472,454
                
                
                632,368Total
                    Gross Profit
                
                
                1,704,027
                
                
                709,439Operating
                    costs and expenses:Research
                    and development
                
                
                109,041
                
                
                109,134Selling,
                    general and administrative
                
                
                1,649,152
                
                
                504,6061,758,193
                
                
                613,740Operating
                    Income(loss) before other income (expenses)
                
                
                (54,166
                )
                
                95,699Other
                    income (expense):Derivative
                
                
                (1,684,074
                )
                
                —Extinguishment
                    (gain)
                
                
                2,073,589
                
                
                —Interest
                    Expense
                
                
                (385,803
                )
                
                (129,890
                )Finance
                    Expense
                
                
                (5,000
                )
                
                (8,043
                )Total
                    Other income (expenses)
                
                
                7,712
                
                
                (137,933
                )Net
                    Income (Loss) before Minority Interest
                
                
                (46,454
                )
                
                (42,234
                )Minority
                    Interest
                
                
                47,043
                
                
                (7,442
                )Net
                    Loss
                
                $
                (93,497
                )
                $
                (49,676
                )Net
                    Loss per Common Share -Basic and Diluted
                
                $
                (0.00
                )
                $
                (0.00
                )Weighted
                    average shares outstanding basic and diluted
                
                
                16,629,848
                
                
                8,984,150
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 
 3
  **LATTICE
        INCORPORATED (FORMALLY SCIENCE DYNAMICS CORPORATION) AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (UNAUDITED)
  Three
                    Months Ended March 31,2007
                
                2006Cash
                    flows from operating activities: Net (loss)
                
                $
                (102,497
                )
                
                (49,676
                )Adjustments
                    to reconcile net (loss) to net cash provided
                    by (used for) operating activities:Depreciation
                
                
                4,125
                
                
                20,940Amortization
                    Intangible assets
                
                
                520,428
                
                
                56,690Financing
                    expense non cash
                
                
                5,000
                
                
                8,043Derivative
                    Expense
                
                
                1,684,074
                
                
                —Non
                    Cash interest Derivative
                
                
                113,207
                
                
                36,180Amortization
                    of Debt Discount
                
                
                205,809
                
                
                —Extinguishment
                    gain
                
                
                (2,073,589
                )
                
                —Minority
                    interest
                
                
                47,043
                
                
                7,442Stock
                    base compensation
                
                
                61,440
                
                
                —Changes
                    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
                
                
                77,531
                
                
                (55,144
                )Net
                    cash provided by (used for) operating activities
                
                
                (24,966
                )
                
                (104,820
                )Cash
                    flows from financing activities:Payments
                    of Short term note payable
                
                
                (45,000
                )
                
                —Net
                    borrowing (Payment)on Revolving AR credit facility
                
                
                (81,570
                )
                
                166,591Net
                    cash (used in) provided by financing activities
                
                
                (126,570
                )
                
                166,591Net
                    increase (decrease) incash 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
                
                $
                40,315
                
                $
                54,527
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  4
   **LATTICE
        INCORPORATED (FORMALLY SCIENCE DYNAMICS CORPORATION) AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (unaudited)
 
 **Note
        1- Organization and Summary of Significant Accounting Policies**
 
 **a)
        Organization**
 
 Lattice
        Incorporated (Formally known as Science Dynamics Corporation and referred
        to
        herein as) (the "Company", "Latiice " ) was incorporated in the State of
        Delaware May 1973 and commenced operations in July 1977. The Company began
        as a
        provider of specialized solutions to the telecom industry. Throughout its
        history Lattice has adapted to the changes in this industry by reinventing
        itself to be more responsive and open to the dynamic pace of change experienced
        in the broader converged communications industry of today. Currently Lattice
        provides advanced solutions for several vertical markets. The greatest change
        in
        operations is in the shift from being a component manufacturer to a solution
        provider focused on developing applications through software on its core
        platform technology. To further its strategy of becoming a solutions provider,
        the Company acquired a majority interest in “SMEI” in February 2005. 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 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. In January,
        2007,
        we changed our name to Lattice Incorporated.
 
 
 **b)
        Basis of Financial Statement Presentation**
 
 The
        accompanying unaudited 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 S B.
        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,
        200 are
        not
        necessarily indicative of the results that may be expected for the year ended
        December 31, 2007.
 
 The
        Company’s auditors have expressed a going concern opinion in their audit reports
        for 2006 and 2005. Management acknowledges the basis for the going concern
        opinion, given the Company’s historical net losses and working capital deficits.
        However, it should be noted that the Company has made significant improvements
        in its operating performance in 2006. The Company has increased its sales
        by
        approximately 76.9% compared to 2005, through organic growth and acquisitions,
        posted positive operating income of $455,886 versus an operating loss of
        $1,006,881 in 2005 and was able to increase the availability of its revolving
        credit facility financing from $1M to $2M with the refinancing of the PFC
        facility with GBBF. Additionally, upon the effectiveness of its restated
        certificate of incorporation on February 2, 2007, the Company was able to
        convert its $4.5M note with Barron to Series A Preferred Stock. Given these
        events collectively and the anticipation that the positive trends will continue,
        management expects the going concern opinion to be removed from future
        filings.
 
 The
        accompanying financial statements include the operating results of Systems
        Management Engineering Systems, Inc. (SMEI), a majority owned (86%) subsidiary
        of Lattice. On February 14, 2005 the Company recorded on its Balance Sheet
        a
        Minority Interest Liability of $171,995 representing the net asset value
        not
        acquired by the Company. The carrying value of the minority interest of $171,995
        has increased to $182,604 at March 31, 2007 giving effect to the SMEI’s net
        operating results. The carrying value increased by $47,043 in the three months
        ended March 31, 2007 giving effect to the portion of SMEI’s net operating profit
        allocable to minority shareholders.
 
 5
 **c)
        Principles of Consolidation** :
 
 The
        consolidated financial statements included the accounts of the Company and
        all
        of its subsidiaries in which a controlling interest is maintained. All
        significant inter-company accounts and transactions have been eliminated
        in
        consolidation. For those consolidated subsidiaries where Company ownership
        is
        less than 100%, the outside stockholders' interests are shown as minority
        interests.
 
 **d)
        Use of Estimates** :
 
 The
        financial statements have been prepared in accordance with accounting principles
        generally accepted in the United States (US GAAP). The preparation of these
        financial statements requires management to make estimates and assumptions
        that
        affect the reported amounts in the financial statements and accompanying
        notes.
        These estimates form the basis for judgments made about the carrying values
        of
        assets and liabilities that are not readily apparent from other sources.
        Estimates and judgments are based on historical experience and on various
        other
        assumptions that the Company believes are reasonable under the circumstances.
        However, future events are subject to change and the best estimates and
        judgments routinely require adjustment. US GAAP requires estimates and judgments
        in several areas, including those related to impairment of goodwill and equity
        investments, revenue recognition, recoverability of inventory and receivables,
        the useful lives long lived assets such as property and equipment, the future
        realization of deferred income tax benefits and the recording of various
        accruals. The ultimate outcome and actual results could differ from the
        estimates and assumptions used.
  **e)
        Stock-Based Compensation -** 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 Stock-Based Compensation* ,
        to
        account for compensation costs under its stock option plans. The Company
        previously utilized the intrinsic value method under Accounting Principles
        Board
        Opinion No. 25, *Accounting
        for Stock Issued to Employees (as amended)* (“APB
        25”). Under the intrinsic value method prescribed by APB 25, no compensation
        costs were recognized for the Company’s stock options because the option
        exercise price in its plans equals the market price on the date of grant.
        Prior
        to January 1, 2006, the Company only disclosed the pro forma effects on net
        income and earnings per share as if the fair value recognition provisions
        of
        SFAS 123(R) had been utilized.
  In
        adopting SFAS No. 123, the Company elected to use the modified prospective
        method to account for the transition from the intrinsic value method to the
        fair
        value recognition method. Under the modified prospective method, compensation
        cost is recognized from the adoption date forward for all new stock options
        granted and for any outstanding unvested awards as if the fair value method
        had
        been applied to those awards as of the date of grant. For the three months
        ended
        March 31, 2007 and 2006, stock-based compensation 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.
 
 **f)
        Depreciation, Amortization and Long-Lived Assets**
 
 Long-lived
        assets include:
 
 Property,
        plant and equipment - These assets are recorded at original cost and increased
        by the cost of any significant improvements after purchase. The Company
        depreciates the cost evenly over the assets' estimated useful lives. For
        tax
        purposes, accelerated depreciation methods are used as allowed by tax
        laws.
 
 Goodwill-
        Goodwill represents the difference between the purchase price of an acquired
        business and the fair value of the net assets. Goodwill is not amortized.
        The
        Company tests goodwill for impairment annually ( or in interim periods if
        events
        or changes in circumstances indicate that its carrying amount may not be
        recoverable) by comparing the fair value of each reporting unit, as measured
        by
        discounted cash flows, to the carrying value to determine if there is an
        indication that potential impairment may exist. One of the most significant
        assumptions is the projection of future sales. The Company reviews its
        assumptions each time goodwill is tested for impairment and makes appropriate
        adjustments, if any, based on facts and circumstances available at that time.
 
 6
 Identifiable
        intangible assets - These assets are recorded at original cost. Intangible
        assets with finite lives are amortized evenly over their estimated useful
        lives.
        Intangible assets with indefinite lives are not amortized.
 
 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**
 
 The
        Company generally does not use derivative financial instruments to hedge
        exposures to cash-flow or market risks. However, certain other financial
        instruments, such as warrants and embedded conversion features that are indexed
        to the Company’s common stock, are classified as liabilities when either (a) the
        holder possesses rights to net-cash settlement or (b) physical or net-share
        settlement is not within the control of the Company. In such instances, net-cash
        settlement is assumed for financial accounting and reporting, even when the
        terms of the underlying contracts do not provide for net-cash settlement.
        Such
        financial instruments are initially recorded at fair value and subsequently
        adjusted to fair value at the close of each reporting period.
 
 **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.
  **Note
        2- Acquisition of "RTI" Stock**
 
 
 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 is to deliver to the RTI employees 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 three year vesting 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:
 
 Category
              
              AmountCurrent
                  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 in 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.
 
 
 8
 
 **Note
        3- Segment Reporting**
 
 Management
        views its business as two operating units, Technology Products and Technology
        Services.
  Three
                      Months Ended
                  
                  Three
                      Months EndedMarch
                      31, 2007
                  
                  March
                      31, 2005RevenueTechnology
                      Products
                  
                  $
                  289,402
                  
                  $
                  423,890Technology
                      Services
                  
                  
                  2,887,079
                  
                  
                  917,917Total
                      Consolidated Revenue
                  
                  $
                  3,176,481
                  
                  $
                  1,341,807Gross
                      ProfitTechnology
                      Products
                  
                  $
                  200,210
                  
                  $
                  269,770Technology
                      Services
                  
                  
                  1,503,817
                  
                  
                  439,669Total
                      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
              
              $
              —
              
              $
              —
 
 9
 
 **(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%. Interest on
        the
        line will be charged at the rate of prime plus 6%. 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 ratably over the twelve month term of the facility. As of March
        31,
        2007, 11,667 remain unamortized
  **(b)
        Notes Payable Stockholders/officers**
  The
        Company has a short-term loan payable with a former officer and stockholder
        of
        the Company amounting to $98,000, this note bears interest of 8% per annum.
        The
        note is an unsecured demand note.
  At
        December 31, 2006 the Company has a short term notes 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% per annum and is payable at 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 no later than September 17, 2007 and bears an interest rate of 10%
        per
        annum.
 
 **(c)
        Short term notes**
 
 In
        connection with the September 18, 2006 omnibus amendment and waiver agreement
        with Laurus the Company 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 September
        19, 2006 and ending on the maturity date which is September 18,
        2007.
 **(d)
          2006 Barron Financing Agreement**
 
 Convertible
          Promissory Notes
 
 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. 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 is not within the Company’s
          control. The following table reflects the components of the initial
          allocation:
 
 Financial
                    instrument:Warrant
                    derivative
                
                $
                13,895,090Compound
                    derivative
                
                
                8,113,451Convertible
                    notes payable
                
                
                --Financing
                    costs, net of cash costs of$404,851
                
                
                (867,357
                )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 $0.5 and $1.20, respectively.
          The
          Company fair valued the derivative warrants using the Black-Scholes-Merton
          Technique using a volatility factor of 90.76% and a risk free interest
          rate of
          $4.69%. The Company uses the Black-Scholes-Merton valuation technique for
          warrants 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 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 Carle embodies all
          assumptions (including credit risk, interest rate risk, conversion/redemption
          behaviors) necessary to fair value complex, compound derivative financial
          instruments.
 
 Since
          the
          derivative financial instruments are required to be recorded, both initially
          and
          subsequently at fair values, there were insufficient proceeds to allocate
          any
          amount to the Convertible Notes Payable and, accordingly, it has no carrying
          value on the inception date. In addition, proceeds were insufficient to
          record
          the fair values of the derivative financial instruments, resulting in a
          day-one
          derivative loss of $17,096,035. It should be noted that derivative instruments
          will be adjusted to fair value at each reporting date. Fair values are
          highly
          influenced by our trading stock price and volatility, changes in our credit
          risk
          and market interest rates.
 
 
 The
          Company amortized the discount on the Convertible Notes Payable resulting
          from
          the initial allocation over the term of the debt instrument using the effective
          method.
 
 On
          February 2, 2007, upon filing of the Restated Certificate of Incorporation,
          the
          Convertible Notes Payable was automatically converted into Series A Preferred
          Stock. Based upon the Company’s evaluation of the terms and conditions of the
          Series A Preferred Stock, the Company concluded that the Preferred Stock
          was
          more akin to equity rather than debt and thus have been classified as
          stockholders’ equity. Since the conversion features on the debenture had been
          bifurcated from the convertible debt host contract and recorded as a liability,
          there was no equity conversion feature remaining in the debt instrument
          for
          accounting purposes. Therefore, for accounting purposes, both liabilities
          (i.e.
          the debt host contract and the bifurcated derivative liability) were subject
          to
          extinguishment accounting.
 
 On
          February 7, 2007, the Company entered into an amendment agreement in which
          the
          investors amended the Securities Purchase Agreement and Registration Rights
          Agreement, and provided for (i) the waiver of all accrued and unpaid liquidated
          damages for not filing the registration statement in 60 days as is required
          in
          the registration rights agreement and (ii) the extension to a later date
          of
          certain mandated events, such as the re-composition of the Board. On February
          7,
          2007, the Company issued warrants to purchase 1.9 million shares of common
          stock
          as compensation to the investors for this amendment, valued at approximately
          $1,031,000 using the Black-Scholes-Merton technique. 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. This debt modification
          was
          deemed to be a modification rather than a debt extinguishment since it
          did not
          rise to the requirements of EITF 96-19 to be deemed a debt extinguishment.
          The
          Company recorded the modification in conjunction with the preferred stock
          conversion which resulted in a derivative expense of $838,709 for the amount
          of
          the warrant consideration that was allocated to the derivative instruments
          and
          an extinguishment gain of $1,199,589 related to the conversion.
 
 In
          accordance with FAS 5, the Company had accrued a liability for the liquidated
          damages of $874,000. Upon receipt of the waiver of the liquidating damages,
          this
          amount was recorded as a gain on extinguishment.
 
 During
          December 2006, the Financial Accounting Standards Board issued FASB Staff
          Position (FSP) EITF 00-19-2, Accounting
          for Registration Payment Arrangements ,
          which
          amended Financial Accounting Standard No. 133 Accounting
          for Derivative Financial Instruments and Hedging Activities .
          Generally, the amendment provides for the exclusion of registration payments,
          such as the liquidated damages that the Company has incurred, from the
          consideration of classification of financial instruments, previously required
          under FAS133 and EITF 00-19. Rather, registration payments are to be accounted
          for pursuant to Financial Accounting Standard No. 5 Accounting
          for Contingencies ,
          which
          provides for the recognition of registration payments when they are both
          probably and reasonably estimable. The FSP was adopted by the Company on
          January
          1, 2007, as was required by the new accounting pronouncement. However,
          the
          Company had previously applied the view (provided in EITF 05-04) that
          registration payments required recognition pursuant to FAS 5.
  Adoption
          of the FSP involved management’s reevaluation of the conditions for equity or
          liability classification of existing derivative financial instruments pursuant
          to the revised criteria of EITF 00-19. As a result of the reevaluation,
          management concluded that the warrants, associated with the 2006 Barron
          financing agreement, and classified as liabilities, did not meet the eight
          conditions for equity classification provided in EITF 00-19, and are continued
          to be recorded as liabilities and adjusted to fair value each quarter.
          There
          were two traunches of Series C warrants to purchase 4,891,000 shares of
          common
          stock each that had been considered “tainted” due to the conversion features in
          the Barron financing. These
          warrants were initially recorded as liabilities when the Company entered
          into
          the Barron financing on September 19, 2006 at which time it lost the ability
          to
          net share-settle all of its obligations. The company affected a 1 for 10
          reverse
          stock split February 2, 2007 at which time it regained the ability to net
          share-settle all of its obligations. Since the Series C warrants met the
          eight
          conditions for equity classification provided in EITF 00-19, the fair value
          of
          these warrants ($462,517) was reclassified to equity. The fair value of
          the
          warrants was determined using the Black-Scholes-Merton valuation
          technique.
 
 
 **Note
          5 - Derivative Financial Instruments**
 
 The
          balance sheet caption derivative liabilities consist 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, 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:
 
 Derivative
                    income (expense)
                
                Quarter
                    ended
                  March
                    31, 2007
                
                Quarter
                    ended
                  March
                    31, 2006Conversion
                    features
                
                $
                (
                    1,305,829
                )
                $
                264,752Warrant
                    derivative
                
                $
                (
                    322,600
                )
                $
                105,275
 
 Liabilities
                
                March
                    31, 2007
                
                March
                    31, 2006Compound
                    derivative
                
                $
                -
                
                
                ($
                    255,462
                )Warrant
                    derivative
                
                
                ($
                    13,033,396
                )
                
                ($
                    207,000
                )
 
  Freestanding
          derivative instruments, consisting of warrants and options that arose from
          the
          Laurus and Barron financing are valued using the Black-Scholes-Merton valuation
          methodology because that model embodies all of the relevant assumptions
          that
          address the features underlying these instruments. Significant assumptions
          used
          in the Black Scholes models included: conversion or strike prices ranging
          from
          $0.1 - $1.10; volatility factors ranging from 88.21% - 148.83% based upon
          forward terms of instruments; terms-remaining term for all instruments;
          and a
          risk free rate ranging from 4.54% - 4.65%. Fair value for forward-based
          features
          (principally the interest reset feature) is determined using the income
          approach; generally discounted cash flows.
 
 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.
          During the first quarter of 2007, the embedded derivatives were recorded
          at fair
          value prior to the conversion into shares of Series A Preferred Stock.
          The
          compound embedded derivative instruments are 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. Significant assumptions included in the Flexible Monte
          Carlo included: conversion or strike price of $0.23; volatility factor
          of
          157.20% based upon forward terms of instruments; terms-remaining term for
          all
          instruments; equivalent interest rate risk of 11.81% and equivalent yield
          rate
          of 11.59%.
 
 Equivalent
          amounts reflect the net results of multiple modeling simulations that the
          Monte
          Carlo Simulation methodology applies to underlying assumptions.
 **Note 6
        Common Stock/Preferred Stock**
  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.
 
  February
        2, 2007 the Company file a restated certificate of incorporation with the
        State
        of Delaware, upon the effectiveness the principal and interest due on the
        Barrons note was automatically converted into7,826,087 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.
  Each
        share of Series A Preferred Stock is convertible into 25 shares of common
        stock
        subject to adjustment in certain instances, including the issuance by the
        Company of common stock at a price which is less than the conversion price
        applicable to the Series A Preferred Stock, which is initially $0.023 per
        share,
        subject to adjustment
 
 13
  **Note
        7-Stock Based Compensation**
  **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
        ("SFAS") No.123 (Revised 2004), "Share Based Payment," ("SFAS 123R"), using
        the
        modified prospective method. In accordance with SFAS 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
        service 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, SFAS 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 SFAS 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 SFAS
        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 in 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 option pricing
        model, The following assumptions were used to estimate the fair value of
        the
        options at grant date based on the following:
 
 14
 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
 **Warrants**
 
 On
        February 8, 2007 the company issued a warrant to purchase 1,900,000 shares
        of
        its common stock at an exercise price of $0.50, as consideration for an
        amendment to the September 19, 2006 Securities purchase agreement, which
        extended the filing date of a registration statement from 60 days from September
        19, 2006 to no later than February 12, 2007. It also extended the date to
        have
        an independent board, and an audit committee comprised of not less than three
        directors, a majority of whom are independent directors, and a compensation
        committee to February 12, 2007
  15
 **Item
        2.**  **Management’s
        Discussion and Analysis or Plan of Operation.**
  **GENERAL
        OVERVIEW**
  Lattice
        Incorporated (Formally Science Dynamics Corporation) 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.
  For
        the
        quarter ended March 31, 2007, the company has continued to demonstrate improved
        operating performance. The positive “Adjusted Operating Income” (reported
        operating loss of ($54,166) plus non-cash depreciation and amortization of
        $524,553 and share-based compensation of $61,440). These results are especially
        encouraging when compared to the same period a year ago which shows an increase
        in Adjusted Operating Income of 200%+. The company's improved results are
        a
        direct reflection of the company's efforts to manage our costs effectively,
        the
        acquisition of “RTI” in the third quarter of 2006 and the expansion of our
        existing contracts and addition of new contracts.
  The
        Company's management believes “Adjusted Operating Income”, a non-GAAP financial
        measure, is an important financial metric to monitor operating performance.
        The
        Company also believes “Adjusted Operating Income" provides meaningful insight to
        its investors in understanding the Company's operating performance.
  For
        the
        three months ended March 31, 2007 and 2006, the Company's “Adjusted Operating
        Income” reconciles to reported operating income as follows:
  For
                  the three months ended
                March
                  31,2007
              
              2006Reported
                  Operating Income (Loss)
              
              $
              (54,166
              )
              $
              95,699Add-back:Non-cash
                  Depreciation & Amortization expenses
              
              $
              524,553
              
              $
              77,630Share-based
                  Compensation
              
              $
              61,440
              
              $
              —Adjusted
                  Operating Income
              
              $
              531,827
              
              $
              173,329
 16
  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.
 
 **Item
        2.**  **Management’s
        Discussion and Analysis or Plan of Operation.**
 
 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.
 
 
 Revenues
        for the three months ended March 31, 2007 were $3,176,481, compared to
        $1,341,807 for the three months ended March 31, 2006. This represents an
        increase of $1,834,674, or 237% comparing the two periods. The increase in
        revenue for the three months ended March 31, 2007 includes the results of
“RTI”
which was acquired in the third quarter of 2006. Excluding the “RTI”
acquisition, revenues increased by $376,319 or 28% compared to the year ago
        period.
  Product
        revenues decreased $134,488, or 32%, during the three months ended March
        31,
        2007 compared to the same period in fiscal 2006. Product revenues are sensitive
        to unit shipments on a quarter to quarter basis and should be viewed on a
        full
        year basis.
 
 Service
        revenues increased $2,084,196, or 227% to $3,002,113 during the three months
        ended March 31, 2007 compared to the same period in fiscal 2006. The increase
        in
        revenues included the results of”RTI” which was acquired in the third quarter of
        2006. Excluding “RTI”, service revenues increased by $625,841 or 68%.
 
 Gross
        profit increased by $994,588, or 140%, to $1,704,027 for the three months
        ended
        March 31, 2007 compared to $709,439 for the three months ended March 31,
        2006.
        The increase in gross profit included the results of “RTI” acquired in the third
        quarter of 2006. Excluding RTI, gross margin increased by $174,588 or 25%,
        which
        was in line with our revenue growth.
 
 For
        the
        three months ended March 31, 2007, Research and development expenses were
        $109,041 compared to $109,134 for the three months ended March 31, 2006.
 
 For
        the
        three months ended March 31, 2007, selling, general and administrative expenses
        totaled $1,649,152 compared to $504,606 for the period ended March 31, 2006
        for
        an increase of $1,144,546, or 227%.
 
 The
        increase in selling, general and administrative expenses included the results
        of
“RTI”, which was acquired in the third quarter of 2006. Excluding RTI, selling,
        general and administrative increased $274,688 or 54%. The increase in baseline
        selling, general and administrative expenses was primarily attributable to:
        non-cash share-based compensation of $61,440 in the current quarter, executive
        salaries of $56,000 (waived in the first quarter of 2006), and an overall
        increase in operating expenses.
 
 17
 Interest
        and finance expense was $390,803 and $137,933 for the three months ended
        March
        31, 2007 and 2006, respectively. This was an increase of $252,870. Included
        in
        the current quarter expense of $390,803 was non-cash amortization totaling
        $315,000 of debt discount and finance fees related to the $4.5M Barron
        convertible promissory note. The note was converted to equity (Series “A”
Preferred Stock) during the current quarter.
 
 
 Our
        net
        loss was **$** 102,497 **** for
        the
        three months ended March 31, 2007 compared to a net loss of **$** 49,676 **** for
        the
        three months ended March 31, 2006. The current quarter net loss included
        non-cash amortization expenses related to acquired intangibles totaling $520,428
        compared to amortization expense of $56,690 in the year ago period.
  **Liquidity
        and Capital Resources**
 
 As
        of
        March 31, 2007 our cash balance was $240,739, compared to $392,275 at December
        31, 2006. Total current assets at March 31, 2007 were $3,523,707 compared
        to
        $3,567,395 at December 31, 2006. Current liabilities totaling $16,627,132
        at
        March 31, 2007 which includes non-cash derivative liabilities of $13,047,396.
        Excluding the non-cash derivative liabilities, current liabilities totaled
        $3,579,736 at March 31, 2007. We currently plan to use our cash balance and
        cash
        generated from operations for increasing our working capital reserves and
        paying
        down short term debt coming due in the next twelve months. Management believes
        that the current cash on hand, additional cash expected from operations in
        fiscal 2007 and the availability on our line of credit facility will be
        sufficient to cover our working capital requirements for fiscal 2007.
 
 Our
        accounts receivable at March 31, 2007 was $2,980,145, compared to $2,412,164
        at
        December 31, 2006. The change in accounts receivable is primarily due to;
        slower
        collections with certain government agencies.
 
 We
        have
        approximately $1,100,000 of short term debt coming due by end of fiscal 2007.
        We
        plan to pay this with proceeds generated from anticipated operating cash
        flows,
        our current cash position and the availability on our line of credit facility.
        Our outstanding balance on the $2.0M line of credit facility was $509,000
        at
        March 31, 2007.
  At
        March
        31, 2007 the Company had no long term debt.
  **Financings**
 
 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.
  Pursuant
        to the RTI Agreement, the consideration for stock of RTI consisted of (a)
        $3,500,000, which was paid from the proceeds of the sale of the Note and
        Warrants to Barron Partners LP (as descussed below) (b) 5,000,000 shares
        of
        common stock, (c) a $500,000 promissory note (the "RTI Note"), which if not
        paid
        sooner must be paid in full on the earlier of (i) twelve months from the
        closing
        date of the transaction, which was September 19, 2006 (the "closing
        date")   or (ii) the consummation of a transfer of all or
        substantially all of the assets or equity securities of the Company to a
        third
        party, and (b) 1,000,000 shares of the Company's Series B Convertible Preferred
        Stock. To secure the indemnification obligations of the former RTI stockholders,
        a portion of the purchase price, consisting of $350,000 and 583,333 shares
        of
        common stock was placed in escrow for a period of 18 months, subject to any
        claims that may arise under the agreement during the 18-month warranty survival
        period.
  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 commons
        stock,
        subject to adjustment in the event of stock dividends, splits and other
        distributions, combinations of shares or reverse splits or other
        recapitalizations. 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.
  18
 As
        part
        of the purchase price for price for RTI stock, the Company agreed to pay
        the
        former RTI stockholders up to an additional $1,500,000 depending on the
        technology’s services segment EBITDA for the twelve-month period ending on the
        first anniversary of the Closing Date. If the segments 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,
        the former RTI stockholders will receive $1,500,000.
  Pursuant
        to the RTI Agreement, the Company is to deliver to the RTI's employee’s
        incentive stock options to purchase 200,000 shares of common stock at an
        exercise price equal to the greater of: (i) the market price on the closing
        date
        and (ii) the volume-weighted average price per share for the fifteen (15)
        days
        prior to the Closing Date. The grant of the options shall be subject to approval
        by the Company, with approval not to be unreasonably withheld. During the
        two
        years following the closing, the Company shall grant the RTI employees incentive
        stock options to purchase 50,000 shares in each year of the two year period.
        These options shall have an exercise price equal to the greater of: (i) the
        closing market price and (ii) the volume-weighted average price per share
        for
        the fifteen (15) days prior to the date of each such grant. The options will
        have a ten-year term and shall vest equally in each year in first three years
        and such vesting shall accelerate if (i) such employee is terminated without
        cause or without good reason or (ii) upon a change of control of the
        Company.
  Pursuant
        to the RTI Agreement, to secure the Company's payment obligations under the
        RTI
        Note, the Company and each owner of the issued and outstanding shares of
        RTI's
        capital stock executed a Pledge Agreement. Pursuant to the Pledge Agreement,
        15.24% of the share of RTI's capital stock purchased by the Company is being
        held in escrow until the payment in full by the Company' of the RTI
        Note.
  The
        RTI
        transaction was financed through a private placement with Barron Partners
        LP, a
        private investment partnership based in New York. The Company sold Barron
        a
        convertible subordinated promissory note in the principal amount of $4.5
        million
        (the "Note"), a warrant to purchase up to 12.5 million shares of the company's
        common stock at an exercise price of $0.50 per share and a warrant to purchase
        up to 12.5 million shares of the Company's common stock at an exercise price
        of
        $1.25 per share which expire in Sept, 2011. The private placement closed
        on
        September 19, 2006. As a result of the filing of our amended and restated
        certificate of incorporation with the State of Delaware, on February 2, 2007,
        the principal and interest due on the Barron note automatically converted
        into 7,826,087 shares of series A preferred stock.
  Each
        share of Series A Preferred Stock is convertible into 2.5 shares of common
        stock
        subject to adjustment in certain instances, including the issuance by the
        Company of common stock at a price which is less than the conversion price
        applicable to the Series A Preferred Stock (the "Series A Conversion Price"),
        which is initially $.23 per share, subject to adjustment.
  The
        Purchase Agreement as well as the certificate of designation for the Series
        A
        Preferred Stock and Warrants provide for an adjustment in the conversion
        price
        of the note and Series A Preferred Stock and the exercise price of the Warrants
        if the Company's earnings before interest, taxes, depreciation and amortization
        is less than a specified amount per share, on a fully-diluted basis, with
        a
        maximum reduction of 30% for each year. The target EBITDA per share is $0.19
        for
        2006 and $0.549 for 2007. The amount of reduction per year is the percentage
        shortfall. Thus, a 15% shortfall will result in a 15% reduction in the
        applicable conversion or exercise price then in effect. For purpose of
        determining fully-diluted, all shares of Common Stock issuable upon conversion
        of convertible securities and upon exercise of warrants and options shall
        be
        deemed to be outstanding, regardless of whether (i) such shares are treated
        as
        outstanding for determining diluted earnings per share under GAAP, (ii) such
        securities are "in the money," or (iii) such shares may be issued as a result
        of
        the 4.9% Limitation. The per share amounts are adjusted in accordance with
        GAAP
        to reflect any stock dividend, split, distribution, reverse split or combination
        of shares or other recapitalization, including the reverse split effected
        by the
        restated certificate of incorporation.
 
 19
 On
        February 8, 2007 the company issued a warrant to purchase 1,900,000 shares
        of
        its common stock at an exercise price of $0.50, as consideration for an
        amendment to the September 19, 2006 Securities purchase agreement, which
        extended the filing date of a registration statement from 60 days from September
        19, 2006 to no later than February 12, 2007. It also extended the date to
        have
        an independent board, and an audit committee comprised of not less than three
        directors, a majority of whom are independent directors, and a compensation
        committee to February 12, 2007 (will be tied to the derivatives)
  The
        Company entered into a Omnibus Amendment and Waiver Agreement with Laurus
        Master
        Fund, LTD ("Laurus"), dated September 18, 2006 (the "Laurus Agreement") for
        the
        purpose of amending, restating and waiving certain terms of (i) the Amended
        and
        Restated Secured Convertible Term Note, issued as of February 11, 2005 and
        amended and restated as of July 21, 2006 (as amended and restated, amended,
        modified and supplemented from time to time, the "Term Note") by the Company
        to
        Laurus, (ii) the Securities Purchase Agreement, dated as of February 11,
        2005
        (as amended, modified or supplemented from time to time, the "Purchase
        Agreement") by and between the Company and Laurus, (iii) the Common Stock
        Purchase Warrant, issued as of February 11, 2005 by the Company to Laurus
        (as
        amended and restated, amended, modified and supplemented from time to time,
        the
        "Initial Warrant"), (iv) the Common Stock Purchase Warrant, issued as of
        November 18, 2005 by the Company to Laurus (as amended and restated, amended,
        modified and supplemented from time to time, the "Additional Warrant") and
        (v)
        the Forbearance Agreement, dated as of July 21, 2006 between the Company
        and
        Laurus (as amended, modified or supplemented from time to time, the "Forbearance
        Agreement"). The Company issued 100,000 common shares and paid $500,000 in
        cash in conjunction with the July 21, 2006 agreement.
  Pursuant
        to the Laurus Agreement, on September 19, 2006, Laurus waived each Event
        of
        Default that may have arisen under Section 4.1 of the Term Note and Section
        3 of
        the Forbearance Agreement solely as a result of the failure by the Company
        to
        make the $32,656 in interest payments due to Laurus on September 1,
        2006.
  Pursuant
        to Laurus Agreement, on September 19, 2006, in exchange for the cancellation
        of
        the term note in the principal amount of $2,000,000, the Company (a) paid
        $500,000 in principal amount of the Term Note, (b) issued an amendment and
        restated note in the principal amount of $250,000, and (c) issued a warrant
        to
        purchase up to 1,458,333 shares of common stock (subject to adjustment),
        upon
        the cashless exercise by the holder thereof for an imputed exercise price
        of
        $0.10 per share.
  Pursuant
        to a letter agreement between the Company and the Keshet Fund LP and Keshet
        L.P.
        (collectively the "Keshet"), the Company agreed to issue 300,000 shares of
        common stock in consideration for the cancellation of all payment obligations
        arising under the convertible notes issued to Keshet by the Company.
        Additionally, the Keshet will, at the Company's expense, terminate all of
        its
        agreements with the Company, other than in respect of (x) indemnification
        and
        expense reimbursement provisions of such agreements and such other provisions
        thereof as expressly survive the payment in full of the Obligations and (y)
        any
        options and/or warrants received by Keshet from the Company.
  Between
        April 14, 2006 and May 11, 2006 the Company sold 2,274,951 shares of common
        stock and 1,161,587 warrants to purchase additional shares of common stock
        to
        various accredited investors in a private placement. The Company received
        proceeds of $1,293,906 and exchanged $100,000 of accrued expenses for a total
        of
        $1,393,906. The Company used these proceeds for working capital purposes
        and to
        reduce short term debt.
 
 
 20
 **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.
 
 **Summary
        of Significant Accounting Policies**
  **Use
        of Estimates** - The
        financial statements have been prepared in accordance with accounting principles
        generally accepted in the United States (US GAAP). The preparation of these
        financial statements requires management to make estimates and assumptions
        that
        affect the reported amounts in the financial statements and accompanying
        notes.
        These estimates form the basis for judgments made about the carrying values
        of
        assets and liabilities that are not readily apparent from other sources.
        Estimates and judgments are based on historical experience and on various
        other
        assumptions that the Company believes are reasonable under the circumstances.
        However, future events are subject to change and the best estimates and
        judgments routinely require adjustment. US GAAP requires estimates and judgments
        in several areas, including those related to impairment of goodwill and equity
        investments, revenue recognition, recoverability of inventory and receivables,
        the useful lives long lived assets such as property and equipment, the future
        realization of deferred income tax benefits and the recording of various
        accruals. The ultimate outcome and actual results could differ from the
        estimates and assumptions used.
  **Basis
        of Financial Statement Presentation** - The
        Company’s auditors have expressed a going concern opinion in their audit reports
        for 2006 and 2005. Management acknowledges the basis for the going concern
        opinion, given the Company’s historical net losses and working capital deficits.
        However, it should be noted that the Company has made significant improvements
        in its operating performance in 2006. The Company has increased its sales
        by
        approximately 76.9% compared to 2005, through organic growth and acquisitions,
        posted positive operating income of $455,886 versus an operating loss of
        $1,006,881 in 2005 and was able to increase the availability of its revolving
        credit facility financing from $1M to $2M with the refinancing of the PFC
        facility with GBBF. Additionally, upon the effectiveness of its restated
        certificate of incorporation on February 2, 2007, the Company was able to
        convert its $4.5M note with Barron to Series A Preferred Stock. Given these
        events collectively and the anticipation that the positive trends will continue,
        management expects the going concern opinion to be removed from future
        filings.
  **Principles
        of Consolidation** -
        The
        consolidated financial statements included the accounts of the Company and
        all
        of its subsidiaries in which a controlling interest is maintained. All
        significant inter-company accounts and transactions have been eliminated
        in
        consolidation. For those consolidated subsidiaries where Company ownership
        is
        less than 100%, the outside stockholders' interests are shown as minority
        interests.
 
 **Derivative
        Financial Instruments** The
        Company generally does not use derivative financial instruments to hedge
        exposures to cash-flow or market risks. However, certain other financial
        instruments, such as warrants and embedded conversion features that are indexed
        to the Company’s common stock, are classified as liabilities when either (a) the
        holder possesses rights to net-cash settlement or (b) physical or net-share
        settlement is not within the control of the Company. In such instances, net-cash
        settlement is assumed for financial accounting and reporting, even when the
        terms of the underlying contracts do not provide for net-cash settlement.
        Such
        financial instruments are initially recorded at fair value and subsequently
        adjusted to fair value at the close of each reporting period.
 
 **Revenue
        Recognition -** Revenue
        is recognized when all significant contractual obligations have been satisfied
        and collection of the resulting receivable is reasonably assured. Revenue
        from
        product sales is recognized when the goods are shipped and title passes to
        the
        customer.
 
 The
        company applies the guidance of SOP-97.2 with regards to its software products.
        Under this guidance, the Company determined that its product sales do not
        contain multiple deliverables for an extended period beyond delivery where
        bifurcation of multiple elements is necessary. The software is embedded in
        the
        producst sold and shipped. Revenue is recognized upon delivery, installation
        and
        acceptance by the customer. PCS (postcontract 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 susotmer arrangement but are rendered at the time of delivery
        of
        the product and invoicing.
  21
 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.
  **Depreciation,
        Amortization and Long-Lived Assets**
 
 Long-lived
        assets include:
 
 Property,
        plant and equipment - These assets are recorded at original cost and increased
        by the cost of any significant improvements after purchase. The Company
        depreciates the cost evenly over the assets' estimated useful lives. For
        tax
        purposes, accelerated depreciation methods are used as allowed by tax
        laws.
 
 Goodwill-
        Goodwill represents the difference between the purchase price of an acquired
        business and the fair value of the net assets. Goodwill is not amortized.
        The
        Company tests goodwill for impairment annually ( or in interim periods if
        events
        or changes in circumstances indicate that its carrying amount may not be
        recoverable) by comparing the fair value of each reporting unit, as measured
        by
        discounted cash flows, to the carrying value to determine if there is an
        indication that potential impairment may exist. One of the most significant
        assumptions is the projection of future sales. The Company reviews its
        assumptions each time goodwill is tested for impairment and makes appropriate
        adjustments, if any, based on facts and circumstances available at that time.
 
 Identifiable
        intangible assets - These assets are recorded at original cost. Intangible
        assets with finite lives are amortized evenly over their estimated useful
        lives.
        Intangible assets with indefinite lives are not amortized.
 
 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.
  **Item
        3.**  **Controls
        and Procedures.**
 
 As
        of the
        end of the period covered by this report, we conducted an evaluation, under
        the
        supervision and with the participation of our chief executive officer and
        chief
        financial officer of our disclosure controls and procedures (as defined in
        Rule
        13a-15(e) and Rule 15d-15(e) of the Exchange Act. Based on that evaluation,
        our Chief Executive Officer and Chief Financial Officer concluded that our
        disclosure controls and procedures are not effective to provide (i) reasonable
        assurance that information we are required to disclose in this report that
        we
        file or submit under the Exchange Act is recorded, processed, summarized
        and
        reported within the time periods specified in SEC rules and forms, and (ii)
        that
        such information is accumulated and communicated to our management, including
        our chief executive officer and chief financial officer, as appropriate,
        to
        allow timely decisions regarding required disclosure. Please see subsection
        “Significant Deficiencies in Disclosure Controls and Procedures or Internal
        Controls” below.
  Significant
        Deficiencies in Disclosure Controls and Procedures or internal
        Controls
  We
        have
        identified the following material weakness in our internal controls. The
        Company
        has experienced difficulty gaining access to the financial records of its
        subsidiary Ricciardi Technologies, Inc. The Company’s management is taking
        corrective actions in order to ensure timely access to such financial records.
 
 22
 **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.
 
 
 23
  **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:
                  May 21, 2007
              By:
              /s/
                  Paul
                  BurgessPaul
                  BurgessPresident,
                  Chief Executive Officerand
                  Director
  Date:
                  May 21, 2007
              By:
              /s/
                  Joe
                  NotoJoe
                  NotoChief
                  Financial Officer and PrincipalAccounting
                  Officer
 
  24