UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


___________________


FORM
10-K





[X]              Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the
fiscal year ended December 31, 2007





[  ]              Transition
Report Under to Section 13 or 15 (d) of the Securities Exchange Act of
1934





Commission
file number:  000-16299





ANTS
SOFTWARE INC.


(Exact
name of registrant as specified in its charter)






Delaware
            
            13-3054685(State or other
      jurisdiction of
            
            (IRS Employer
      Identification Number)Incorporation or
      Organization)




700
Airport Blvd., Suite 300, Burlingame, California 94010


(Address
of principal executive offices including zip code)





(650)
931-0500


(Registrant’s
telephone number, including Area Code)





Securities
registered under Section 12(b) of the Act:  None





Securities
Registered under Section 12(g) of the Act:  Common Stock, $0.0001 par
value


___________________





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes
[  ]   No [X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Exchange Act.  Yes [   ] No
[X]





Indicate
by check mark if the registrant (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.  [X]
Yes   [  ]   No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  [ X]





Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer,  a non-accelerated filer, or a smaller reporting company (in
Rule 12b-2 of the Exchange Act).  Large accelerated filer
[  ]   Accelerated filer
[X]   Non-accelerated
filer  [  ]  Smaller reporting
company  [  ]





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





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter.
As of June 30, 2007 the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $92 million based on
the average bid and asked price of such common stock as reported on the NASD
Bulletin Board system.  Shares
of common stock held by each officer and director and each person who owns more
than 10% or more of the outstanding common stock have been excluded because
these persons may be deemed to be affiliates.  The determination of
affiliate status for purpose of this calculation is not necessarily a conclusive
determination for other purposes.







The issuer
had 57,398,445 shares of common stock outstanding as of February 29,
2008.








DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy
Statement”), to be filed within 120 days of the end of the fiscal year ended
December 31, 2007, are incorporated by reference in Part III
hereof.  Except with respect to information specifically incorporated
by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as
part hereof.





2


TABLE
OF CONTENTS





PART IItem 1.
                
                Business
                4Item 1A.
                
                Risk Factors
                10Item 1B.
                
                Unresolved Staff Comments
                14Item 2.
                
                Properties
                14Item 3.
                
                Legal Proceedings
                14Item 4.
                
                Submission of Matters to a Vote of Security
      Holders
                14PART IIItem 5.
                
                Market for Common Equity and Related Stockholder Matters and
      IssuerPurchases of Equity Securities
                15Item 6.
                
                Selected Financial Data
                17Item 7.
                
                Management’s Discussion and Analysis of Financial Conditions
      and Results ofOperations.
                17Item 7A.
                
                Quantitative and Qualitative Disclosures About Market
      Risk
                27Item 8.
                
                Financial Statements and Supplementary
    Data.
                28Item 9.
                
                Changes in and Disagreements with Accountants on Accounting
      andFinancial Disclosure.
                28Item 9A.
                
                Controls and Procedures.
                28Item 9B.
                
                Other Information.
                30PART IIIItem 10.
                
                Directors, Executive Officers and Corporate
      Governance
                31Item 11.
                
                Executive Compensation
                31Item 12.
                
                Security Ownership of Certain Beneficial Owners and
      Managementand Related Stockholder Matters
                31Item 13.
                
                Certain Relationships and Related Transaction and Director
      Independence
                31Item 14.
                
                Principal Accountant Fees and Services
                31PART IVItem 15.
                
                Exhibits, Financial Statements and
      Schedules
                32Signatures
                
                
                61Exhibits.
                
                
                63





3


This
Annual Report and the information incorporated herein by reference contain
forward-looking statements that involve a number of risks and uncertainties, as
well as assumptions that, if they never materialize or if they prove incorrect,
would likely cause our results to differ materially from those expressed or
implied by such forward-looking statements.  Although our
forward-looking statements reflect the good faith judgment of our management,
these statements can only be based on facts and factors currently known by
us.  Consequently, forward-looking statements are inherently subject
to risks and uncertainties, and actual results and outcomes may differ
materially from results and outcomes discussed in the forward-looking
statements.





Forward-looking
statements can be identified by the use of forward-looking words such as
“believes,” “expects,” “hopes,” “may,” “will,” “plans,” “intends,” “estimates,”
“could,” “should,” “would,” “continue,” “seeks” or “anticipates,” or other
similar words (including their use in the negative), or by discussions of future
matters such as the development of new products, problems incurred in
establishing sales and sales channels, technology enhancements, possible changes
in legislation and other statements that are not historical.  These
statements include, but are not limited to, statements under the captions
“Business,” “Risk Factors,” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” as well as other sections in
this Annual Report.  You should be aware that the occurrence of any of
the events discussed under the heading “Item 1A — Risk Factors” and
elsewhere in this Annual Report could substantially harm our business, results
of operations and financial condition.  If any of these events occurs,
the trading price of our common stock could decline and you could lose all or a
part of the value of your shares of our common stock.





The
cautionary statements made in this Annual Report are intended to be applicable
to all related forward-looking statements wherever they may appear in this
Annual Report.  We urge you not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report.








PART I





ITEM 1.  BUSINESS





The
Company





ANTs
software inc. is developing the ANTs Compatibility Server and develops, markets
and supports the ANTs Data Server. The ANTs Compatibility
Server  (“ACS”) is middleware that is intended to offer a fast,
cost-effective method to move applications from one database to another and
enable enterprises to achieve cost efficiencies by consolidating their
applications onto fewer databases. The ANTs Data Server (“ADS”) is a relational
database management system (“RDBMS”) that can reduce costs and improve
application performance. ACS is built on proprietary compatibility technologies
developed by us. ADS incorporates patented high-performance technologies
developed by us. End-users of RDBMS’s, independent software vendors who bundle
an RDBMS with their products and other RDBMS vendors can use the ADS and ACS to
lower costs and gain competitive advantage.





Corporate History





ANTs
software inc. (sometimes referred to herein as “ANTs” or “we”) is a Delaware
corporation headquartered in Burlingame, California.  Our shares are
traded on the OTC Bulletin Board under the stock symbol ANTS. We are the
successor to Sullivan Computer Corporation, a Delaware corporation incorporated
in January 1979, which, in 1986 changed its name to CHoPP Computer Corporation.
In 1997, we reincorporated from Delaware to Nevada, and in February 1999 changed
our name to ANTs software.com. In July 2000, we merged with Intellectual
Properties and Technologies, Inc., a wholly owned subsidiary with no significant
assets. In December 2000, we reincorporated from Nevada to Delaware and changed
our name from ANTs software.com to ANTs software inc.





Development
related to the ANTs Compatibility Server began in 2006 and is based on research
and development related to the ANTs Data Server which began in
2000.





Technology
and Intellectual Property





Overview





Beginning in 2000, we focused on
development of the ANTs Data Server and core high-performance database
technologies. In 2006, we began building compatibility technology into ADS and
in early 2007, after identifying a potential market for this compatibility
technology, we began developing the ANTs Compatibility Server. We have developed
numerous proprietary technologies related to the ACS and we have
patented technologies related to the ANTs Concurrency Engine at the heart of
ADS.




4





The
ANTs Concurrency Engine





Applications that require access to
rapidly changing, shared data often suffer from poor performance and poor
scalability because of database locking. The ANTs Concurrency Engine (ACE),
which comprises a highly efficient data-processing engine coupled with lock-free
data structures, eliminates virtually all data locking. ACE is architected into
the core of the ANTs Data Server and enables performance improvements over other
RDBMS’s.





ACE
consists of two key components:





·
            A
      highly efficient data processing
engine


·
            Lock-free
      data structures, enabling
concurrency





The
Data Processing Engine





For many years, shared data
manipulation due to locking in the database has been the bottleneck in
application performance and scalability. Our research and development team
developed a revolutionary way of organizing the work associated with
manipulating data. The data processing engine at the heart of the ANTs Data
Server reorganizes tasks so as to avoid locking. The result is an entirely new
approach to the process by which data is managed.





Lock-Free
Data Structures





Contention for shared data produces
two significant performance bottlenecks in data-intensive
applications:





·
            The
      necessity of locking records and in some cases entire indexes, to ensure
      data integrity. This results in significant delays due to lock
      waiting.


·
            Cache
      synchronization conflicts that occur when shared data is distributed in
      multiple caches or multiple clients





Our innovative lock-free data
structure technology, which virtually eliminates index locking, allows index
operations, which, to our knowledge, are not possible with existing RDBMS’s.
Locks not only cause waiting, they also can cause severe cache synchronization
conflicts, which ACE also eliminates. Operations that would significantly
decrease performance in an index-dependent application, such as adding or
modifying items, should, when using the ANTs Data Server, execute concurrently
at maximum speed.





Using the ANTs Data Server,
developers can design applications knowing that they will handle operations
under loads that are now generally impossible, even when the data are rapidly
changing. We have several patented and patent-pending designs for the
implementation and deployment of lock-free data structures.





Patents





We have developed several patented
technologies, all of which relate to ADS and several proprietary and
patent-pending technologies that relate to both ADS and ACS. We have filed
thirteen patent applications to obtain protection for our intellectual property.
We have been granted six patents. The remaining seven applications are pending
and we await the Patent and Trademark Office’s action. We also claim copyright,
trade secret and trademark protection in aspects of our business and technology
and new intellectual property is under development on an ongoing
basis.





Products





The
ANTs Data Server





The ANTs Data Server is an RDBMS that
can reduce costs and can improve performance in a wide range of applications. It
incorporates the ANTs Concurrency Engine, which provides unique performance and
cost-saving advantages that make ADS an attractive alternative to other RDBMS’s.
End-users of RDBMS’s, independent software vendors that bundle an RDBMS with
their products and other RDBMS vendors can use ADS or its technologies to lower
costs and gain competitive advantage.




5





In addition to its unique performance
technologies, ADS incorporates features that make it suitable for a wide range
of applications, including:





·
            It
      can be deployed on off-the-shelf
hardware


·
            It
      can be deployed on the Linux, Windows, Solaris and AIX operating
      systems


·
            It
      supports the SQL-92 language and popular features from
    SQL-99


·
            Its
      micro-threaded execution engine maximizes performance of multi-core CPUs
      and multi-processor servers


·
            Transactions
      are durably recorded to disk logs for backup, failover and
      recovery


·
            Automatic
      failover and recovery are built in





ADS contains many additional features
and provides a platform on which the ANTs R&D team can build significant new
features as the market demands.





The
ANTs Compatibility Server





Applications written to work with one
RDBMS are typically incompatible with other RDBMSs due to proprietary extensions
developed and popularized by RDBMS vendors. This has the effect of locking
customers into one RDBMS vendor because it would generally be cost-prohibitive
and too time-consuming to migrate an application from one RDBMS to another. We
are developing a middleware product, the ANTs Compatibility Server (ACS), that
natively translates these proprietary extensions from one RDBMS to another. This
product should allow customers to migrate applications from one RDBMS to another
more easily and at less cost.





Migrating applications is intended to
be a three-step process when using ACS:





1.
            Move
      the data – the large RDBMS vendors all have full-featured tools that allow
      customers to move data from other products to
  theirs.


2.
            Install
      ACS – once the data is migrated, ACS is installed and connected to the
      application and the new RDBMS.


3.
            Test
      and deploy – the application is first tested to ensure that it functions
      properly with the new RDBMS, and then the customer goes “live” with the
      application.





We have developed the underlying
technologies related to ACS. We have conducted successful pilot tests and expect
to launch ACS commercially in the first half of 2008.




Sales
and Marketing




The
Market





According
to IDC Research, the market for RDBMS products was $16 billion in 2006 and will
grow to $21 billion by 2010.   Oracle, Microsoft and IBM control
approximately 85% of this market. According to the numerous CTOs, database
architects and application developers at the target Global 2000 enterprises with
whom we have spoken, database infrastructure costs have become one of the most
expensive line items in the IT budget. These Global 2000 enterprises typically
have annual database “spends” in excess of tens and, in some cases, hundreds of
millions of dollars and their database budgets are growing annually. The
migration cost from one RDBMS to another, even to a low-cost open-source RDBMS,
is extensive due to lack of compatibility between the products’ proprietary
extensions. There is significant interest, confirmed by our discussions with
industry analysts and user groups, for a product that can provide the capability
to migrate an application from one RDBMS to another.





Strategy





Our go-to-market strategy adapts with
changes in the competitive structure of the RDBMS market.  The
refinement of our strategy is a continuous and iterative process, reflecting our
goal of providing a cost-effective solution across a wide variety of
applications.  Our strategy has recently included:




6





·
            Developing
      partnerships with Oracle, Microsoft, IBM, Sybase and others to bring ACS
      to market


·
            Focusing
      on large enterprise customers who can realize significant savings by
      migrating applications among leading RDBMS
  products.


·
            Focusing
      on industry segments where high-performance applications demand a
      high-performance database.


·
            Selling
      the ANTs Data Server through two sales
channels:





o
            Through
      independent software vendors who will incorporate the ANTs Data Server
      with their own product which they will sell to their customers,
      and


o
            Through
      selling partners such as value-added resellers and system integrators that
      generally have deep expertise in certain vertical or geographical markets
      and that integrate the best products to develop complete solutions for
      their customers.





ACS can
provide a solution for enterprises, to the problem of RDBMS lock-in and cost
escalation by enabling them to migrate applications among RDBMS’s and ACS can
provide a potentially significant competitive advantage for RDBMS vendors such
as Oracle, IBM, Microsoft and others that sell and support it, because for the
first time, they would have the ability to cost-effectively migrate applications
from their competitors’ products to their own.





We intend
to bring ACS to market through partners that will sell and support it. The most
likely partners are the large database vendors with which we are currently in
discussions regarding the resale and support of ACS.





If we are
successful in this go-to-market strategy for ACS, we intend to generate revenue
through royalties and professional services. If one or more of the large RDBMS
vendors resells ACS, we would expect to share in the license and maintenance
revenue. Each sale of ACS will require installation, testing, tuning and other
professional services. It is our intention to generate revenue by providing
those services.





If
successful, we expect to generate first revenues from ACS in 2008, though it is
premature to discuss product or service pricing or provide revenue estimates. It
is our goal to ensure that the total cost of migrating an application is less,
the risk lower and the project faster when using ACS.





ADS, our
high-performance RDBMS technology, is a suitable alternative for new and
existing applications where database performance is critical.  Such
applications include:





·
            High
      volume on-line transaction processing, such as in capital markets
      applications


·
            Telecom
      – messaging applications


·
            Real-time
      analytics for security and defense department
  applications





We have established relationships with
a number of partners that  resell the ANTs Data Server. These partners
include selling partners, with whom we are engaged as a means of gaining market
distribution and access to customers, and independent software vendor (“ISV”)
partners, who bundle the ANTs Data Server with their software products and sell
a “turn-key” solution to customers. Following are select results of our
partnering strategy:





·
            IBM
      – In January 2007 we announced that through a multinational solutions
      engagement agreement, ADS may be sold through IBM contracts to customers
      worldwide. First success: ADS selected for deployment on IBM blade servers
      in Raytheon, Inc.’s shipboard computing platform for the U.S.
      Navy.





·
            Four
      Js Development Tools, Ltd.– selling a turnkey solution comprised of its
      application development tool, Genero, bundled with ADS (which is rebranded
      by Four Js as Genero db). First success: Genero db selected by a Fortune
      100 retailer in mid-2006 for in-store applications; now deployed in over
      900 stores.





·
            Singlepoint,
      Inc. (formerly Wireless Services Corporation) – bundling ADS with
      Singlepoint’s text messaging platform to provide high performance for
      wireless carriers. First success: ADS replaces Microsoft SQL Server at
      Sprint, processing over 12 million messages per
  day.





We
generate ADS revenue through licensing, maintenance, and
integration/customization fees. We intend to license ACS to partners whom we
expect will bundle and resell it for use with their applications. We also intend
to license ADS through re-sellers and system integrators.  We began
selling the first commercial version of ADS in 2005 and have generated
approximately $1.1 million in revenues through December 31, 2007.




7


Competition





We have not identified any direct
competitor for ACS. Oracle, IBM and Microsoft encourage migration from
competitive products through use of their proprietary migration tools. These
tools often require substantial investment to rewrite applications. Customers
with which we have spoken are not receptive to migrating applications due to the
expense and risk of such rewrites. Our ACS on the other hand intends to allow
low-cost migration with minimal modification to the application.





ADS
operates in the high-performance segment of the RDBMS market and competes
against other high-performance, general-purpose and compatible
RDBMS’s.





Competition for ADS in the
high-performance segment comes from in-memory databases such as the TimesTen
product from Oracle and the Solid Information Technology product (acquired by
IBM in January 2008), from specialty vendors such as Kx Systems, Inc. and FAME
Information Systems, Inc., and also from the general-purpose RDBMS vendors:
Oracle, IBM, Microsoft, MySQL AB, InterSystems Corporation and Sybase,
Inc.  The general-purpose vendors often encourage customers to solve
high-performance problems by upgrading hardware and by contracting with
high-cost consulting services to develop work-arounds to the bottlenecks found
in their products.





Business
conditions in the high-performance RDBMS market are highly competitive for a
number of reasons, including: the market is dominated by very large companies
with extensive financial, marketing, and engineering resources; the market is
well-established and some customers have built up extensive infrastructure
around competitive RDBMS products and expect high levels of both features and
service from an RDBMS vendor. Our success will likely require that we win
business from established competitors, and as a new entrant in the RDBMS market,
our product may have less functionality than customers expect; making sales of
ADS more challenging.





Current
Operations





Our
operations currently comprise (i) development of the ANTs Compatibility Server,
middleware that for the first time, brings the promise of a fast, cost-effective
method for customers to move applications from one database to another and
enables enterprises to achieve cost efficiencies by consolidating their
applications onto fewer databases, and (ii) marketing and supporting the ANTs
Data Server, a relational database management system that can reduce costs and
improve application performance. Our headquarters are located in Burlingame,
California. We work with two contract development organizations in India and
have individual contractors who provide development and consulting services from
Europe, Australia and India as well as other parts of the United
States.





We have
financed operations through private offerings to accredited investors to whom we
have sold common stock and issued convertible promissory notes and warrants. We
expect to continue to raise capital for operations through such private
offerings until such time as sales revenue offsets expenses. We believe we have
sufficient funds to cover operations into the second fiscal quarter of 2008 at
the expected expense rate. We anticipate our focus over the next year will be on
continued development, marketing both ACS and ADS and supporting
customers.





Employees





As of
March 1, 2008, we had 31 full-time employees, all based in the United States. Of
the total number, 26 were engaged in research, development and customer support,
two in business development/marketing, and three in general, administrative and
finance. We have not experienced work stoppages, are not subject to any
collective bargaining agreement and believe that our relationship with our
employees is good.





Available
Information





Our Annual Report on Form 10K,
Quarterly Reports on Form 10Q, Current Reports on Form 8K and amendments to
reports filed or furnished pursuant to Sections 13(a) and 15 (d) of the
Securities and Exchange Act of 1934, as amended, are available free of charge on
our Investor Relations Web site at www.ants.com as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.  The information posted on our website is not
incorporated into this Annual Report on Form 10-K.




8





Executive
Officers





ANTs
executive officers and principal employees as of December 31, 2007:







Name
            Age
            PositionJoseph
      Kozak
            57
            Chairman,
      President and Chief Executive Officer, Class 1 Director, term expires in
      2010





Clifford
      Hersh
            60
            Managing
      Director and Chief Scientist





Kenneth
      Ruotolo.
            47
            Chief
      Financial Officer, Executive Vice President, Finance and Administration,
      and Secretary





Jeffrey
      R. Spirn, Ph.D.
            59
            Vice
      President, Research and Development





Joseph
Kozak – Chairman, President and Chief Executive Officer




Joseph Kozak joined ANTs software inc.
in June 2005 as President and was named Chief Executive Officer and appointed to
the Board of Directors in August 2006 and was appointed Chairman of the Board of
Directors in October 2007. Mr. Kozak brings 25 years of front-line leadership
experience in sales, marketing and business development. Mr. Kozak joined ANTs
from Oracle Corporation, where he was Vice President of Industry Sales. While
with Oracle he defined and executed global strategies for retail,
distribution, life science, process manufacturing, and consumer packaged goods
industries. He also managed Oracle's acquisition of Retek, Inc. a $630 million
purchase in the retail applications space. Prior to Oracle, Mr. Kozak was CEO of
Lombardi Software a manufacturer of business process management solutions. He
was also a partner with Ernst and Young, LLP, in the retail and consumer
packaged goods division; Vice President of Sales for SAP America, where he was
responsible for the retail distribution and consumer goods business units
for the Americas; and Mr. Kozak held numerous management positions with AT&T
and IBM.




Clifford
Hersh – Managing Director and Chief Scientist





Clifford Hersh joined ANTs in March
1997. Previously, he was a founder and Chief Executive Officer of Move
Resources, Inc. He was also Vice President of Engineering for Array
Technologies, Inc. and Director of Advanced Development at Genigraphics
Corporation.  Mr. Hersh received a bachelor degree in mathematics from
the University of California at Berkeley, and a Master of Science degree in
engineering from the Federal Institute of Technology, Zurich,
Switzerland.





Kenneth
Ruotolo – Executive Vice President Finance and Operations, Chief Financial
Officer and Secretary





Kenneth
Ruotolo joined ANTs in June 2001. Before joining the Company, Mr. Ruotolo was a
founder and served as Vice President of Finance and Operations for eStar, Inc.
an internet-based content developer and syndicator. Prior to eStar, Mr. Ruotolo
was a partner for twelve years with era2, an interactive design and internet
consulting agency. Mr. Ruotolo holds a B.A. degree in Economics from the
University of California at Davis and an M.B.A. from Northeastern
University.





Jeffrey
R. Spirn, Ph.D. - Vice President Research and Development





Jeffrey
Spirn joined ANTs in March 2000, became Director of Engineering in February 2001
and was promoted to Vice President of Research and Development in September
2001. Before joining ANTs, Dr. Spirn was a software architect at Oracle, where
he worked on application server, naming, and multithreading issues. Prior to
that, Dr. Spirn worked for Sun Microsystems and in the HP and DEC research labs.
Before his industrial career, Dr. Spirn was a Computer Science Professor at
Brown and Penn State Universities, and held visiting positions at Bell
Laboratories and the University of Hawaii. During this period, he published one
book and many technical articles on network and operating system design and
performance modeling. Dr. Spirn holds a Ph.D. in Electrical Engineering/Computer
Science from Princeton University, and a B.S. in Electrical Engineering
from M.I.T.




9




ITEM 1A.  RISK FACTORS





In addition to other information in
this Form 10-K, the following risk factors should be carefully considered in
evaluating our business since it operates in a highly changing and complex
business environment that involves numerous risks, some of which are beyond our
control. The following discussion highlights a few of these risk factors, any
one of which may have a significant adverse impact on our business, operating
results and financial condition.  As a result of the risk factors set
forth below and elsewhere in this 10-K, and the risks discussed in our other
Securities and Exchange Commission filings, actual results could differ
materially from those projected in any forward-looking statements.





We face significant risks, and the
risks described below may not be the only risks we face.  Additional
risks that we do not know of or that we currently consider immaterial may also
impair our business operations.  If any of the events or circumstances
described in the following risks actually occurs, our business, financial
condition or results of operations could be harmed and the trading price of our
common stock could decline.





Market acceptance
of our products and services is not guaranteed and our business model is
evolving..





We are at an early stage of development
and our revenue will depend upon market acceptance and utilization of our
products and services, including the ACS now under development. Our products are
under constant development and are still maturing. Customers may be reluctant to
purchase products from us because they are unproven they may be concerned about
our financial viability and our ability to provide a full range of support
services. Given these risks, customers may only be willing to purchase our
products through partners who are not faced with similar challenges. We may have
difficulty finding partners to resell our products. Also, due to economic
conditions, including a possible future recession, some potential customers may
have tightened budgets for evaluating new products and technologies and the
evaluation cycles may be much longer than in the past. There can be no assurance
that our product and technology development or support efforts will result in
new products and services, or that they will be successfully
introduced.





If we deliver
products with defects, our credibility will be harmed and the sales and market
acceptance of our products will decrease.





Our product and services are complex
and have at times contained errors, defects and bugs.  If we deliver
products with errors, defects or bugs, our credibility and the market acceptance
and sales of our products would be harmed.  Further, if our products
contain errors, defects or bugs, we may be required to expend significant
capital and resources to alleviate such problems.  We may agree to
indemnify our customers in some circumstances against liability arising from
defects in our products. Defects could also lead to product liability as a
result of product liability lawsuits against us or against our customers. We
carry product and information liability and errors and omissions insurance, but
in the event that we are required to defend more than a few such actions, or in
the event that we are found liable in connection with such an action, our
business and operations may be severely and materially adversely
affected.





A
failure to obtain financing could prevent us from executing our business plan or
operate as a going concern.





We anticipate that current cash
resources will be sufficient for us to execute our business plan into the second
fiscal quarter of 2008.  If further financing is not obtained we will
not be able to continue to operate as a going concern.  We believe
that securing additional sources of financing to enable us to continue the
development and commercialization of our proprietary technologies will be
difficult and there is no assurance of our ability to secure such
financing.  A failure to obtain additional financing could prevent us
from making expenditures that are needed to pay current obligations, allow us to
hire additional personnel and continue development of our product and
technology.  If we raise additional financing by selling equity or
convertible debt securities, the relative equity ownership of our existing
investors could be diluted or the new investors could obtain terms more
favorable than previous investors.  If we raise additional funds
through debt financing, we could incur significant borrowing costs and be
subject to adverse consequences in the event of a default.





We depend on a
limited number of customers for a significant portion of our
revenue.





During
2007 our three largest customers accounted for approximately 94% of our revenue.
Revenue from one of these customers was $213,212, or 59% of total revenues.
Revenues from the second and third customers were $63,281, or 18% of total
revenues, and $60,000 or 17% of total revenues, respectively. A decrease in
revenue from any of our largest customers for any reason, including a decrease
in pricing or activity, or a decision to either utilize another vendor or to no
longer use some or all of the products and services we provide, could have a
material adverse affect on our revenue.
  10





Our ANTs Data
Server product competes with products offered by large
companies.





We operate in a highly competitive
industry.  Although we believe that our ANTs Data Server technology is
unique, can be protected, and, if adopted, will confer benefits to customers, we
face very large competitors with greater resources who may adopt various
strategies to block or slow our market penetration, thereby straining our more
limited resources.  We are aware of efforts by competitors to
introduce doubt about our financial stability as we compete to make sales and
win customers and business.  Large competitors may also seek to hinder
our operations through attempts to recruit key staff with exceptionally
attractive terms of employment, including signing bonuses, or by offer of highly
competitive terms to potential or newly acquired customers.





Our
ANTs Compatibility Server (ACS) product is at an early stage and a business
model is not yet established.





We began developing the ANTs
Compatibility Server in 2007 and have not yet begun selling the product. We
anticipate that we will sell ACS through partners, although we have not yet
executed reselling agreements with any partner. Consequently, we have not yet
established pricing for ACS and have only preliminary estimates as to the
possible revenues and expenses associated with sales, support and delivery. It
is possible that we will not generate enough revenue to offset the expenses and
that the ACS line of business will not be profitable.




We
have incurred indebtedness.




We
have incurred debt in the past year and may incur substantial additional debt in
the future.  A significant portion of our future cash flow from
operating activities may be dedicated to the payment of interest and the
repayment of principal on our indebtedness.  There is no guarantee
that we will be able to meet our debt service obligations.  If we are
unable to generate sufficient cash flow or obtain funds for required payments,
or if we fail to comply with our debt obligations, we will be in
default.  In addition, we may not be able to refinance our debt on
terms acceptable to us, or at all.  Our indebtedness could limit our
ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions or other purposes in the
future, as needed; to plan for, or react to, changes in technology and in our
business and competition; and to react in the event of an economic
downturn.





We will need to
continue our product development efforts.





We believe that the market for our
products will be characterized by increasing technical
sophistication.  We also believe that our eventual success will depend
on our ability to continue to provide increased and specialized technical
expertise.  There is no assurance that we will not fall
technologically behind competitors with greater resources.  Although
we believe that we enjoy a lead in our product development, and believe that our
patents on ADS and the ACE and trade secrets provide some protection, we will
likely need significant additional capital in order to maintain that lead over
competitors with more resources.





We rely upon
reselling partners and independent software vendors for product
sales.





A significant portion of our sales has
been and we believe, will continue to be made through reselling partners and
independent software vendors (together “Partners”). As a result, our success may
depend on the continued sales efforts of Partners, and identifying and entering
into agreements with additional Partners.  The use of Partners
involves certain risks, including risks that they will not effectively sell or
support our products, that they will be unable to satisfy their financial
obligations with us, and that they will cease operations.  Any
reduction, delay or loss of orders from Partners may harm our
results.  There can be no assurance that we will identify or engage
qualified Partners in a timely manner, and the failure to do so could have a
material adverse affect on our business, financial condition and results of
operations.





If we are unable
to protect our intellectual property, our competitive position would be
adversely affected.





We rely on patent protection, as well
as trademark and copyright law, trade secret protection and confidentiality
agreements with our employees and others to protect our intellectual
property.  However, we have not yet filed any patent applications on
any technology or inventions included or incorporated in the ACS
product.  Despite our precautions, unauthorized third parties may copy
our products and services or reverse engineer or obtain and use information that
we regard as proprietary.  We have filed thirteen patent applications
with the United States Patent and Trademark Office and intend to file
more.  Six patents have been granted; however, we do not know if the
remaining seven applications will be granted or whether we will be successful in
prosecuting any future patents.  In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States.  Our means of protecting our proprietary rights may
not be adequate and third parties may infringe or misappropriate our patents,
copyrights, trademarks and similar proprietary rights.  If we fail to
protect our intellectual property and proprietary rights, our business,
financial condition and results of operations would suffer.  We
believe that we do not infringe upon the proprietary rights of any third party,
and no third party has asserted an infringement claim against us.  It
is possible, however, that such a claim might be asserted successfully against
us in the future.  We may be forced to suspend our operations to pay
significant amounts to defend our rights, and a substantial amount of the
attention of our management may be diverted from our ongoing business, all of
which would materially adversely affect our business.




11




We focus on the
research and development of our proprietary technologies.





We believe that these technologies are
the basis for marketable commercial products.  However, there can be
no assurance of this, and it is possible that our proprietary technologies and
products will have little commercial benefit or potential.  In
addition, from our inception to the present, we have not recognized any
substantial operating revenues.





We depend on our
key personnel and may have difficulty attracting and retaining the skilled staff
we need to execute our growth plans.





Our success will be dependent largely
upon the personal efforts of our Chief Executive Officer, Joseph Kozak and other
senior managers.  The loss of key staff could have a material adverse
effect on our business and prospects.  To execute our plans, we will
have to retain current employees. Competition for highly skilled employees with
technical, management, marketing, sales, product development and other
specialized training is intense.  We may not be successful in
retaining such qualified personnel. Specifically, we may experience increased
costs in order to retain skilled employees. If we are unable to retain
experienced employees as needed, we would be unable to execute our business
plan.





We face rapid
technological change.





The market for our products and
services is characterized by rapidly changing technologies, extensive research
and the introduction of new products and services. We believe that our future
success will depend in part upon our ability to continue to develop and enhance
ACS and to develop, manufacture and market new products and services. As a
result, we expect to continue to make a significant investment in engineering,
research and development.  There can be no assurance that we will be
able to develop and introduce new products and services or enhance our initial
products in a timely manner to satisfy customer needs, achieve market acceptance
or address technological changes in our target markets. Failure to develop
products and services and introduce them successfully and in a timely manner
could adversely affect our competitive position, financial condition and results
of operations.





If we experience
rapid growth, we will need to manage such growth well.





We may experience substantial growth in
the size of our staff and the scope of our operations, resulting in increased
responsibilities for management.  To manage this possible growth
effectively, we will need to continue to improve our operational, financial and
management information systems, will possibly need to create departments that do
not now exist, and hire, train, motivate and manage a growing number of
staff.  Due to a competitive employment environment for qualified
technical, marketing and sales personnel, we expect to experience difficulty in
filling our needs for qualified personnel.  There can be no assurance
that we will be able to effectively achieve or manage any future growth, and our
failure to do so could delay product development cycles and market penetration
or otherwise have a material adverse effect on our financial condition and
results of operations.





We could face
information and product liability risks and may not have adequate
insurance.





Our products may be used to manage data
from critical business applications. We may become the subject of litigation
alleging that our products were ineffective or disruptive in our treatment of
data, or in the compilation, processing or manipulation of critical business
information.  Thus, we may become the target of lawsuits from injured
or disgruntled businesses or other users. We carry product and information
liability and errors and omissions insurance, but in the event that we are
required to defend more than a few such actions, or in the event our products
are found liable in connection with such an action, our business and operations
may be severely and materially adversely affected.




12





Future
profitability is not guaranteed.





We have not recognized any substantial
operating revenues to date.  Assuming we can attract sufficient
financing, and revenues increase, there is no assurance that our plans will be
realized or that we will achieve break-even status or profitability in the
future.





Changes to
financial accounting standards may affect our results of operations and cause us
to change business practices.





We prepare
financial statements in conformity with U.S. generally accepted accounting
principles.  These accounting principles are subject to interpretation
by the American Institute of Certified Public Accountants, the Public Company
Accounting Oversight Board, the SEC and various other bodies formed to interpret
and create appropriate accounting principles.  A change in those
principles can have a significant affect on our reported results and may affect
the way we report a transaction which is completed before a change in those
principles is announced.  Changes to those rules or the questioning of
current practices may adversely affect our reported financial results or the way
we conduct business.  For example, accounting principles affecting
many aspects of our business, including rules relating to equity-related
compensation, have recently been revised and new regulations have been
added.  The Financial Accounting Standards Board and other agencies
finalized changes to U.S. generally accepted accounting principles that required
us, starting January 1, 2006, to record a charge to earnings for employee stock
option grants and other equity incentives. We will have significant ongoing
accounting charges resulting from option grant and other equity incentive
expensing that could reduce net income or increase losses.  In
addition, since we historically used equity-related compensation as a component
of our total employee compensation program, the accounting and regulation
changes could make the use of equity-related compensation less attractive and
therefore make it more difficult to attract and retain employees.





There is a
limited market for our common stock.





Our common stock is not listed on any
exchange and trades in the over-the-counter (the “OTC”) market.  As
such, the market for our common stock is limited and is not regulated by the
rules and regulations of any exchange. Further, the price of our common stock
and its volume in the OTC market may be subject to wide fluctuations. Our stock
price could decline regardless of our actual operating performance, and
stockholders could lose a substantial part of their investment as a result of
industry or market-based fluctuations. Our stock trades relatively
thinly.  If a more active public market for our stock is not
sustained, it may be difficult for stockholders to sell shares of our common
stock.  Because we do not anticipate paying cash dividends on our
common stock for the foreseeable future, stockholders will not be able to
receive a return on their shares unless they are able to sell
them.  The market price of our common stock will likely fluctuate in
response to a number of factors, including but not limited to, the
following:





·
            sales,
      sales cycle and market acceptance or rejection of our
      products;


·
            our
      ability to sign Partners who are successful in selling our
      products


·
            economic
      conditions within the database
industry;


·
            our
      failure to develop and commercialize the
ACS;


·
            the
      timing of announcements by us or our competitors of significant products,
      contracts or acquisitions or publicity regarding actual or potential
      results or performance thereof; and


·
            domestic
      and international economic, business and political
    conditions.





We have a long
corporate existence and were inactive during much of our corporate
history.





We were formed as the Sullivan
Computer Corporation, incorporated in Delaware in January 1979.  We
were privately owned until late 1986, at which time our common stock began
trading on the over-the-counter market.  This was a result of the
registration of our common stock pursuant to a merger with CHoPP Computer
Corporation, a British Columbia corporation.  During the period from
mid-1987 through late 1999, we had few or no employees. Our operating activities
were limited and were largely administered personally by our former Chairman.
Due to the passage of time and the poor condition of financial and other
records, there can be no assurance that all matters have been addressed at this
date.





Failure to
maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock
price.





Section 404 of the Sarbanes-Oxley
Act of 2002 and the related rules and regulations of the SEC require annual
management assessments of the effectiveness of our internal control over
financial reporting and a report by our independent registered public accounting
firm on these internal controls.  If we fail to adequately maintain
compliance with, or maintain the adequacy of, our internal control over
financial reporting, as such standards are modified, supplemented or amended
from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the
related rules and regulations of the SEC.  If we cannot favorably
assess, or our independent registered public accounting firm is unable to
provide an unqualified attestation report on the effectiveness of our internal
controls over financial reporting, investor confidence in the reliability of our
financial reports may be adversely affected, which could have a material adverse
effect on our stock price.




13




We have
indemnified our officers and directors.





We have indemnified our Officers and
Directors against possible monetary liability to the maximum extent permitted
under Delaware law.





Limitation on
ability for control through proxy contest.





Our Bylaws provide for a Board of
Directors to be elected in three classes.  This classified Board may
make it more difficult for a potential acquirer to gain control of us by using a
proxy contest, since the acquirer would only be able to elect approximately
one-third of the directors at each shareholders’ meeting held for that
purpose.





Our actual
results could differ materially from those anticipated in our forward-looking
statements.





This report contains forward-looking
statements within the meaning of the federal securities laws that relate to
future events or future financial performance.  When used in this
report, you can identify forward-looking statements by terminology such as
“believes,” “anticipates,” “plans,” “predicts,” “expects,” “estimates,”
“intends,” “will,” “continue,” “may,” “potential,” “should” and similar
expressions.  These statements are only expressions of
expectation.  Our actual results could, and likely will, differ
materially from those anticipated in such forward-looking statements as a result
of many factors, including those set forth above and elsewhere in this report
and including factors unanticipated by us and not included
herein.  Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.  Neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We assume no duty to update any of the forward-looking statements
after the date of this report or to conform these statements to actual
results.  Accordingly, we caution readers not to place undue reliance
on these statements.








ITEM 1B. UNRESOLVED STAFF COMMENTS





None.





ITEM 2.  PROPERTIES





Our headquarters are located at 700
Airport Blvd., Suite 300, Burlingame, California.  We lease
approximately 15,000 square feet of office space.





ITEM 3.  LEGAL PROCEEDINGS





We are not a party to any material
pending legal proceedings.





ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





There were no matters submitted to our
shareholders for a vote from October 1, 2007 to December 31, 2007.




14





PART II


ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





(a)
            
            Price
      Range of Common Stock





Our common equity is traded on the
Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “ANTS”.





The following is the range of high and
low closing bid prices of our stock, for the periods indicated
below.  This information was obtained from Yahoo! Finance Historical
Quotes, and can be found at the following Internet address: http://finance.yahoo.com/q/hp?s=ANTS.OB.


High
              
              
              LowQuarter
      Ended December 31, 2007
              
              $
              1.45
              
              
              $
              0.65Quarter
      Ended September 30, 2007
              
              
              2.14
              
              
              
              1.50Quarter
      Ended June 30, 2007
              
              
              2.00
              
              
              
              1.49Quarter
      Ended March 31, 2007
              
              
              2.56
              
              
              
              1.92Quarter
      Ended December 31, 2006
              
              $
              2.85
              
              
              $
              1.99Quarter
      Ended September 30, 2006
              
              
              2.29
              
              
              
              2.00Quarter
      Ended June 30, 2006
              
              
              3.03
              
              
              
              2.11Quarter
      Ended March 31, 2006
              
              
              2.65
              
              
              
              2.00




The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.





As of
February 29, 2008 there were 57,398,445 shares of common stock issued and
outstanding and 1,358 registered holders of record of our common
stock.





COMPANY
STOCK PRICE PERFORMANCE





The
following information shall not be deemed to be “soliciting material” or to be
“filed” with the Securities and Exchange Commission nor shall this information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to
the extent that ANTs specifically incorporates it by reference into a
filing.





The graph
below compares the cumulative total shareholder return on ANTs software, inc.
(ANTs) common stock for the last five full fiscal years with the cumulative
return on the NASDAQ composite and the Peer group for the same period. The graph
assumes that $100 was invested in ANTs common stock and in each of the other
indices on December 31, 2002 and that all dividends were reinvested. ANTs has
never paid cash dividends on its stock. The comparisons in the graph below are
based on historical data, with ANTs common stock prices based on the closing
price on the dates indicated and are not intended to forecast the possible
future performance of ANTs common stock.




15















2002
            
            
            2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007ANTs
      software inc.
            
            
            100.00
            
            
            
            116.25
            
            
            
            272.50
            
            
            
            260.00
            
            
            
            302.50
            
            
            
            88.75NASDAQ
      Composite
            
            
            100.00
            
            
            
            150.79
            
            
            
            164.60
            
            
            
            168.08
            
            
            
            185.55
            
            
            
            211.29Peer
      Group
            
            
            100.00
            
            
            
            102.19
            
            
            
            138.05
            
            
            
            120.21
            
            
            
            147.74
            
            
            
            323.15





(b)
            
            Dividend
      Policy





We have not declared or paid cash
dividends or made distributions in the past, and do not anticipate that we will
pay cash dividends or make distributions in the foreseeable future.





(c)
            
            Recent
      Sales of Unregistered Securities





In October
2007, we sold a convertible promissory note in the amount of $2,000,000 to an
accredited investor. Pursuant to the sale, we issued a warrant to the investor
covering 1,333,333 shares of our common stock with a per share exercise price of
$3.25. The warrant expires 36 months from issuance. The Note bears interest at
the rate of 10% per annum (simple interest) due and payable at the end of each
calendar quarter. The Note matures 36 months from issuance and is convertible
into shares of our common stock, at the election of the holder, at a per share
price of $1.50.  The Note is prepayable without penalty if (i) the bid
price of our common stock equals or exceeds $4.00 per share for ten consecutive
trading days and (ii) we provide the investor with 20 trading days’ notice of
our intent to prepay. The net proceeds were used to fund operations. The sales
of these securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





In
December 2007, we sold a convertible promissory note in the amount of
$1,003,226.  Pursuant to the sale, we issued a warrant to the investor
covering 668,817 shares of our common stock with a per share exercise price of
$3.25. The warrant expires 36 months from issuance. The Note bears interest at
the rate of 10% per annum (simple interest) due and payable at the end of each
calendar quarter. The Note matures 36 months from issuance and is convertible
into shares of our common stock, at the election of the holder, at a per share
price of $1.50.  The Note is prepayable without penalty if (i) the bid
price of our common stock equals or exceeds $4.00 per share for ten consecutive
trading days and (ii) we provide the investor with 20 trading days’ notice of
our intent to prepay. The net proceeds were used to fund
operations.  The sales of these securities were made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.







Stock
Repurchases




There were no shares repurchased by us
or our affiliates during 2007.




16




ITEM 6.  SELECTED FINANCIAL DATA





The following selected financial data
are derived from our financial statements. This data should be read in
conjunction with the financial statements and notes and with Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.








ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Fiscal
      Years ended December 31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003Operations:Revenue
                
                $
                359,706
                
                
                $
                287,832
                
                
                $
                466,620
                
                
                $
                -
                
                
                $
                -Operating
      expenses
                
                
                16,692,143
                
                
                
                15,532,252
                
                
                
                9,154,979
                
                
                
                5,060,292
                
                
                
                3,616,351Net
      loss
                
                
                (16,313,223
                )
                
                
                (15,125,903
                )
                
                
                (8,704,497
                )
                
                
                (5,060,061
                )
                
                
                (3,587,340
                )Basic
      and diluted net loss per share
                
                $
                (0.29
                )
                
                $
                (0.30
                )
                
                $
                (0.22
                )
                
                $
                (0.16
                )
                
                $
                (0.15
                )Financial
      Position:Cash
      and cash equivalents
                
                $
                4,480,694
                
                
                $
                4,698,949
                
                
                $
                6,381,932
                
                
                $
                1,448,724
                
                
                $
                541,725Working
      capital
                
                
                3,007,543
                
                
                
                4,130,830
                
                
                
                5,525,616
                
                
                
                1,196,604
                
                
                
                (220,883
                )Total
      assets
                
                
                5,939,803
                
                
                
                5,996,171
                
                
                
                7,436,357
                
                
                
                1,868,616
                
                
                
                921,355Stockholders'
      (deficit) equity
                
                $
                (5,044,880
                )
                
                $
                3,823,010
                
                
                $
                6,412,586
                
                
                $
                1,529,181
                
                
                $
                (135,315
                )


Results of Operations





The
results of operations for the fiscal years ended December 31, 2007, 2006 and
2005 are summarized in the table below.




2007
              
              
              %
      Change
              
              
              2006
              
              
              %
      Change
              
              
              2005Revenues
              
              $
              359,706
              
              
              
              25%
              
              
              $
              287,832
              
              
              
              -38%
              
              
              $
              466,620Cost
      of goods sold
              
              
              12,677
              
              
              
              -47%
              
              
              
              23,893
              
              
              
              N/A
              
              
              
              -Gross
      profit
              
              
              347,029
              
              
              
              31%
              
              
              
              263,939
              
              
              
              -43%
              
              
              
              466,620Operating
      expenses
              
              
              16,692,143
              
              
              
              7%
              
              
              
              15,532,252
              
              
              
              70%
              
              
              
              9,154,979Loss
      from operations
              
              
              (16,345,114
              )
              
              
              7%
              
              
              
              (15,268,313
              )
              
              
              76%
              
              
              
              (8,688,359
              )Other
      income (expense), net
              
              
              31,891
              
              
              
              -78%
              
              
              
              142,410
              
              
              
              -982%
              
              
              
              (16,138
              )Net
      loss
              
              $
              (16,313,223
              )
              
              
              8%
              
              
              $
              (15,125,903
              )
              
              
              74%
              
              
              $
              (8,704,497
              )Net
      loss per share -basic
      and diluted
              
              $
              (0.29
              )
              
              
              -3%
              
              
              $
              (0.30
              )
              
              
              36%
              
              
              $
              (0.22
              )Shares
      used in computing basic anddiluted
      net loss per share
              
              
              56,618,971
              
              
              
              12%
              
              
              
              50,474,155
              
              
              
              25%
              
              
              
              40,418,575





Revenues





Revenues
for all three years relate to the ANTs Data Server and consist of license fees,
recognition of deferred maintenance and support over the term of the agreements,
royalties from third parties that resell ADS, and professional services
fees.  Professional services revenues relate to post-sales
consulting.  During 2007, we modified our go-to-market strategy,
eliminating direct sales of ADS and selling solely through
partners.




17





During
2007, we recognized $360 thousand in revenue, an increase of $72 thousand from
fiscal 2006.  Of the total recognized:





·
            $259
      thousand were license and royalties, an increase of $101 thousand versus
      2006.  The increase was primarily due to a first-time minimum
      royalty payment, which was offset by lower license revenue from direct
      sales;


·
            $101
      thousand were maintenance and support fees, a $5 thousand decrease from
      the previous year; and,


·
            We
      did not provide any professional services during 2007, resulting in a $24
      thousand decrease in professional services revenue from 2006 as no such
      services were requested by our customers in
  2007.





During
2006, we recognized $288 thousand in revenue, a decrease of $179 thousand from
fiscal 2005.  Of the total recognized:





·
            $158
      thousand was license revenues, a decrease of $240 thousand versus
      2005.  The decrease was due to our inability to compete
      effectively against larger and more established database companies and the
      limited market for our product;


·
            $106
      thousand was maintenance and support fees from
      current  customers, an increase of $56 thousand versus 2005;
      and


·
            $24
      thousand was professional services fees, an increase of $5 thousand versus
      2005.





Cost
of Revenues





Cost of
revenues was $13 thousand, $24 thousand and $0 for fiscal 2007, 2006 and 2005,
respectively.  Costs of revenues consist of third-party commissions
and services and equipment needed to install the ANTs Data Server at a customer
sites.





Operating
Expenses





Operating
expenses for the fiscal years ending December 31, 2007, 2006 and 2005 were as
follows:




2007
              
              
              % of
                Total
              
              
              %
      Change
              
              
              2006
              
              
              % of
                Total
              
              
              %
      Change
              
              
              2005
              
              
              % of
                TotalSales
      and marketing
              
              $
              2,939,481
              
              
              
              18%
              
              
              
              -43%
              
              
              $
              5,164,937
              
              
              
              33%
              
              
              
              43%
              
              
              $
              3,618,324
              
              
              
              40%Research
      and development
              
              
              9,442,521
              
              
              
              56%
              
              
              
              40%
              
              
              
              6,736,381
              
              
              
              44%
              
              
              
              88%
              
              
              
              3,589,565
              
              
              
              39%General
      and administrative
              
              
              4,310,141
              
              
              
              26%
              
              
              
              19%
              
              
              
              3,630,934
              
              
              
              23%
              
              
              
              86%
              
              
              
              1,947,090
              
              
              
              21%Total
      operating expenses
              
              $
              16,692,143
              
              
              
              100%
              
              
              
              7%
              
              
              $
              15,532,252
              
              
              
              100%
              
              
              
              70%
              
              
              $
              9,154,979
              
              
              
              100%





Our
primary expenses are salaries, benefits and consulting fees relating to
development and marketing the ANTs Compatibility Server (ACS) and development
and support of the ANTs Data Server (ADS) and supporting ADS. We completed
development of ADS in 2005 and began sales and support of that product during
that year.  We began development of ACS in early
2007.  During 2007 we shifted most resources to development of ACS and
eliminated direct sales and marketing of ADS.





The number
and distribution of full-time employees as of December 31, 2007, 2006 and 2005
were as follows:




2007
              
              
              % of
                Total
              
              
              2006
              
              
              % of
                Total
              
              
              2005
              
              
              % of
                TotalSales
      and marketing
              
              
              3
              
              
              
              8%
              
              
              
              12
              
              
              
              23%
              
              
              
              13
              
              
              
              35%Research
      and development
              
              
              29
              
              
              
              78%
              
              
              
              32
              
              
              
              62%
              
              
              
              18
              
              
              
              49%General
      and administrative
              
              
              5
              
              
              
              14%
              
              
              
              8
              
              
              
              15%
              
              
              
              6
              
              
              
              16%Headcount
      at end of period
              
              
              37
              
              
              
              100%
              
              
              
              52
              
              
              
              100%
              
              
              
              37
              
              
              
              100%




18


Sales
and Marketing Expenses





Sales and
marketing expenses consist primarily of employee salaries and benefits
(including stock-based compensation), consultants’ fees, travel, marketing
programs, sales literature and presentations, technical pre-sales consulting and
allocation of corporate overhead.





Changes to
key sales and marketing expenses and headcount for the years ended December
31,




2007
              
              
              %
      Change
              
              
              
              2006*
              
              
              %
      Change
              
              
              
              2005*Employee
      compensation and benefits
              
              
              1,348,694
              
              
              
              -43%
              
              
              
              2,374,501
              
              
              
              25%
              
              
              
              1,901,491Marketing
      programs
              
              
              946,605
              
              
              
              -47%
              
              
              
              1,782,274
              
              
              
              60%
              
              
              
              1,114,558Stock-based
      compensation
              
              
              189,188
              
              
              
              -15%
              
              
              
              221,586
              
              
              
              320%
              
              
              
              52,791Travel
              
              
              290,324
              
              
              
              -45%
              
              
              
              526,770
              
              
              
              53%
              
              
              
              343,229Headcount
      at end of period
              
              
              3
              
              
              
              -75%
              
              
              
              12
              
              
              
              -8%
              
              
              
              13





* For the
purposes of our analysis of key expenses, fiscal 2006 and 2005 results have been
revised from previously reported amounts in both employee compensation and
benefits and stock-based compensation, as follows:





o
            We
      have combined certain employee-related benefits expenses together in our
      presentation of employee compensation and
  benefits.


o
            Due
      to reductions in headcount and multiple functional responsibilities of
      certain employees, effective January 1, 2007, we began allocating a
      portion of certain employees’ salaries and bonuses between departments
      based on each employee’s contribution to that
  department.


o
            Stock-based
      compensation has been revised to include expenses recognized on issuances
      of warrants and options to
non-employees.





2007 versus 2006
Results





Total
sales and marketing expenses decreased by $2.2 million, a 43% decrease in 2007
versus 2006 due primarily to the following:





·
            Employee
      compensation and benefits decreased 43% in 2007 versus 2006 due
      to reductions in our direct sales team as we implemented our ADS
      partner strategy and due to the transfer of pre-sales technical staff to
      research and development.


·
            Marketing
      programs decreased 47% due to our change in go-to-market strategy. By
      selling through partners rather than selling directly to end-users, we
      eliminated end-user marketing and lead-generation programs and reduced
      advertising and trade-show
attendance.


·
            Stock-based
      compensation decreased 15% primarily due to reduced headcount from 12 at
      the end of fiscal 2006 to 3 at the end of fiscal
  2007.


·
            Travel
      decreased 45% because our partnering strategy required less travel and due
      to the reduction in our sales team.





2006 versus 2005
Results





Total sales and marketing expenses
increased by $1.5 million in 2006 compared to 2005, due primarily to the
following:





·
            Expenses
      related to direct marketing activities such as trade shows, advertising,
      lead generation and other marketing events increased
      significantly;


·
            Employee-related
      expenses increased as the prior year’s staffing increases were realized
      over the course of a full year;


·
            Recognition
      of employee stock-based compensation expense for all employee stock option
      issuances as required by SFAS 123(R) which was implemented January 1,
      2006.  In 2005, stock-based compensation consisted expenses
      recognized for the issuance of options to non-employees and to a lesser
      extent, acceleration of vesting of employee stock options effective
      December 31, 2005.


·
            Sales-related
      travel expense increased as we expanded sales activity in international
      and domestic markets.






19


Research
and Development Expenses





Research
and development expenses consist primarily of employee compensation and
benefits, contractor fees to research and development service providers,
stock-based compensation, and research and development equipment, which include
depreciation expense.  During 2007 we began developing ACS and added
significantly to our contract research and development full-time employees and
outsourced certain development and support activities.




2007
              
              
              %
      Change
              
              
              
              2006*
              
              
              %
      Change
              
              
              
              2005*Employee
      compensation and benefits
              
              
              5,366,836
              
              
              
              33%
              
              
              
              4,046,325
              
              
              
              60%
              
              
              
              2,529,155Contract
      research and development
              
              
              2,245,030
              
              
              
              60%
              
              
              
              1,401,728
              
              
              
              168%
              
              
              
              523,607Stock-based
      compensation
              
              
              741,312
              
              
              
              46%
              
              
              
              507,600
              
              
              
              2421%
              
              
              
              20,137Equipment
      and computer supplies
              
              
              396,449
              
              
              
              -6%
              
              
              
              423,966
              
              
              
              44%
              
              
              
              293,956Headcount
      at end of period
              
              
              29
              
              
              
              -9%
              
              
              
              32
              
              
              
              78%
              
              
              
              18


* For the
purposes of our analysis of key expenses, fiscal 2006 and 2005 results have been
revised from previously reported amounts in both employee compensation and
benefits and stock-based compensation, as follows:





o
            We
      have combined certain employee-related benefits together in our
      presentation of employee compensation and
  benefits.


o
            Due
      to reductions in headcount and multiple functional responsibilities of
      certain employees, effective January 1, 2007, we began allocating a
      portion of certain employees’ salaries and bonuses between departments
      based on each employee’s contribution to that
  department.


o
            Stock-based
      compensation has been revised to include expenses recognized on issuances
      of warrants and options to
non-employees.





2007 versus 2006
Results





Total
research and development expenses increased by $2.7 million, a 40% increase in
2007 versus 2006 due primarily to the following:





·
            Employee
      compensation and benefits increased 33% in fiscal 2007 versus 2006 due to
      an increase in average full-time equivalent
      employees.  Full-time equivalent employees represent the sum of
      the headcount at the end of each month, divided by the number of months in
      the period, which differs from actual headcount at the end of each year as
      presented above.  Full-time equivalent employees increased from
      an average of 25 in 2006 to an average of 33 in 2007 fiscal
      year.  This increase includes the transfer of pre-sales
      technical staff from our sales and marketing department to research and
      development. Although the actual headcount in research and development on
      December 31, 2007, was less than on December 31, 2006, the decrease was
      due to a reduction in force at the end of 2007, and those employees were
      on staff for almost the entire year, leading to higher overall
      expense.


·
            We
      increased use of contract research and development
  teams.


·
            Stock-based
      compensation increased 46% in 2007 versus 2006 due to the increase in
      headcount.


·
            Equipment
      and computer supplies expense decreased 6% primarily due to decreased
      purchases of computer equipment.  During early 2007, we
      completed the purchase of the majority of computers and of related
      equipment required for our development and test lab, offset by an increase
      in depreciation expense on computer equipment that was purchased in the
      third quarter of 2006 but impacted all of fiscal
  2007.






20


2006 versus 2005
Results





Total
research and development expenses increased by $3.1 million in 2006 compared to
2005, due primarily to the following:





·
            Employee
      compensation and benefits increased 60% due to increases in headcount from
      an average of 17 in 2005 to 26 in
2006.


·
            We
      increased use of contract research and development
  teams.


·
            Stock-based
      compensation increased due to expense related to employee stock option
      issuances as required by SFAS 123(R) which was implemented January 1,
      2006.  In 2005, stock-based compensation consisted expenses
      recognized for the issuance of options to non-employees and to a lesser
      extent, acceleration of vesting of employee stock options effective
      December 31, 2005.





General
and Administrative Expenses





General
and administrative expenses consists primarily of employee salaries and
benefits, professional fees (legal, accounting, director fees, investor
relations and placement agent fees related to financing), facilities expenses
and insurance.





Changes to
key general and administrative expenses for the years ended December
31,


2007
              
              
              %
      Change
              
              
              
              2006*
              
              %
      Change
              
              
              
              2005*Employee
      compensation and benefits
              
              
              1,663,826
              
              
              
              26%
              
              
              
              1,324,176
              
              
              31%
              
              
              
              1,012,725Professional
      fees
              
              
              1,082,380
              
              
              
              -11%
              
              
              
              1,221,579
              
              
              91%
              
              
              
              640,089Stock-based
      compensation
              
              
              657,322
              
              
              
              6%
              
              
              
              619,060
              
              
              1172%
              
              
              
              48,684Debt
      Issuance Costs
              
              
              386,845
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -Director
      Fees
              
              
              224,750
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -Headcount
      at end of period
              
              
              5
              
              
              
              -38%
              
              
              
              8
              
              
              33%
              
              
              
              6





* For the purposes of our analysis of
key expenses, fiscal 2006 and 2005 results have been revised from previously
reported amounts in stock-based compensation to include expenses recognized on
issuances of warrants and options to non-employees.





2007 versus 2006
Results





Total
general and administrative expenses increased by $679 thousand, a 19% increase
in 2007 versus 2006 due primarily to the following:





·
            Employee
      compensation and benefits expense increased 26% in fiscal 2007 from 2006,
      primarily due to a $500 thousand obligation incurred under a
      severance agreement between us and our former chairman.  This
      increase was offset by lower salaries and benefits of $272 thousand due to
      a reduction in full-time employees.


·
            Professional
      fees decreased primarily due to reduced Sarbanes Oxley compliance costs as
      activities switched from first-time compliance in 2006 to maintenance in
      2007.


·
            Stock-based
      compensation expense includes expense related to options issued to
      employees, including members of our Board of Directors, and options and
      warrants issued to non-employees.  Stock-based compensation
      increased marginally by 6% in 2007 over fiscal
  2006.


·
            Debt
      issuance costs relate to the amortization of placement agent fees that we
      incurred on debt issuances made in late December 2006 and in the first
      quarter of 2007.  These fees were incurred in relation to $13
      million raised in J Unit convertible promissory note
      financing.  This amortization will continue through the maturity
      dates of each note.


·
            Director
      fees increased in 2007 as we began to pay outside directors cash
      compensation in consideration for their service on the Board of
      Directors.  Prior to 2007 we compensated directors by issuing
      stock options.






21


2006 versus 2005
Results





Total
general and administrative expenses increased by $1.7 million in 2006 compared
to 2005, due primarily to the following:





·
            Employee-related
      expense increases were driven in large part by increases in medical
      insurance premiums as well as an increase in
  headcount.


·
            Professional
      fees increased 91% primarily due to the costs of compliance with section
      404 of the Sarbanes-Oxley Act of
2002.


·
            Recognition
      of employee stock-based compensation expense for all employee stock option
      issuances as required by SFAS 123(R) which was implemented January 1,
      2006.  We have also combined all expenses related to issuance of
      options and warrants to non-employees.  In 2005, stock-based
      compensation consisted expenses recognized for the issuance of options to
      non-employees.





The
majority of our operating expenses and costs over the fiscal year are expected
to be related to the development of the ANTs Compatibility Server, supporting
ACS and to a lesser extent, ADS customers, marketing our ACS product to
partners, and general and administrative expenses.





Other
Income (Expense), Net





The
components of other income (expense), net are presented in the table
below.


Fiscal
      Years ended December 31,2007
              
              
              % Change
              
              
              2006
              
              
              % Change
              
              
              2005Other
      income (expense):Interest
      expense on convertible promissory notes
              
              $
              (638,643)
              
              
              
              20168%
              
              
              $
              (3,151)
              
              
              
              N/A
              
              
              $
              -Amortization
      of premium, convertiblepromissory
      notes
              
              
              365,869
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -Amortization
      of discount, convertible
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -promissory
      notes
              
              
              (12,492)
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
      income
              
              
              320,928
              
              
              
              58%
              
              
              
              203,133
              
              
              
              740%
              
              
              
              24,170Write
      off of assets
              
              
              (932)
              
              
              
              -98%
              
              
              
              (57,614)
              
              
              
              40%
              
              
              
              (41,294)Other
      interest expense
              
              
              (6,438)
              
              
              
              50%
              
              
              
              (4,295)
              
              
              
              -14%
              
              
              
              (5,014)Gain
      on legal settlement and other
              
              
              3,599
              
              
              
              -17%
              
              
              
              4,337
              
              
              
              -28%
              
              
              
              6,000Other
      income (expense), net
              
              $
              31,891
              
              
              
              -78%
              
              
              $
              142,410
              
              
              
              982%
              
              
              $
              (16,138)





Other
income, net decreased by $111 thousand in 2007 compared to 2006, due primarily
to:





·
            The
      issuance of $6.5 million in convertible promissory notes in December 2006
      through March 2007 and an additional issuance of $3.0 million in the
      fourth quarter of fiscal 2007, all accruing interest at
      10%.  Interest expense in 2005 and 2006 consisted of interest
      paid on credit cards used in
operations.


·
            Interest
      income increased, which somewhat offset the increase in interest expense;
      as did


·
            Amortization
      of debt premium and discount, net, of $353
  thousand.





We
recorded $639 thousand in interest expense related to the Convertible Notes
issued between December 2006 and March 2007 compared to $3 thousand in
2006.  In 2006, interest expense consisted entirely of interest
incurred on company credit cards.  The quarterly interest payments on
the Convertible Notes were offset somewhat by the amortization of the premium on
the Notes.





Interest
income increased by $118 thousand in 2007 compared to 2006.  The
combination of higher average balances and investments in higher-yielding
investment products was responsible for the increase.  Balances
averaged approximately $7.0 million in invested funds during 2007 compared to an
average balance of approximately $6.3 million in 2006.  Cash balances
were invested in higher-yielding money market accounts in 2007 compared with
2006.




22





Total
other income (expense), net increased $159 thousand in 2006 compared to 2005,
due primarily to:





·
            An
      average balance of approximately $6.3 million in invested funds during
      2006 compared to an average balance of approximately $3.2 million in
      fiscal 2005 and


·
            Cash
      balances were invested in higher-yielding money market accounts in 2006
      compared to minimum-yield bank investment products during 2005. Average
      cash funds available for investment have increased over time as the
      Company has raised increasingly larger amounts of
  capital.








Liquidity, Capital Resources and Financial Condition





As of and
for the year ended December 31,





2007
              
              
              Change
              
              
              2006
              
              
              Change
              
              
              2005Net
      cash used in operating activities
              
              $
              (13,982,195)
              
              
              $
              (610,024)
              
              
              $
              (13,372,171)
              
              
              $
              (5,743,035)
              
              
              $
              (7,629,136)Net
      cash used in investing activities
              
              
              (196,011)
              
              
              
              423,762
              
              
              
              (619,773)
              
              
              
              105,633
              
              
              
              (725,406)Net
      cash provided by financing activities
              
              
              13,959,951
              
              
              
              1,650,990
              
              
              
              12,308,961
              
              
              
              (978,789)
              
              
              
              13,287,750Net
      (decrease) increase in cash and cash equivalents
              
              $
              (218,255)
              
              
              $
              1,464,728
              
              
              $
              (1,682,983)
              
              
              $
              (6,616,191)
              
              
              $
              4,933,208


From
inception, we have reported negative cash flow from
operations.  During the periods from fiscal 2000 through fiscal 2004,
we focused primarily on research and development with our first sales occurring
in the first quarter of 2005.  Total revenues since then and through
December 31, 2007 were approximately $1.1 million. These revenues were less than
our need for funds during these years.





Throughout
this eight year period, we have funded operations and investments in operating
assets with cash raised through financing activities in the form of private
offerings to accredited investors.  The funds raised have been
primarily in the form of sales of our common stock and, to a lesser degree,
through the issuance of convertible promissory notes.





Details
regarding the cash flows by activity follows.





Cash Used in Operating
Activities





In fiscal 2007, cash used in operating
activities totaled $14.0 million, $610 thousand higher than cash used in
operating activities in 2006.  The following items significantly
impacted our cash used in operating activities during fiscal 2007:





·
            Our
      net loss included $2.1 million in non-cash charges, which were comprised
      primarily of $1.6 million in stock-based compensation and $421 thousand in
      fixed asset depreciation.


·
            An
      increase in salaries and benefits paid, primarily due to average full-time
      headcount increases in research and
development.


·
            Severance
      payments to our former chairman and former
  employees.


·
            An
      increase in contract research and development
  fees.


·
            An
      increase in interest payments related to convertible promissory
      notes.








In fiscal 2006, cash used in operating
activities totaled $13.4 million, an increase of $5.7 million over
fiscal  2005. The following items significantly impacted our cash used
by operating activities during fiscal 2006:





·
            Our
      fiscal 2006 net loss included $1.9 million in non-cash charges, which were
      comprised primarily of $1.3 million in stock based compensation and $363
      thousand in depreciation of fixed assets;
and


·
            An
      increase in total company salaries and benefits paid as we increased
      headcount to support bringing the ANTs Data Server to
    market.






23


Cash Used in Investing
Activities





In fiscal
2007, cash used in investing activities totaled $196 thousand, a decrease of
$424 thousand from fiscal 2006, primarily due to a $340 thousand decrease in the
purchase of computer and lab equipment required to design and test our
products.  By early 2007, we had purchased substantially all of the
equipment needed to support our design, testing and quality assurance
requirements. In fiscal 2006, cash used in investing activities was $620
thousand, a decrease of $106 thousand versus the prior year, resulting from a
$86 thousand decrease in capital expenditures, primarily on computer and lab
equipment.





Cash Provided by Financing
Activities





We engage
in private placement activities with accredited investors from time to
time.  The private placements sometimes consist of Units, which give
the investor shares of restricted common stock at a discount to the then-current
market price, and a warrant to purchase a number of restricted shares of common
stock at a fixed price set at a premium to the then-current market
price.  The warrants generally have a life of two to three
years.





Beginning
in December 2006 and continuing through March of 2007, we sold units comprised
of common stock and a promissory note convertible into common stock (“Notes”).
The total raised in these private placements was $13 million, excluding cash
commission paid to the placement agent of $1.1 million.  The units
were comprised of $6.5 million in common stock and Notes with a face value of
$6.5 million. The Notes bear interest at the rate of 10% per annum (simple
interest) due and payable at the end of each fiscal quarter. The Notes mature 2
years from the issuance date, and are convertible into shares of our common
stock, at the election of the holder, at a per share price of
$2.00.  The Notes are prepayable without penalty upon 30 days
notice.  The Notes are convertible at our election upon a certain
event, and if converted we have agreed to register the shares of stock issuable
upon conversion. If the Notes are not converted, we will have an obligation to
pay the note holders the face value of $1.0 million in December 2008 and $5.5
million during the first fiscal quarter of 2009.





In the
fourth quarter 2007, we raised an additional $3.0 million through the sale of
convertible promissory notes (“Q4 Notes”) These Q4 Notes bear interest at the
rate of 10% per annum (simple interest) due and payable at the end of each
fiscal quarter, mature three years from the issuance date and are convertible
into shares of our common stock, at the election of the holder, at a per share
price of $3.25.  The Q4 Notes are prepayable without penalty if (i)
the bid price of our common stock equals or exceeds $4.00 per share for ten
consecutive trading days and (ii) we provide the investor with 20 trading days’
notice of our intent to prepay. As part of the sale, the investor in the Q4
Notes was issued warrants covering 2,002,150 shares of our common stock, such
warrants having an exercise price of $3.25 per share and a term of three
years.





We have
also raised funds as investors exercise warrants related to prior offerings and
via stock options exercises. During 2007, warrants covering 796,900 shares were
exercised, resulting in proceeds of $996,125 and stock options covering a total
of 60,000 shares were exercised, resulting in proceeds of
$60,600.





On March
11, 2008, we had approximately $2.3 million in cash on hand to fund operations
and equipment purchases.  We anticipate this balance will fund
operations into the second quarter of 2008 at our current levels of revenues and
expenditures. We are pursuing a number of avenues to raise additional operating
capital, including:





·
            Raising
      funds through sales of our common stock and the issuance of convertible
      notes to accredited investors through private
  offerings.


·
            As
      we develop close relationships with large partners, we are pursuing
      strategic investments from those
partners.


·
            We
      expect to continue generating revenue in 2008, which if successful will be
      a source of operating funds.





We are
pursuing all three avenues, however, we believe that due to an uncertain
investment climate, securing additional investment will be
difficult.  This uncertainty raises substantial doubt about our
ability to continue as a going concern.





24




Contractual
Obligations and Contingencies




The
following table summarizes our contractual obligations as of December 31,
2007:




Payments Due
              
              
              Payments Due
              
              
              Payments
              
              
              Paymentsin
      Less
              
              
              in
              
              
              Due
      in
              
              
              Due AfterContractual
      Obligations
              
              Total
              
              
              Than
      1 Year
              
              
              1-3 Years
              
              
              4-5 Years
              
              
              5
      YearsConvertible
      Notes
              
              $
              9,503,226
              
              
              $
              1,000,000
              
              
              $
              8,503,226
              
              
              $
              -
              
              
              $
              -Non-cancelable
      operating leases
              
              
              492,160
              
              
              
              355,360
              
              
              
              136,800Total
      contractual obligations
              
              $
              9,995,386
              
              
              $
              1,355,360
              
              
              $
              8,640,026
              
              
              $
              -
              
              
              $
              -
  Off-Balance-Sheet
Arrangements





On April
27, 2005, we entered into a lease with Bayside Plaza, a partnership, for
approximately 15,000 square feet of general commercial offices located at 700
Airport Boulevard, Suite 300, Burlingame, California (the “Premises”). We moved
our principal offices to these Premises on May 2, 2005. The Premises are used
for the purposes of general office use and for software development. The lease
has an initial term of three years, subject to our right to extend the term of
the lease for a total of six additional years. The base rent under this lease is
$16,060 per month for the first year, $17,520 per month for the second year and
$20,440 per month for the third year. The Company received abated rent for the
period from May 1, 2005 to July 30, 2005 and the initial term of the lease was
accounted for in accordance with Financial Technical Bulletin 85-3 (“FTB 85-3”),
“Accounting for Operating Leases with Scheduled Rent Increases” which required
the effects of the scheduled rent increases and effects of rent abatement to be
recognized on a straight-line basis over the initial term of the
lease.  This results in monthly rental expense of $16,668 through
April 30, 2008, the original lease term. During the fiscal years ended December
31, 2007, 2006 and 2005 we recognized a total of $200,020, $200,020 and $133,344
respectively, in rental expense for this lease. In July 2007 we extended this
lease for the period May 1, 2008 through April 30, 2009 at the rate of $34,200
per month.  There are no asset retirement obligations under our
operating lease.





Critical
Accounting Policies





Use
of Estimates





The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. We evaluate such estimates and
assumptions on an ongoing basis and base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates and probably will
differ from these estimates under different assumptions or conditions. On a
regular basis we evaluate our assumptions, judgments and estimates and make
changes accordingly. We also discuss our critical accounting estimates with the
Audit Committee of the Board of Directors. We believe the assumptions, judgments
and estimates involved in the accounting for revenue recognition, stock-based
compensation, and research and development have the greatest potential impact on
our financial statements. These areas are key components of our results of
operations and are based on complex rules that require us to make judgments and
estimates; as a result, we consider these to be our significant accounting
policies. Historically, our assumptions, judgments and estimates relative to our
significant accounting policies have not differed materially from actual
results.





Revenue
Recognition




We
recognize license and royalty revenue in accordance with the provisions of
Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, and SOP
98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions.” Revenue consists primarily of revenue earned under
agreements for software licenses, maintenance and support (otherwise known as
post-contract customer support or “PCS”) and professional services. Maintenance
and support revenue is deferred and recognized over the related contract period,
generally twelve months, beginning with customer acceptance of the
product.




We use the
residual method to recognize revenue when a license agreement includes one or
more elements to be delivered at a future date.  If there is an
undelivered element under the license arrangement, we defer revenue based on
vendor-specific objective evidence, or VSOE, of the fair value of the
undelivered element, as determined by the price charged when the element is sold
separately.  If VSOE of fair value does not
exist for all undelivered elements, we defer all revenue until sufficient
evidence exists or all elements have been delivered.  Under the
residual method, discounts are allocated only to the delivered elements in a
multiple element arrangement with any undelivered elements being deferred based
on VSOE of fair values of such undelivered elements.  Revenue from
software license arrangements, which comprise prepaid license and maintenance
and support fees, is recognized when all of the following criteria are
met:




25


·
            Persuasive
      evidence of an arrangement exists.


·
            Delivery
      has occurred and there are no future deliverables except post-contract
      customer support (“PCS”).


·
            The
      fee is fixed and determinable.  If we cannot conclude that a fee
      is fixed and determinable, then assuming all other criteria have been met,
      revenue is recognized, as payments become due in accordance with paragraph
      29 of SOP 97-2.


·
            Collection
      is probable.





Revenue
from professional services, consisting primarily of consulting services, is
recognized as services are provided and the revenues are earned.





Research
and Development Expenses





We account
for research and development expenses in accordance with Statement of Financial
Accounting Standards No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed.”





We have
not yet established technological feasibility of our ACS product; therefore, all
costs relating to its development have been expensed in accordance with SFAS No.
86. Upon the establishment of such feasibility and once the product is made
available for release to customers, we will capitalize these costs in our
Balance Sheet.  Our research and development expenses consist
primarily of salaries and benefits and outside contractor expenses.





Employee
Stock-Based Compensation Expense




We have a
stock-based employee and director compensation plan (the ANTs software inc. 2000
Stock Option Plan or the “Plan”).  Employee stock-based compensation
expense includes awards to employees and our directors.  Effective
January 1, 2006, we implemented the provisions of Statement of Financial
Accounting Standards (“SFAS”) 123(R), “Share-Based Payment” (the “Statement” or
“SFAS 123(R)”), to account for employee stock-based compensation expense. Our
employee stock-based compensation expense for fiscal 2007 and 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not fully vested, as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123,
“Accounting for Stock Compensation” (“SFAS 123”).  Stock-based
compensation expense for all stock-based compensation awards granted subsequent
to January 1, 2006 is based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). We recognize compensation expense for
employee stock option awards on a straight-line basis over the requisite service
period of the award, generally three years; however, we have also issued grants
with certain performance-based criteria which vest upon satisfaction of that
criteria.  For these grants, and in accordance with SFAS 123(R), at
each interim reporting period we determine whether it is more likely than not
that the performance criteria will be achieved.  If performance is
deemed likely, the award is considered vested and expensed for financial
reporting purposes.





In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which
provides guidance on SFAS 123(R).  SAB 107 was issued to assist
preparers by simplifying some of the implementation challenges of SFAS 123(R)
while enhancing the information that investors receive.  SAB 107
creates a framework that is premised on two over arching themes: (a)
considerable judgment will be required by preparers to successfully implement
SFAS 123(R), specifically when valuing employee stock options; and (b)
reasonable individuals, acting in good faith, may conclude differently on the
fair value of employee stock options.  Key topics covered by SAB 107
include valuation models, expected volatility and expected term.  We
apply the principles of SAB 107 in conjunction with SFAS
123(R).




26





Income
Taxes





The
carrying value of our deferred tax assets is dependent upon our ability to
generate sufficient future taxable income in certain tax jurisdictions. Until
such time as we establish a taxable income in such jurisdictions, the total
amount of our deferred tax assets shall be offset with a valuation allowance
equal to our deferred tax asset balance.





Effective
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the criteria
for recognizing income tax benefits under FASB Statement No. 109, “Accounting
for Income Taxes”, and requires additional disclosures about uncertain tax
positions. Under FIN 48 the financial statement recognition of the benefit for a
tax position is dependent upon the benefit being more likely than not to be
sustainable upon audit by the applicable taxing authority. If this threshold is
met, the tax benefit is then measured and recognized at the largest amount that
is greater than 50 percent likely of being realized upon ultimate settlement.
Although the implementation of FIN 48 did not impact the amount of our liability
for unrecognized tax benefits, nor did it impact beginning retained earnings, we
reduced our deferred tax asset and valuation allowance by $685
thousand.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework and gives guidance regarding
the methods used in measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 applies in conjunction with other accounting
pronouncements that require or permit fair value measurements and is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years.  The adoption of
FAS 157 is not expected to have a material impact on our financial condition or
results of operations.





In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”.  SFAS 159 allows an entity
the irrevocable option to elect fair value for the initial and subsequent
measurement of certain financial assets and liabilities under an
instrument-by-instrument election.  Subsequent measurements for the
financial assets and liabilities an entity elects to record at fair value will
be recognized in earnings. SFAS 159 also establishes additional disclosure
requirements.  SFAS is effective for fiscal years beginning after
November 15, 2007.  We are currently evaluating the impact of adopting
SFAS 159 on our financial statements.





In June
2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF
06-11”).  EITF 06-11 provides that a realized income tax benefit from
dividends that are charged to retained earnings and are paid to employees for
equity classified nonvested equity shares and units should be recognized as an
increase to additional paid-in capital. The provisions of this EITF should be
applied prospectively to the income tax benefits of dividends on
equity-classified employee share-based payment awards that are declared in
fiscal years beginning after September 15, 2007.  We do not currently
pay dividends to employees on shares of unvested restricted common stock and
therefore the provisions of EITF Issue No. 06-11 will not have a material impact
on our financial statements.




In
December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations.”
SFAS 141(R) retains the fundamental requirements in SFAS 141 that the
acquisition method of accounting (which SFAS 141 called the purchase method) be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date.
SFAS 141(R) requires costs incurred to effect the acquisition and restructuring
costs to be recognized separately from the acquisition. SFAS 141(R) applies to
business combinations for which the acquisition date is on or after
January 1, 2009.





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Foreign
Currency Exchange Risk





Our
revenue is invoiced and received in United States dollars.  One of our
partners bundles our product with its own and sells to customers in the U.S. and
abroad.  For the year ended December 31, 2007, approximately 4% of our
revenue was generated through these non-U.S. royalties.  As a result,
our net royalty receipts may have been impacted by any foreign exchange risk
experienced by this partner; however, we believe that our financial results were
not and are not expected to be materially affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign
markets.  We do not enter into foreign currency hedging transactions
to mitigate any potential exposure to foreign currency exchange
risks.
  27





Interest
Rates





Our
exposure to market risk for changes in interest rates relates primarily to the
increase or decrease in the amount of interest income we earn on our investment
portfolio. Our investment portfolio consists of liquid investments that have
maturities of three months or less. Our risk associated with fluctuating
interest income is limited to investments in interest rate sensitive financial
instruments. Under our current policy, we do not use interest rate derivative
instruments to manage this exposure to interest rate changes. We seek to ensure
the safety and preservation of its invested principal by limiting default risk,
market risk, and reinvestment risk.  We mitigate default risk by
investing in short-term investment grade securities.





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA




Year
      EndedFiscal
      2007 Quarters Ended,
              
              
              December
      31,March
      31
              
              
              June
      30
              
              
              September
      30
              
              December
      31
              
              2007Revenues
              
              $
              69,127
              
              
              $
              21,467
              
              
              $
              226,964
              
              
              $
              42,148
              
              
              $
              359,706Gross
      profit
              
              
              66,415
              
              
              
              14,703
              
              
              
              224,563
              
              
              
              41,348
              
              
              
              347,029Net
      loss
              
              
              (3,670,619
              )
              
              
              (4,699,139
              )
              
              
              (3,888,039
              )
              
              
              (4,055,426
              )
              
              
              (16,313,223
              )Basic
      and diluted net loss per common share
              
              
              (0.07
              )
              
              
              (0.08
              )
              
              
              (0.07
              )
              
              
              (0.07
              )
              
              
              (0.29
              )Shares
      used in computing basic and dilutednet
      loss per share
              
              
              55,995,934
              
              
              
              56,460,534
              
              
              
              56,622,605
              
              
              
              57,381,544
              
              
              
              56,618,971Year
      EndedFiscal
      2006 Quarters Ended,
              
              
              December
      31,March
      31
              
              
              June
      30
              
              
              September
      30
              
              December
      31
              
              2006Revenues
              
              $
              68,389
              
              
              $
              83,258
              
              
              $
              48,212
              
              
              $
              87,973
              
              
              $
              287,832Gross
      profit
              
              
              68,389
              
              
              
              68,162
              
              
              
              46,212
              
              
              
              81,176
              
              
              
              263,939Net
      loss
              
              
              (2,750,979
              )
              
              
              (3,895,181
              )
              
              
              (4,392,656
              )
              
              
              (4,087,087
              )
              
              
              (15,125,903
              )Basic
      and diluted net loss per common share
              
              
              (0.06
              )
              
              
              (0.08
              )
              
              
              (0.08
              )
              
              
              (0.08
              )
              
              
              (0.30
              )Shares
      used in computing basic and dilutednet
      loss per share
              
              
              45,180,279
              
              
              
              51,775,813
              
              
              
              52,053,558
              
              
              
              52,786,035
              
              
              
              50,474,155


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





None





ITEM 9A. CONTROLS AND PROCEDURES





(a)           Disclosure
Controls and Procedures





The
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) was evaluated under the supervision and with
the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, as of the end of the period covered by this annual
report.





Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system no matter how
well conceived and operated can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints and the
benefits of control systems must be considered relative to their cost. As a
result of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues of fraud, if any
within ANTs have been detected.




28





(b)           Management’s
Report on Internal Control over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
(as defined in rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended).  Management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control
– Integrated Framework. Management has concluded that as of December 31, 2007
our internal control over financial reporting is effective based on these
criteria. Our independent registered public accounting firm, Burr, Pilger &
Mayer LLP, has issued an audit report on our internal control over financial
reporting. That audit report is included in this report Form 10-K.





(c)           Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended)
identified in connection with the evaluation of our internal control performed
during fiscal 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.














The
remainder of this page was intentionally left blank.







29





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of ANTs software inc.





We have
audited the internal control over financial reporting of ANTs software inc. (the
“Company”) as of December 31, 2007, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the effectiveness of the Company’s internal control over
financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.





Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, ANTs software inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
the COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of ANTs software inc. as of
December 31, 2007 and 2006, and the related statements of operations,
stockholders’ (deficit) equity, and cash flows for each of the three years in
the three year periods ended December 31, 2007 and our report dated
March 13, 2008 expressed an unqualified opinion on those financial
statements.





/s/   Burr,
Pilger & Mayer LLP





San
Francisco, California


March 13,
2008








ITEM 9B.  OTHER INFORMATION





None






30





PART III






ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE




The
information required by this item is incorporated in this report by reference to
the Company’s Proxy statement to be filed with the SEC in connection with its
2008 Annual Meeting of Stockholders within 120 days after the end of our fiscal
year ended December 31, 2007.




ITEM 11.   EXECUTIVE
COMPENSATION




The
information required by this item is incorporated in this report by reference to
the Company’s Proxy statement to be filed with the SEC in connection with its
2008 Annual Meeting of Stockholders within 120 days after the end of our fiscal
year ended December 31, 2007.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




The
information required by this item is incorporated in this report by reference to
the Company’s Proxy statement to be filed with the SEC in connection with its
2008 Annual Meeting of Stockholders within 120 days after the end of our fiscal
year ended December 31, 2007.




ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE




The
information required by this item is incorporated in this report by reference to
the Company’s Proxy statement to be filed with the SEC in connection with its
2008 Annual Meeting of Stockholders within 120 days after the end of our fiscal
year ended December 31, 2007.


ITEM 14.  PRINCIPAL ACCOUNTING FEES AND
SERVICES




The
information required by this item is incorporated in this report by reference to
the Company’s Proxy statement to be filed with the SEC in connection with its
2008 Annual Meeting of Stockholders within 120 days after the end of our fiscal
year ended December 31, 2007.


31








Part IV





ITEM 15.  exhibits, financial statement
schedules





Documents
filed as part of this report:





PageReport
      of Independent Registered Public Accounting Firm
              
              33Balance
      Sheets as of December 31, 2007 and 2006
              
              34Statements
      of Operations for the years ended December 31, 2007, 2006 and
      2005
              
              35Statements
      of Stockholders’ Equity for the years ended December 31, 2007, 2006 and
      2005
              
              36Statements
      of Cash Flows for the years ended December 31, 2007, 2006 and
      2005
              
              37Notes
      to Financial Statements
              
              39Signatures
      and Exhibits
              
              61






32





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of ANTs software inc.





We have audited the accompanying
balance sheets of ANTs software inc. as of December 31, 2007, and 2006 and the
related statements of operations, stockholders' (deficit) equity, and cash flows
for each of the three years in the three year period ended December 31,
2007.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
those financial statements based on our audits.





We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our opinion, the financial
statements referred to above present fairly, in all material respects, the
financial position of ANTs software inc. as of December 31, 2007, and 2006, and
the results of its operations and its cash flows for each of the years in the
three year periods ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.





The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 “Basis of Presentation and Continuation as a Going
Concern” to the
financial statements, the Company’s recurring losses from operations,
stockholders’ deficit, and cash flows used in operating activities raise
substantial doubt about its ability to continue as a going concern. Management’s
plans regarding those matters are also described in Note 1, “Basis ofPresentation and
Continuation as a Going Concern”. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




As discussed in Note 1 to the financial
statements, the Company adopted Statement of Financial Accounting Standard No.
123 (revised 2004), “Share-Based Payment”, effective January 1, 2006 applying
the modified perspective method, and Financial Accounting Standards Board
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, effective
January1,
2007.





We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December
31, 2007, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 13, 2008 expressed an unqualified opinion
on the Company’s internal control over financial reporting.








/s/ Burr,
Pilger & Mayer LLP


San
Francisco, California





March 13,
2008







33





ANTS
      SOFTWARE  INC.BALANCE
      SHEETSYears
      ended December 31,ASSETS
            
            2007
            
            
            2006Current
      assets:Cash
      and cash equivalents
            
            $
            4,480,694
            
            
            $
            4,698,949Accounts
      receivable
            
            
            8,204
            
            
            
            55,319Current
      portion of prepaid debt issuance cost
            
            
            434,630
            
            
            
            33,645Restricted
      cash
            
            
            192,574
            
            
            
            190,958Prepaid
      expenses and other current assets
            
            
            173,331
            
            
            
            131,480Prepaid
      expense from warrant issued to customer, net
            
            
            57,674
            
            
            
            57,673Total
      current assets
            
            
            5,347,107
            
            
            
            5,168,024Long-term
      portion of prepaid debt issuance cost
            
            
            47,786
            
            
            
            -Property
      and equipment, net
            
            
            510,490
            
            
            
            736,053Prepaid
      expense from warrant issued to customer, net
            
            
            -
            
            
            
            57,674Other
      assets
            
            
            34,420
            
            
            
            34,420Total
      assets
            
            $
            5,939,803
            
            
            $
            5,996,171LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and other accrued expenses
            
            $
            788,460
            
            
            $
            622,860Accrued
      bonuses and commissions payable
            
            
            143,750
            
            
            
            179,127Accrued
      vacation payable
            
            
            89,316
            
            
            
            175,237Current
      portion of convertible promissory notes, includespremium
      of $60,440 and $0, respectively
            
            
            1,060,440
            
            
            
            -Accrued
      interest on convertible promissory notes
            
            
            208,780
            
            
            
            3,151Deferred
      revenues
            
            
            48,818
            
            
            
            56,819Total
      current liabilities
            
            
            2,339,564
            
            
            
            1,037,194Commitments
      and contingencies (Note 11)Long-term
      liabilities:Accrued
      rent
            
            
            -
            
            
            
            15,087Convertible
      promissory notes, includes premium of $380,311and
      $120,880, respectively
            
            
            5,880,311
            
            
            
            1,120,880Convertible
      promissory notes, net of debt discount of $238,418and
      $0, respectively
            
            
            2,764,808
            
            
            
            -Total
      liabilities
            
            
            10,984,683
            
            
            
            2,173,161Stockholders’
      (deficit) equity:Preferred
      stock, $0.0001 par value; 50,000,000 shares authorized,no
      shares issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.0001 par value; 200,000,000 shares authorized;57,398,445
      and 53,188,485 shares issued and outstanding, respectively
            
            
            5,740
            
            
            
            5,319Common
      stock subscribed, not issued
            
            
            -
            
            
            
            1Additional
      paid-in capital
            
            
            69,914,339
            
            
            
            62,469,426Accumulated
      deficit
            
            
            (74,964,959
            )
            
            
            (58,651,736
            )Total
      stockholders’ (deficity) equity
            
            
            (5,044,880
            )
            
            
            3,823,010Total
      liabilities and stockholders' (deficity) equity
            
            $
            5,939,803
            
            
            $
            5,996,171See
      Accompanying Notes to Financial Statements






34








ANTS
      SOFTWARE INC.STATEMENTS
      OF OPERATIONSYears
      Ended December 31,2007
            
            
            2006
            
            
            2005Revenues:Licenses
      and royalties
            
            $
            258,829
            
            
            $
            157,958
            
            
            $
            397,500Maintenance
            
            
            100,877
            
            
            
            105,792
            
            
            
            49,620Professional
      services
            
            
            -
            
            
            
            24,082
            
            
            
            19,500Total
      revenues
            
            
            359,706
            
            
            
            287,832
            
            
            
            466,620Cost
      of  revenue:Licenses
            
            
            12,677
            
            
            
            23,893
            
            
            
            -Gross
      profit
            
            
            347,029
            
            
            
            263,939
            
            
            
            466,620Operating  expenses:Sales
      and marketing
            
            
            2,939,481
            
            
            
            5,164,937
            
            
            
            3,618,324Research
      and development
            
            
            9,442,521
            
            
            
            6,736,381
            
            
            
            3,589,565General
      and administrative
            
            
            4,310,141
            
            
            
            3,630,934
            
            
            
            1,947,090Total
      operating expenses
            
            
            16,692,143
            
            
            
            15,532,252
            
            
            
            9,154,979Loss
      from operations
            
            
            (16,345,114
            )
            
            
            (15,268,313
            )
            
            
            (8,688,359
            )Other
      income (expense):Interest
      income
            
            
            320,928
            
            
            
            203,133
            
            
            
            24,170Gain
      on legal settlement and other
            
            
            3,599
            
            
            
            4,337
            
            
            
            6,000Write-off
      of fixed assets
            
            
            (932
            )
            
            
            (57,614
            )
            
            
            -Disposal
      of assets related to office move
            
            
            -
            
            
            
            -
            
            
            
            (41,294
            )Interest
      expense
            
            
            (291,704
            )
            
            
            (7,446
            )
            
            
            (5,014
            )Other
      income, net
            
            
            31,891
            
            
            
            142,410
            
            
            
            (16,138
            )Net
      loss
            
            $
            (16,313,223
            )
            
            $
            (15,125,903
            )
            
            $
            (8,704,497
            )Basic
      and diluted net loss per common share
            
            $
            (0.29
            )
            
            $
            (0.30
            )
            
            $
            (0.22
            )Shares
      used in computing basic and dilutednet
      loss per share
            
            
            56,618,971
            
            
            
            50,474,155
            
            
            
            40,418,575See
      Accompanying Notes to Financial Statements







35


ANTS
      SOFTWARE INC.STATEMENTS
      OF STOCKHOLDERS' (DEFICIT) EQUITYCommon
      Stock
              
              
              Common
                Stock
              
              
              Additional
                Paid
      in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Subscribed
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance
      at December 31, 2004
              
              
              35,298,817
              
              
              $
              3,530
              
              
              $
              30,000
              
              
              $
              36,316,987
              
              
              $
              (34,821,336
              )
              
              $
              1,529,181Common
      stock issued for shares subscribed at
                December
      31, 2004
              
              
              30,000
              
              
              
              3
              
              
              
              (30,000
              )
              
              
              29,997
              
              
              
              -
              
              
              
              -Proceeds
      from private placements, net of cash commissions, $353,850
              
              
              5,461,125
              
              
              
              546
              
              
              
              -
              
              
              
              7,823,604
              
              
              
              -
              
              
              
              7,824,150Common
      stock subscribed as payment to vendors for services
              
              
              -
              
              
              
              -
              
              
              
              45,158
              
              
              
              -
              
              
              
              -
              
              
              
              45,158Common
      stock issued to finders and placement agent as commission
              
              
              67,556
              
              
              
              7
              
              
              
              -
              
              
              
              (7
              )
              
              
              -
              
              
              
              -Common
      stock subscribed as commission to placement agent
              
              
              -
              
              
              
              -
              
              
              
              198,450
              
              
              
              (198,450
              )
              
              
              -
              
              
              
              -Proceeds
      from warrant exercises, net of cash commissions of
$193,800
              
              
              3,878,970
              
              
              
              388
              
              
              
              -
              
              
              
              5,343,139
              
              
              
              -
              
              
              
              5,343,527Options
      exercised through cash consideration
              
              
              103,704
              
              
              
              11
              
              
              
              -
              
              
              
              125,581
              
              
              
              -
              
              
              
              125,592Stock-based
      compensation expense
              
              
              21,886
              
              
              
              2
              
              
              
              -
              
              
              
              76,452
              
              
              
              -
              
              
              
              76,454Warrants
      issued as prepayment to vendor for services to be provided in the
      future
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              173,021
              
              
              
              -
              
              
              
              173,021Net
      loss and comprehensive net loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (8,704,497
              )
              
              
              (8,704,497
              )Balance
      at December 31, 2005
              
              
              44,862,058
              
              
              
              4,487
              
              
              
              243,608
              
              
              
              49,690,324
              
              
              
              (43,525,833
              )
              
              
              6,412,586Proceeds
      from private placements, net of cash commissions of
    $769,250
              
              
              7,398,129
              
              
              
              740
              
              
              
              -
              
              
              
              10,031,513
              
              
              
              -
              
              
              
              10,032,253Allocation
      of proceeds raised from private placements to premium on convertible
      promissory note
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (120,880
              )
              
              
              -
              
              
              
              (120,880
              )Allocation
      of certain commissions paid to placement agent to debt issuance
      costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,645
              
              
              
              -
              
              
              
              33,645Common
      stock issued for shares subscribed at
                December
      31, 2005
              
              
              137,230
              
              
              
              14
              
              
              
              (243,608
              )
              
              
              243,594
              
              
              
              -
              
              
              
              -Common
      stock subscribed as commission to placement agent at
                December
      31, 2006
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -Proceeds
      from warrant exercises, net of cash commissions of $39,125
              
              
              302,500
              
              
              
              30
              
              
              
              -
              
              
              
              529,179
              
              
              
              -
              
              
              
              529,209Options
      exercised through cash consideration
              
              
              477,902
              
              
              
              47
              
              
              
              -
              
              
              
              713,807
              
              
              
              -
              
              
              
              713,854Stock-based
      compensation expense
              
              
              10,666
              
              
              
              1
              
              
              
              -
              
              
              
              1,348,245
              
              
              
              -
              
              
              
              1,348,246Net
      loss and comprehensive net loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (15,125,903
              )
              
              
              (15,125,903
              )Balance
      at December 31, 2006
              
              
              53,188,485
              
              
              
              5,319
              
              
              
              1
              
              
              
              62,469,426
              
              
              
              (58,651,736
              )
              
              
              3,823,010Proceeds
      from private placements, net of cash commissions of
    $481,426
              
              
              3,142,700
              
              
              
              314
              
              
              
              
              
              
              
              5,018,260
              
              
              
              
              
              
              
              5,018,574Allocation
      of commissions paid to placement agent to debt issuance
    costs
              
              
              
              
              
              
              
              (685,740
              )
              
              
              
              
              
              
              (685,740
              )Allocation
      of proceeds raised on convertible promissory notes to
    discount
              
              
              
              
              
              
              
              250,910
              
              
              
              
              
              
              
              250,910Common
      stock issued for shares subscribed at December 31, 2006
              
              
              210,360
              
              
              
              22
              
              
              
              (1
              )
              
              
              217,021
              
              
              
              
              
              
              
              217,042Proceeds
      from option and warrant exercises
              
              
              856,900
              
              
              
              85
              
              
              
              
              
              
              
              1,056,640
              
              
              
              
              
              
              
              1,056,725Stock-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,587,822
              
              
              
              
              
              
              
              1,587,822Net
      loss and comprehensive net loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (16,313,223
              )
              
              
              (16,313,223
              )Balance
      at December 31, 2007
              
              
              57,398,445
              
              
              $
              5,740
              
              
              $
              -
              
              
              $
              69,914,339
              
              
              $
              (74,964,959
              )
              
              $
              (5,044,880
              )See
      Accompanying Notes to Financial Statements






36




ANTS
      SOFTWARE INC.STATEMENTS
      OF CASH FLOWSYears
      Ended December 31,2007
              
              
              2006
              
              
              2005Cash
      flows from operating activities:Net
      loss
              
              $
              (16,313,223
              )
              
              $
              (15,125,903
              )
              
              $
              (8,704,497
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              421,000
              
              
              
              363,062
              
              
              
              285,423Amortization
      of accrued rent, net of cash payments
              
              
              (33,580
              )
              
              
              (4,380
              )
              
              
              53,047Amortization
      of warrant issued to customer
              
              
              57,673
              
              
              
              57,674
              
              
              
              -Amortization
      of debt premium and discount, net
              
              
              (353,377
              )
              
              
              -
              
              
              
              -Amortization
      of debt issuance costs
              
              
              386,844
              
              
              
              -
              
              
              
              -Stock-based
      compensation expense
              
              
              1,587,822
              
              
              
              1,348,246
              
              
              
              121,612Bad
      debt expense, net of write-offs of uncollectible accounts
              
              
              -
              
              
              
              28,738
              
              
              
              16,000Write-off
      of fixed assets, security deposits and other
              
              
              (1,041
              )
              
              
              57,614
              
              
              
              45,012Changes
      in operating assets and liabilities:
              
              
              
              
              
              
              -
              
              
              
              -Accounts
      receivable
              
              
              47,115
              
              
              
              (51,655
              )
              
              
              (61,228
              )Prepaid
      expenses and other current assets
              
              
              (41,851
              )
              
              
              (78,739
              )
              
              
              13,107Other
      assets
              
              
              -
              
              
              
              282
              
              
              
              (34,420
              )Accrued
      interest on convertible promissory notes
              
              
              205,629
              
              
              
              3,151
              
              
              
              -Accounts
      payable and other accrued expenses
              
              
              184,093
              
              
              
              45,482
              
              
              
              416,273Accrued
      bonuses and commissions payable
              
              
              (35,377
              )
              
              
              (39,623
              )
              
              
              65,571Accrued
      vacation payable
              
              
              (85,921
              )
              
              
              25,664
              
              
              
              96,361Deferred
      revenues
              
              
              (8,001
              )
              
              
              (1,784
              )
              
              
              58,603Net
      cash used in operating activities
              
              
              (13,982,195
              )
              
              
              (13,372,171
              )
              
              
              (7,629,136
              )Cash
      flows used in investing activities:Transfer
      operating funds to restricted cash
              
              
              (1,616
              )
              
              
              (85,559
              )
              
              
              (105,399
              )Purchases
      of property and other assets
              
              
              (194,395
              )
              
              
              (534,214
              )
              
              
              (620,007
              )Net
      cash used in investing activities
              
              
              (196,011
              )
              
              
              (619,773
              )
              
              
              (725,406
              )Cash
      flows from financing activities:Proceeds
      from private placements - equity, net of cash commissions
              
              
              5,018,574
              
              
              
              10,065,898
              
              
              
              -Proceeds
      from private placements - convertible promissory

                  notes,
      net of commission
              
              
              7,884,652
              
              
              
              1,000,000
              
              
              
              7,824,150Proceeds
      from exercise of options
              
              
              60,600
              
              
              
              713,854
              
              
              
              125,592Proceeds
      from exercise of warrants, net of commissions
              
              
              996,125
              
              
              
              529,209
              
              
              
              5,343,527Payments
      on capital lease obligations
              
              
              -
              
              
              
              -
              
              
              
              (5,519
              )Net
      cash provided by financing activities
              
              
              13,959,951
              
              
              
              12,308,961
              
              
              
              13,287,750Net
      (decrease) increase in cash and cash equivalents
              
              
              (218,255
              )
              
              
              (1,682,983
              )
              
              
              4,933,208Cash
      and cash equivalents at beginning of period
              
              
              4,698,949
              
              
              
              6,381,932
              
              
              
              1,448,724Cash
      and cash equivalents at end of period
              
              $
              4,480,694
              
              
              $
              4,698,949
              
              
              $
              6,381,932See
      Accompanying Notes to Financial
Statements






37




Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
              
              $
              433,014
              
              
              $
              4,295
              
              
              $
              5,014Non-cash
      investing and financing activities:Allocation
      of stockholders' equity to premium on convertible note
              
              $
              685,740
              
              
              $
              120,880
              
              
              $
              -Allocation
      of commissions paid to placementagent
      to debt issuance costs, net
              
              $
              217,041
              
              
              $
              6,355
              
              
              $
              -Allocation
      of stockholders' equity to discounton
      convertible promissory note
              
              $
              250,910
              
              
              $
              -
              
              
              $
              -Common
      stock issued to placement agent allocatedto
      additional paid in capital
              
              $
              168,920
              
              
              $
              -
              
              
              $
              -Common
      stock issued for subscribed shares at end of prior year
              
              $
              -
              
              
              $
              198,450
              
              
              $
              30,000Common
      stock subscribed for private placement agent commission
              
              $
              -
              
              
              $
              1
              
              
              $
              198,450Issuance
      of warrant to customer
              
              $
              -
              
              
              $
              -
              
              
              $
              173,021




38


ANTS
SOFTWARE INC.


NOTES
TO FINANCIAL STATEMENTS








1.  The
Company and its Significant Accounting Policies





Nature
of Operations





ANTs
software inc. is developing the ANTs Compatibility Server and develops, markets
and supports the ANTs Data Server. The ANTs Compatibility Server (“ACS”) is
middleware that, for the first time, brings the promise of a fast,
cost-effective method to move applications from one database to another – and
enables enterprises to achieve cost efficiencies by consolidating their
applications onto fewer databases. The ANTs Data Server (“ADS”) is a relational
database management system (“RDBMS”) that can reduce costs and improve
application performance. ACS is built on proprietary compatibility technologies
developed by us. ADS incorporates patented high-performance technologies
developed by us. End-users of RDBMS’s, independent software vendors who bundle
an RDBMS with their products and other RDBMS vendors can use the ADS and ACS to
lower costs and gain competitive advantage.





Basis
of Presentation and Continuation as a Going Concern




The
accompanying financial statements are in accordance with generally accepted
accounting principles of the United States of America, which contemplates
continuation of our Company as a going concern.  However, we have
suffered recurring losses from operations and have a net capital deficiency that
raises substantial doubt about our ability to continue as a goingconcern.  Our ability to
continue as agoingconcern is
dependent upon our ability to generate profitable operations in the future
and/or obtain the necessary financing to meet our obligations and repay our
liabilities arising from normal business operations when they come due. We have
plans to seek additional capital through private placements of equity or
debt.  If we are successful in our efforts to generate revenue in
2008, it will be a source of operating funds through the end of fiscal
2008.  Our plans, if successful, will mitigate the factors that raise
substantial doubt about our ability to continue as agoingconcern.





We have
reclassified certain prior-year amounts to conform to the current year
presentation.  We have no minority interests in subsidiaries or
consolidated subsidiaries.





Use
of Estimates




The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those and other estimates.





Revenue
Recognition





We
recognize license and royalty revenue in accordance with the provisions of
Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, and SOP
98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions.” Revenue consists primarily of revenue earned under
agreements for software licenses, maintenance and support (otherwise known as
post-contract customer support or “PCS”) and professional services. Maintenance
and support revenue is deferred and recognized over the related contract period,
generally twelve months, beginning with customer acceptance of the
product.




We use the
residual method to recognize revenue when a license agreement includes one or
more elements to be delivered at a future date.  If there is an
undelivered element under the license arrangement, we defer revenue based on
vendor-specific objective evidence, or VSOE, of the fair value of the
undelivered element, as determined by the price charged when the element is sold
separately.  If VSOE of fair value does not exist for all undelivered
elements, we defer all revenue until sufficient evidence exists or all elements
have been delivered.  Under the residual method, discounts are
allocated only to the delivered elements in a multiple element arrangement with
any undelivered elements being deferred based on VSOE of fair values of such
undelivered elements.  Revenue from software license arrangements,
which comprise prepaid license and maintenance and support fees, is recognized
when all of the following criteria are met:




39


·
            Persuasive
      evidence of an arrangement exists.


·
            Delivery
      has occurred and there are no future deliverables except post-contract
      customer support (“PCS”).


·
            The
      fee is fixed and determinable.  If we cannot conclude that a fee
      is fixed and determinable, then assuming all other criteria have been met,
      revenue is recognized, as payments become due in accordance with paragraph
      29 of SOP 97-2.


·
            Collection
      is probable.





Revenue
from professional fees, consisting primarily of consulting services, is
recognized as services are provided and the revenues are earned.




Research
and Development Expenses




In
accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," software development costs
are expensed as incurred until technological feasibility has been established,
and at that time such costs will be capitalized until the product is made
available for release to customers.  Our revenues through December 31,
2007 relate entirely to royalties, licenses and maintenance fees of our ADS
product and extensive customization was in most cases required for the sale of
these products.  As a result, we have expensed all research and
development costs relating to the sales and recorded costs directly related to
these revenues to cost of revenues.





We have
not yet established technological feasibility of our ACS product; therefore, all
costs relating to its development have been expensed in accordance with SFAS No.
86. Upon the establishment of such feasibility and the product is made available
for release to customers, we will capitalize these costs in our Balance
Sheet.  Our research and development expenses consist primarily of
salaries and benefits and outside contractor expenses.





Advertising
Costs





We expense advertising costs as
incurred.  The expense recognized for the years ended December 31,
2007, 2006 and 2005 was $33,425, $242,882 and $73,131,
respectively.





Cash
and Cash Equivalents




We
consider all highly liquid investments having original maturities of three
months or less to be cash equivalents.  Our cash equivalents consist
of short-term money market instruments.





Accounts
Receivable





Receivables are stated at net
realizable value.  All accounts receivable outstanding as of December
31, 2007 were collected in January 2008.





Allowance
for Doubtful Accounts





We maintain allowances for doubtful
accounts to reserve for potentially uncollectible trade
receivables.  We review our trade receivables to identify customers
with known disputes or collection issues.  For customers not
specifically identified, we also provide a reserve based on the age of the
receivable.  In determining the reserve, we make judgments about the
credit-worthiness of the customer based on ongoing credit
evaluations.  We also consider our historical level of credit losses
and current economic trends that might impact the level of future credit
losses.





As of
December 31, 2007 our trade receivables totaled $8,204 which was collected in
January 2008; therefore no reserve was required as of December 31,
2007.  Our historical allowances for doubtful accounts
follows:




40




Beginning
                  Balance
              
              
              Charged
      to
                    Operating
                  Expenses
              
              
              Deductions
              
              
              Ending
                  BalanceAllowance
      for doubtful accounts:Years
      Ended December 31,2007
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -2006
              
              $
              16,000
              
              $
              28,738
              
              $
              (44,738)
              
              $
              -2005
              
              $
              -
              
              $
              16,000
              
              $
              -
              
              $
              16,000




Restricted
Cash




Restricted
cash consists of a 365-day certificate of deposit in the principal amount of
$192,574, held by Silicon Valley Bank with an annual interest rate of 0.85% that
matures on July 31, 2008.  The funds are pledged to collateralize our
revolving credit card facility. Management intends to maintain the certificate
of deposit as long as the revolving credit card facility is in place. Amounts
due on the credit card facility are included in accounts payable and other
accrued expenses on the Balance Sheet.





Property
and Equipment




Property and equipment are carried at
cost and are depreciated using a straight-line method over their estimated
useful lives of three to five years. The costs of leasehold improvements are
amortized over the term of the lease plus reasonably assured lease renewals, or
the life of the improvement.  Expenditures for improvement or
expansion of property and equipment are capitalized.  Repairs and
maintenance are charged to expense as incurred.  When the assets are
sold or retired, their cost and related accumulated depreciation are removed
from the accounts with the resulting gain or loss reflected in the statements of
operations.





Deferred
Revenues





As of December 31, 2007, deferred
revenues consisted of annual support and maintenance fees paid in advance by
customers.  The fees are amortized into revenue ratably over the
related contract period, generally twelve months, beginning with customer
acceptance of the product. Deferred revenue also includes license fees for any
customer who has been invoiced, but has not yet signed the customer acceptance
of delivery and acknowledgment form as required under our revenue recognition
policy.





Income
Taxes




We account for income taxes in
accordance with SFAS 109, “Accounting for Income Taxes” and effective January 1,
2007 we also adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48).   We estimate our actual current tax
expense and the temporary differences resulting from differing treatment of
items, such as deferred revenue, for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our balance sheet. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income. If we believe that
recovery of these deferred assets is not likely, we must establish a valuation
allowance. To the extent we either establish or increase a valuation allowance
in a reporting period, we must include an expense within the tax provision in
the statement of operations.  As of December 31, 2007 and 2006, we
have net deferred tax assets totaling $26.7 million and $20.8 million,
respectively; however, because we have never recognized income from operations
and future realization is less than probable, we have established a valuation
allowance for the full amount of these deferred tax assets.





Long-Lived
Assets





Long-lived
assets such as property and equipment, and warrants, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable.  When the indicators of
impairment are present and the estimated undiscounted future cash flows from the
use of these assets is less than the assets’ carrying value, the related assets
will be written down to fair value.






41





Stock-Based
Compensation




We have a
stock-based employee and director compensation plan (the ANTs software inc. 2000
Stock Option Plan or the “Plan”).  Prior to January 1, 2006, we
accounted for stock-based compensation awards issued under the Plan using the
recognition and measurement principles of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” and related
Interpretations, in conjunction with the guidelines set out in Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for Stock Compensation” and SFAS 148, “Accounting
for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB
Statement No. 123”.  On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based
Payment” (the “Statement or “SFAS 123(R)”), requiring us to recognize expense
related to the fair value of our stock-based compensation awards. We elected to
use the modified prospective transition method as permitted by SFAS 123(R) and
therefore have not restated its financial results for prior periods. Under this
transition method, stock-based compensation expense for the fiscal year ended
December 31, 2006 includes compensation expense for all stock-based compensation
awards granted prior to, but not fully vested, as of January 1, 2006, based
on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, “Accounting for Stock Compensation”(“SFAS
123”).  Stock-based compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006 is based on the grant
date fair value estimated in accordance with the provisions of SFAS 123(R). We
recognize compensation expense for stock option awards on a straight-line basis
over the requisite service period of the award, generally three years; however
we have also issued stock options with performance-based vesting
criteria.





In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (“SAB 107”), which offers guidance on SFAS
123(R).  SAB 107 was issued to assist preparers by simplifying some of
the implementation challenges of SFAS 123(R) while enhancing the information
that investors receive.  SAB 107 creates a framework that is premised
on two over arching themes: (a) considerable judgment will be required by
preparers to successfully implement SFAS 123(R), specifically when valuing
employee stock options; and (b) reasonable individuals, acting in good faith,
may conclude differently on the fair value of employee stock
options.  Key topics covered by SAB 107 include valuation models,
expected volatility and expected term.  We apply the principles of SAB
107 in conjunction with SFAS 123(R).





All stock-based awards to nonemployees
are accounted for at their fair value in accordance with Emerging Issues Task
Force (“EITF”) 96-18, “Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”. We have recorded the fair value of each stock option issued to
non-employees as determined at the date of grant and at each interim reporting
period using the Black-Scholes option pricing model.





Comprehensive
Loss





Comprehensive
loss was the same as net loss for the years ended December 31, 2007, 2006 and
2005.





Recently
Adopted Pronouncements





Effective January 1, 2007, we adopted
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN
48). This interpretation clarifies the criteria for recognizing income tax
benefits under FASB Statement No. 109, “Accounting for Income Taxes”, and
requires additional disclosures about uncertain tax positions. Under FIN 48 the
financial statement recognition of the benefit for a tax position is dependent
upon the benefit being more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the tax benefit is then
measured and recognized at the largest amount that is greater than 50 percent
likely of being realized upon ultimate settlement. Upon adoption of FIN 48 we
recognized a $685 thousand increase in liability for unrecognized income tax
benefits.  Refer to Footnote 9 of our notes to these financial
statements for further information regarding the impact of this
pronouncement.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework and gives guidance regarding
the methods used in measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 applies in conjunction with other accounting
pronouncements that require or permit fair value measurements and is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years.  The adoption of
FAS 157 is not expected to have a material impact on our financial condition or
results of operations.




42




In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.  SFAS 159 allows an
entity the irrevocable option to elect fair value for the initial and subsequent
measurement of certain financial assets and liabilities under an
instrument-by-instrument election.  Subsequent measurements for the
financial assets and liabilities an entity elects to record at fair value will
be recognized in earnings. SFAS 159 also establishes additional disclosure
requirements.  SFAS is effective for fiscal years beginning after
November 15, 2007.  We are currently evaluating the impact of adopting
SFAS 159 on our financial statements.





In June 2007, the EITF reached a consensus on EITF Issue No.06-11, “Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards” (“EITF06-11”).  EITF06-11 provides
that a realized income tax benefit from dividends that is charged to retained
earnings and are paid to employees for equity classified nonvested equity shares
and units should be recognized as an increase to additional paid-in capital. The
provisions of this EITF should be applied prospectively to the income tax
benefits of dividends on equity-classified employee share-based payment awards
that are declared in fiscal years beginning after September 15,
2007.  We do not currently pay dividends to employees on shares of
unvested restricted common stock and therefore the provisions of EITF Issue No.
06-11 will not have a material impact on our financial
statements.




In
December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations.”
SFAS 141(R) retains the fundamental requirements in SFAS 141 that the
acquisition method of accounting (which SFAS 141 called the purchase method) be
used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date.
SFAS 141(R) requires costs incurred to effect the acquisition and restructuring
costs to be recognized separately from the acquisition. SFAS 141(R) applies to
business combinations for which the acquisition date is on or after
January 1, 2009.





2.   Basic
and Diluted Net Loss per Share





Basic net loss per share is calculated
in accordance with Statement of Financial Accounting Standards No. 128,
“Earnings per Share” using the weighted-average number of common shares
outstanding during the period.  Diluted net loss per share is computed
using the weighted-average number of common and dilutive common equivalent
shares outstanding during the period.





The following table presents the
calculation of basic and diluted net loss per share for the fiscal years ended
December 31, 2007, 2006 and 2005:





Loss
            
            
            Shares
            
            
            Loss
      per(Numerator)
            
            
            (Denominator)
            
            
            ShareYear
      ended December 31, 2007Basic
      and diluted net loss per share
            
            $
            (16,313,223
            )
            
            
            56,618,971
            
            
            $
            (0.29
            )Year
      ended December 31, 2006Basic
      and diluted net loss per share
            
            $
            (15,125,903
            )
            
            
            50,474,155
            
            
            $
            (0.30
            )Year
      ended December 31, 2005Basic
      and diluted net loss per share
            
            $
            (8,704,497
            )
            
            
            40,418,575
            
            
            $
            (0.22
            )





At December 31, 2007, 2006 and 2005,
stock options and warrants for the purchase of 16,813,430, 16,354,480, and
21,182,381 shares of our common stock at prices ranging from $0.52 to $6.38 per
share respectively, were antidilutive and therefore not included in the
computation of diluted earnings per share.






43




3.  Property
and Equipment




Property and equipment, summarized by
major category, at December 31,




2007
              
              
              2006Computers
      and software
              
              $
              2,005,337
              
              
              $
              1,810,942Furniture
      and fixtures
              
              
              85,215
              
              
              
              85,215Leasehold
      improvements
              
              
              96,804
              
              
              
              96,804Total
      property and equipment
              
              
              2,187,356
              
              
              
              1,992,961Less:
      accumulated depreciation and amortization
              
              
              (1,676,866
              )
              
              
              (1,256,908
              )Property
      and equipment, net
              
              $
              510,490
              
              
              $
              736,053




Depreciation
expense for fiscal 2007, 2006 and 2005 was $421,000, $363,062, and $285,423,
respectively.  During 2007 we performed a physical inventory of our
property and equipment and no adjustment to the financial statements was
required.   During 2006 we performed a physical inventory of
property and equipment and wrote off $57,614 in fixed assets, net of accumulated
depreciation.





As of
December 31, 2007 and 2006, we had $1,010,235 and $760,640, respectively, in
fully depreciated assets in use, consisting primarily of computer equipment and
software.





4.
            Current
      Portion of Prepaid Debt Issuance
Costs





As more fully discussed in Note 10, we
incurred $869,260 in placement agent fees, paid in cash and equity, related to
convertible promissory notes issued from December 2006 through March 2007. These
fees are being amortized into general and administrative expense using the
straight-line method, which is not materially different from the effective
interest method over the 24-month life of the notes. As of December 31, 2007,
$482,416 of the fees was unamortized. Amortization of these costs commenced on
January 1, 2007 and totaled $386,844 during the year ended December 31,
2007.  Of the total balance of $482,416 remaining as of December 31,
2007, $434,630 will be recognized in the year ending December 31, 2008 and the
remainder, $47,786, is recorded as the long-term portion of prepaid debt
issuance costs to be recognized in 2009.





5.  Prepaid
Expenses and Other Current Assets





As of December 31, 2007, prepaid
expenses and other current assets were $173,331, primarily consisting of
$112,440 in prepaid insurance and other employee benefit costs, and $37,267 in
prepaid marketing costs for subscriptions to industry analyst services and
conferences.   As of December 31, 2006, prepaid expenses were
$131,480 consisting of prepaid expenses which included unamortized balances of
prepaid insurance, prepaid marketing expenses related to 2007 subscriptions to
industry analyst services and conferences, and other expenses that are prepaid
in the ordinary course of business.





6.   Prepaid
Expense from Warrant





Prepaid expense from warrant consists
of the original charge of $173,021 related to the issuance of a warrant to a
customer in 2005 to purchase 100,000 shares of the our Common Stock, in exchange
for a guarantee by that customer to provide maintenance and support services for
the ANTs Data Server to our customers should we be unable to provide such
services.  The fair value of the warrant was calculated using the
Black-Scholes valuation model.  The warrant has an exercise price of
$3.50 per share and may be exercised until July 2008.  The prepaid
expense is being amortized into the statements of operations on a straight-line
basis, over 36 months, commencing January 2006.  We recognized
amortization expense of $57,673 and $57,674 in the fiscal years ended December
31, 2007 and 2006, respectively.  The unamortized balance of $57,674
will be recognized in the year ending December 31, 2008.





The prepaid expense is evaluated
periodically for signs of impairment, and will be reduced as necessary, with a
corresponding charge to the statement of operations.






44





7.
            Deferred
      Revenues





Deferred revenue is comprised of
license fees and annual maintenance and support fees. License fees are
recognized upon customer acceptance of the product. Annual maintenance and
support fees are amortized ratably into revenue on the statements of operations
over the life of the contract, which is generally a 12-month period beginning
with customer acceptance of the product.





Deferred
revenue activity for the fiscal years ending December 31, 2007 and 2006 was as
follows:





2007
            
            
            2006Beginning
      balance
            
            
            
            
            $
            56,819
            
            
            
            
            
            $
            58,603Invoiced
      current year
            
            
            
            
            
            382,770
            
            
            
            
            
            
            290,849Deferred
      revenue recognized from prior year
            
            $
            (26,820
            )
            
            
            
            
            
            $
            (58,603
            )Invoiced
      and recognized current year
            
            
            (332,886
            )
            
            
            
            
            
            
            (229,230
            )Total
      revenue recognized current year
            
            
            
            
            
            
            (359,706
            )
            
            
            
            
            
            
            (287,833
            )Write-offs
            
            
            
            
            
            
            (31,065
            )
            
            
            
            
            
            
            (4,800
            )Ending
      balance
            
            
            
            
            
            $
            48,818
            
            
            
            
            
            
            $
            56,819





Write-offs consist of bad debt expense
charged on deferred revenues outstanding as of the beginning of each period as
well as amounts charged to deferred revenue during each period but that became
unrealizable.





8.  Industry
Segment, Customer and Geographic Information




We operate in a single industry
segment, computer software. Substantially all of our assets and employees are
located at the corporate headquarters in Burlingame, California. Our
organization is primarily structured in a functional manner.  During
the periods presented, our current Chief Executive Officer was identified as our
Chief Operating Decision Maker (CODM) as defined by SFAS No. 131, “Disclosures
About Segments of an Enterprise and Related Information” (SFAS
131).  We currently generate revenues from ADS and do not segregate
operating expenses between those incurred for maintenance and support of ADS and
research and development expenses incurred on ACS. Therefore our CODM reviews
consolidated financial information on revenues, gross margins and operating
expenses and discrete information regarding between our existing product (ADS)
and our ACS product under development, is not currently maintained or
reviewed.





Customer
Information





For the year ended December, 31, 2007,
$336,493, or 94%, of our revenues were derived from three customers, which
represented $213,212, $63,281 and $60,000, or 59%, 18% and 17% of our total
revenues, respectively.  For the year ended December 31, 2006,
$118,800, or 41%, of our revenues were from two customers, which represented
$69,000 and $49,800 or 24% and 17% of our total revenues,
respectively.  For the year ended December 31, 2005, $384,500, or 82%,
of our revenues were from two customers, which represented $284,500 and $100,000
or 61% and 21% of our total revenues, respectively.





Geographic
Information





Revenues by geographic area were as
follows:




Years
      ended December 31,2007
              
              
              
              %
              
              
              
              2006
              
              
              
              %
              
              
              
              2005
              
              
              
              %Domestic
              
              $
              146,494
              
              
              
              41
              %
              
              $
              240,009
              
              
              
              83
              %
              
              $
              348,620
              
              
              
              75
              %International
              
              
              213,212
              
              
              
              59
              %
              
              
              47,823
              
              
              
              17
              %
              
              
              118,000
              
              
              
              25
              %Total
              
              $
              359,706
              
              
              
              100
              %
              
              $
              287,832
              
              
              
              100
              %
              
              $
              466,620
              
              
              
              100
              %






45




9.  Income
Taxes


We account for income taxes in
accordance with SFAS 109, “Accounting for Income Taxes”.  Due to our
loss position for the periods ended December 31, 2007, 2006 and 2005, there was
no provision for income taxes during these periods.





A valuation allowance has been recorded
for our total deferred tax assets as a result of uncertainties regarding
realization of the assets based upon the lack of profitability and the
uncertainty of future profitability.





The tax effects of significant
temporary differences representing deferred tax assets as of December 31,
2007, 2006 and 2005 are as follows:





As
      of December 31,2007
              
              
              2006
              
              
              2005Net
      operating loss carryforward
              
              $
              24,474,327
              
              
              $
              18,765,178
              
              
              $
              13,412,485Research
      tax credit carryforward
              
              
              2,114,423
              
              
              
              1,922,882
              
              
              
              1,371,851Expenses
      deductible in later years
              
              
              96,098
              
              
              
              79,833
              
              
              
              76,768Gross
      deferred tax assets
              
              
              26,684,848
              
              
              
              20,767,893
              
              
              
              14,861,104Less:
      valuation allowance
              
              
              (26,684,848
              )
              
              
              (20,767,893
              )
              
              
              (14,861,104
              )Net
      deferred tax assets
              
              $
              -
              
              
              $
              -
              
              
              $
              -


The
effective rate is lower than the Federal statutory rate due to an increase in
the valuation allowance with respect to federal and state deferred tax
assets.  The valuation allowance increased in 2007, 2006, and 2005 by $5,916,955,
$5,906,789, and $4,004,194, respectively.





As of December 31, 2007, we had net
operating loss carryforwards of approximately $60.3 million for federal tax
purposes and $58.5 million for state tax purposes. If not earlier utilized, the
federal net operating loss carryforwards will expire in various years from 2008
through 2027 and the state net operating loss carryforwards will expire in
various years from 2012 through 2027.





As of December 31, 2007, we had
research credit carryforwards of approximately $1.8 million for federal tax
purposes and $1.3 million for state tax purposes. If not earlier utilized the
federal research credit carryforwards will expire in various years from 2012
through 2027. The state research credit carries forward indefinitely until
utilized.





Federal and California tax laws impose
substantial restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" for tax purposes, as defined
in Sections 382 and the related provisions of the Internal Revenue
Code.  If such ownership change has occurred or occurs in the future,
utilization of the net operating losses and tax credits would be subject to an
annual limitation based on the fair market value of the company on the change
date.





A summary of our deferred tax
allowances are as follows:




Charged
      toBeginning
                
                
                Deferred
      Tax
                
                
                
                
                
                EndingBalance
                
                
                Assets
                
                
                Deductions
                
                
                BalanceDeferred
      Tax Allowance Accounts:Years
      Ended December 31,2007
                
                $
                20,767,893
                
                
                $
                5,916,975
                
                
                $
                -
                
                
                $
                26,684,8682006
                
                $
                14,861,104
                
                
                $
                5,906,789
                
                
                $
                -
                
                
                $
                20,767,8932005
                
                $
                10,856,910
                
                
                $
                4,004,194
                
                
                $
                -
                
                
                $
                14,861,104







46




Uncertain Tax Provisions




Effective January 1, 2007, we adopted
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN
48). This interpretation clarifies the criteria for recognizing income tax
benefits under FASB Statement No. 109, “Accounting for Income Taxes”, and
requires additional disclosures about uncertain tax positions. Under FIN 48 the
financial statement recognition of the benefit for a tax position is dependent
upon the benefit being more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the tax benefit is then
measured and recognized at the largest amount that is greater than 50 percent
likely of being realized upon ultimate settlement.  On January 1,
2007, although the implementation of FIN 48 did not impact the amount of our
liability or impact beginning retained earnings, we reduced our deferred tax
asset and valuation allowance by $685 thousand.





A reconciliation of the beginning and
ending amount of the liability for unrecognized income tax benefits during the
tax year ended December 31, 2007 is as follows:





Balance
      at January 1, 2007
              
              $
              684,954Additions
      for tax positions related to the year ended December 31,
    2007
              
              
              -Balance
      at December 31, 2007
              
              $
              684,954





The $684,954 of unrecognized tax
benefits, if recognized, will affect our effective income tax
rate.  We account for any applicable interest and penalties on
uncertain tax positions as a component of income tax expense.  Our
only major tax jurisdictions are the United States and California. The tax years
1993 through 2007 remain open and are subject to examination by the appropriate
governmental agencies in the U.S and 2000 through 2007 in
California.





10.   Convertible
Promissory Notes





“J” Unit
Sales





In December 2006 our Board of Directors
approved the terms of a private offering to raise additional working capital.
The private offering consisted of units (the “J Units”) sold at a per unit price
of $50,000 with each J Unit comprised of (i) 14,285 shares of our common stock
(issued at a per share price of $1.75) and (ii) a convertible promissory note
(the “Note”) with an initial face value of $25,000.   The Notes
bear interest at the rate of 10% per annum (simple interest) due and payable at
the end of each fiscal quarter. Each Note matures 24 months from its issuance
date, and is convertible into shares of our common stock, at the election of the
holder, at a per share price of $2.00.  The Notes are prepayable
without penalty upon 30 days notice.  The Notes are convertible at our
election in the event the closing price of our common stock equals or exceeds
$4.00 per share, and if converted at our election, we have agreed to register
the shares of stock issuable upon conversion.





In December 2006, we sold 40 J Units to
accredited investors, raising $2 million and issued 571,400 shares of common
stock and Notes with an aggregate face value of $1 million.  In
January 2007, we sold 180 J Units to accredited investors, raising $9 million,
and issued 2,571,300 shares of common stock and Notes with an aggregate face
value of $4.5 million.  In March 2007, we sold 40 J Units to
accredited investors, raising $2 million, and issued 571,400 shares of common
stock and Notes with an aggregate face value of $1 million. The sales of these
securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





We applied the guidance in Accounting
Principles Board (“APB”) No. 14, “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants” and Emerging Issues Task Force (“EITF”)
00-27, “Application of EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Feature or Contingent with Adjustable Conversion Ratios,
to Certain Convertible Instruments” to allocate the proceeds between the common
stock and the Notes based on their relative fair values. The allocation resulted
in a premium of $533,700 and $152,040 respectively, for the January 2007 and
March 2007 Notes. The premium is included in Notes Payable on the balance sheet
at September 30, 2007. The premium is amortized as a reduction to Interest
Expense on a straight-line basis over the life of each Note.





As a commission for the sale of the
January 2007 and March 2007 J Unit sales and placement of the Notes, we paid
$1,100,000 in cash commissions and issued 199,980 shares of common stock to a
placement agent. The shares are contractually valued at $1.93 per share or
$385,961. The total commission value of $1,485,961 was allocated between debt
issuance costs and additional paid-in capital as a cost of raising the funds, in
the same proportion that was used to allocate the gross proceeds of the offering
between notes payable and stockholders’ equity.  This resulted in (i)
an increase to debt issuance costs of $835,616, amortizable over the life of
each Note and (ii) and increase to additional paid-in capital of $650,345. The
shares issued to the placement agent in the second quarter of 2007 for all J
Unit sales beginning in December 2006 total 210,360 and are shown on the balance
sheet in common stock at their par value of $21.




47




At December 31, 2006, we owed $40,000
in cash commissions and 10,380 shares of common stock of the Company to a
placement agent for services related to sales of the J Units, which was paid in
2007. The shares are contractually valued at $1.93 per share or $20,033. The
total commission value of $60,033 was allocated between debt issuance costs, and
additional paid-in capital as a cost of raising the funds, in the same
proportion that was used to allocate the gross proceeds of the offering between
notes payable, and stockholders’ equity.  This resulted in debt
issuance costs of $33,645, which are included in prepaid expenses on the balance
sheet at December 31, 2006.  The remaining $26,388 was allocated to
additional paid-in capital. The cash commission is included in accounts payable
and other accrued expenses on the balance sheet as of December 31, 2006 and was
subsequently paid in January 2007. The 10,380 shares due to the placement agent
is shown on the balance sheet in common stock subscribed at its par value of $1
and was issued in the first quarter of 2007.





For the sale of the 2006 and 2007 “J”
Units, we accreted $593,699 and $0 in interest expense for the years ended
December 31, 2007 and 2006, respectively.





Convertible Notes Payable
with Warrants





During
October 2007 we sold a convertible promissory note in the amount of $2,000,000
to an accredited investor. Pursuant to the sale, we issued a warrant to the
investor covering 1,333,333 shares of our common stock with a per share exercise
price of $3.25. The warrant expires 36 months from issuance. The note bears
interest at the rate of 10% per annum (simple interest) due and payable at the
end of each calendar quarter. The note matures 36 months from issuance and is
convertible into shares of our common stock, at the election of the holder, at a
per share price of $1.50.  The note is prepayable without penalty if
(i) the bid price of our common stock equals or exceeds $4.00 per share for ten
consecutive trading days and (ii) we provide the investor with 20 trading days’
notice of our intent to prepay. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.





During
December 2007 we sold a convertible promissory note in the amount of
$1,003,226.  Pursuant to the sale, we issued a warrant to the investor
covering 668,817 shares of our common stock with a per share exercise price of
$3.25. The warrant expires 36 months from issuance. The note bears interest at
the rate of 10% per annum (simple interest) due and payable at the end of each
calendar quarter. The note matures 36 months from issuance and is convertible
into shares of our common stock, at the election of the holder, at a per share
price of $1.50.  The note is prepayable without penalty if (i) the bid
price of our common stock equals or exceeds $4.00 per share for ten consecutive
trading days and (ii) we provide the investor with 20 trading days’ notice of
our intent to prepay. The sales of these securities were made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.





In
accordance with APB 14 and EITF 00-27 we allocated the proceeds of these sales
between the warrants and the notes based on their relative fair
values.  The allocation resulted in a discount of $250,910 which is
being expensed to Interest Expense using the straight-line method, which is not
materially different than the effective rate method, over the life of each
note.  The interest expense related to these notes was $12,492 for the
year ended December 31, 2007. The balance of $238,418 is included in Convertible
Promissory Notes as of December 31, 2007.




48




11.   Commitments
and Contingencies
 
 As of December 31, 2007, we leased
office facilities under a non-cancelable operating lease.  Future
minimum lease payments required under the non-cancelable leases are as
follows:


Operating LeasesYear
      ending December 31, 2008
              
              $
              355,360Through
      April 30, 2009
              
              
              136,800Total
      minimum lease payments
              
              $
              492,160




On April
27, 2005, we entered into a lease with Bayside Plaza, a partnership, for
approximately 15,000 square feet of general commercial offices located at 700
Airport Boulevard, Suite 300, Burlingame, California (the “Premises”). We moved
our principal offices to these Premises on May 2, 2005. The Premises are used
for the purposes of general office use and for software development. The lease
has an initial term of three years, subject to the Company's right to extend the
term of the lease for a total of six additional years. The base rent under this
lease is $16,060 per month for the first year, $17,520 per month for the second
year and $20,440 per month for the third year. The Company received abated rent
for the period from May 1, 2005 to July 30, 2005 and the initial term of the
lease was accounted for in accordance with Financial Technical Bulletin 85-3
(“FTB 85-3”), “Accounting for
Operating Leases with Scheduled Rent Increases” which required the
effects of the scheduled rent increases and effects of rent abatement to be
recognized on a straight-line basis over the initial term of the
lease.  This results in monthly rental expense of $16,668 through
April 30, 2008, the original lease term. During the fiscal years ended December
31, 2007, 2006 and 2005 the Company recognized a total of $200,020, $200,020 and
$133,344 respectively, in rental expense for this lease. In July 2007 we
extended this lease for the period May 1, 2008 through April 30, 2009 at the
rate of $34,200 per month.  There are no asset retirement obligations
under our operating lease.





Contingencies





We not a
party to any material pending legal proceedings.






49




12.
Stockholders’ Equity





Stockholders’
equity transactions by cash and non-cash transactions for the years ending
December 31, 2007, 2006 and 2005 is presented below.




2007
              
              
              2006
              
              
              2005Total
      stockholders' equity, beginning of year
              
              $
              3,823,010
              
              
              $
              6,412,586
              
              
              $
              1,529,181Cash
      transactions:Proceeds
      from private placements:Sales
      of "F" Units at $1.00 per unit
              
              
              -
              
              
              
              -
              
              
              
              933,000Cash
      commissions on sales of "F" units
              
              
              -
              
              
              
              -
              
              
              
              (90,350
              )Sales
      of "G" Units at $1.60 per unit
              
              
              -
              
              
              
              -
              
              
              
              3,042,000Cash
      commissions on sales of "G" units
              
              
              -
              
              
              
              -
              
              
              
              (75,000
              )Sales
      of "H" units at $1.60 per unit
              
              
              -
              
              
              
              204,000
              
              
              
              2,603,000Cash
      commissions on sales of "H" units
              
              
              -
              
              
              
              (20,000
              )
              
              
              (188,500
              )Sales
      of restricted shares of common stock at $1.50 per share
              
              
              -
              
              
              
              9,597,503
              
              
              
              -Cash
      commissions on sales of restricted stock
              
              
              -
              
              
              
              (709,250
              )
              
              
              -Sales
      of "I" units at $1.60 per unit
              
              
              -
              
              
              
              -
              
              
              
              1,600,000Sales
      of "J" units at $25,000 per unit (equity portion of units)
              
              
              -
              
              
              
              1,000,000
              
              
              
              -Cash
      commissions on sales of "J" units
              
              
              -
              
              
              
              (40,000
              )
              
              
              -Sales
      of "J" units at $25,000 per unit
              
              
              5,500,000
              
              
              
              -
              
              
              
              -Total
      cash commissions on sales of "J" units
              
              
              (481,426
              )
              
              
              -
              
              
              
              -Total
              
              
              5,018,574
              
              
              
              10,032,253
              
              
              
              7,824,150Proceeds
      from stock and warrant exercises:Warrants
      with exercise price of $2.00 per share discounted to$1.50
      and $1.50/$1.40 per share in 2006 and 2005, respectively
              
              
              -
              
              
              
              109,998
              
              
              
              5,537,327Warrants
      with exercise price of $2.00 exercised at $2.00 per share
              
              
              -
              
              
              
              458,336
              
              
              
              -Cash
      commissions on exercise of warrants
              
              
              -
              
              
              
              (39,125
              )
              
              
              (193,800
              )Warrants
      with exercise price of $2.00-$3.50 per share discounted to
              
              
              
              -
              
              
              
              -$1.25
      per share
              
              
              996,125
              
              
              
              -
              
              
              
              -Cash
      proceeds from exercise of stock options
              
              
              60,600
              
              
              
              713,854
              
              
              
              146,382Total
              
              
              1,056,725
              
              
              
              1,243,063
              
              
              
              5,489,909Total
      cash transactions
              
              
              6,075,299
              
              
              
              11,275,316
              
              
              
              13,314,059Non-cash
      transactions:Related
      to private placements:Prepaid
      debt issuance costs on note payable
              
              
              (685,740
              )
              
              
              -
              
              
              
              -Discount
      on note payable
              
              
              250,910
              
              
              
              -
              
              
              
              -Allocation
      of portion of proceeds from "J" units to convertible
              
              
              -
              
              
              
              -
              
              
              
              -promissory
      note payable premium
              
              
              -
              
              
              
              (120,880
              )
              
              
              -Allocation
      of portion of total commissions paid to placement agent
              
              
              -
              
              
              
              -
              
              
              
              -for
      "J" units to debt issuance costs
              
              
              -
              
              
              
              33,645
              
              
              
              -Common
      stock issued to placement agent on sales of 220 "J' units,
    net
              
              
              217,042
              
              
              
              -
              
              
              
              -Total
              
              
              (217,788
              )
              
              
              (87,235
              )
              
              
              -Related
      to stock vesting and warrant-based compensation:Employee
      compensation expense
              
              
              1,488,405
              
              
              
              1,253,159
              
              
              
              3,742Non-employee
      compensation expense
              
              
              99,417
              
              
              
              95,087
              
              
              
              97,080Prepaid
      expense recognized from issuance of a warrant to a
customer
              
              
              -
              
              
              
              -
              
              
              
              173,021Total
              
              
              1,587,822
              
              
              
              1,348,246
              
              
              
              273,843Total
      non-cash transactions
              
              $
              1,370,034
              
              
              $
              1,261,011
              
              
              $
              273,843Net
      loss for year
              
              
              (16,313,223
              )
              
              $
              (15,125,903
              )
              
              $
              (8,704,497
              )Total
      stockholders' equity, end of year
              
              $
              (5,044,880
              )
              
              $
              3,823,010
              
              
              $
              6,412,586




50


Details of
these transactions by quarter for the years ending December 31, 2007, 2006 and
2005 are presented below.
 
 Fiscal Year
2007
 
 Funds
raised through private offerings to accredited investors:
  In the first quarter of 2007, we
entered into agreements with accredited investors to purchase 180 J Units,
raising $11,000,000. Pursuant to the sale, we issued 3,142,700 shares of our
common stock at a share price of $1.75 totaling $5,500,000 and issued Notes with
an initial face value of $5,500,000. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
  We paid
$1,100,000 in cash commissions and issued 199,980 shares of our common stock
which were valued at $1.93 per share or $385,961.  The total
commission value of $1,485,961 was allocated between debt issuance costs and
additional paid-in capital as a cost of raising the equity portion of the
offering, in the same proportion that was used to allocate the gross proceeds of
the offering between notes payable and stockholders’ equity.  This
resulted in an allocation to paid in capital of $650,345 and $835,616 to debt
issuance costs.
  As more fully discussed in Footnote 9,
“Convertible Notes Payable with Warrants”, in the fourth quarter of 2007 we
issued two convertible promissory notes payable with a principal value of
$3,003,186, along with a total of 2,002,150 in warrants exercisable at $3.25 per
share.  The $3,003,186 in cash proceeds were allocated between notes
payable and equity in proportion to their relative fair values on the date of
each issuance, which resulted in a discount on notes payable and reduction of
additional paid in capital of $250,910. The sales of these securities were made
in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
 
 Funds
raised through cash exercises of stock options and warrants:
 
 For the fiscal year ended December 31,
2007, stock options covering a total of 60,000 shares were exercised, generating
$60,600 in cash proceeds to the Company.  In the last two quarters of
fiscal 2007, warrants covering 796,900 shares were exercised at a discounted
price of $1.25 per share, resulting in proceeds of $996,125.
 
 Other equity
transactions:
 
 For the fiscal year ended December 31,
2007, we recognized $1,488,405 in compensation expense related to vesting of
employee stock options, and $99,417 in professional fees related to the vesting
of non-employee stock options and warrants in accordance with the accounting
guidelines set forth in SFAS 123 (R) and EITF 96-18, respectively.
 
 Fiscal Year
2006
 
 Funds
raised through private offerings to accredited investors:
 
 Pursuant to the terms of a private
placement offering sold in December 2006, which is described more fully in Note
9 to these financial statements, we sold 40 J Units to accredited
investors.  We received $2,000,000 in gross proceeds from the
offering, of which $1,000,000 was the face value of the Notes and $1,000,000 was
the face value of the 571,400 restricted shares of our common stock issued. The
transaction included a premium on the Notes of $120,880, which was allocated
from stockholders’ equity to notes payable. At December 31, 2006, we owed
$40,000 in cash commissions and were obligated to issue 10,380 shares of our
common stock to a placement agent for services related to sales of the J Units.
The shares are contractually valued at $1.93 per share or $20,033. The total
commission value of $60,033 was allocated between debt issuance costs, and
additional paid-in capital as a cost of raising the equity portion of the
offering, in the same proportion that was used to allocate the gross proceeds of
the offering between notes payable, and stockholders’ equity.  This
resulted in debt issuance costs of $33,645, which are included in prepaid
expenses on the balance sheet at December 31, 2006.  The remaining
$26,388 was allocated to additional paid-in capital. The cash commission is
included in accounts payable and other accrued expenses on the balance sheet as
of December 31, 2006 and was subsequently paid in January 2007. The 10,380
shares due to the placement agent is shown on the balance sheet in common stock
subscribed at its par value of $1 and was issued in the first quarter of
2007.  The sales of these securities were made in reliance upon Rule
506 and Section 4(2) of the Securities Act of 1933.
 51


During the
quarter ended June 30, 2006, we sold to accredited investors, through a private
offering, 6,398,335 restricted shares of our common stock at a price of one
dollar and fifty cents ($1.50) per share.  We received $9,597,503 in
gross proceeds from the offering.  We paid $709,250 in cash
commissions on these sales to the placement agent.  Commissions paid
in common stock to the placement agent totaled $496,475.  The sales of
these securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





During the quarter ended March 31,
2006, we sold to accredited investors, through a private offering, 127,500 H
Units at a price of one dollar and sixty cents ($1.60) per H Unit, with each H
Unit consisting of (i) one (1) share of  our common stock, and (ii) a
warrant to purchase up to one (1) share of our common stock at a per share
exercise price of three dollars and twenty-five cents ($3.25), exercisable until
April 14, 2008.  We received $204,000 in gross proceeds from the
offering.  No commissions were incurred for these sales. The sales of
these securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





During the quarter ended March 31,
2006, we paid cash commissions totaling $20,000 in connection with the H Unit
offering that occurred during the fourth quarter of 2005.





Funds
raised through cash exercises of warrants:





During the quarter ended September 30,
2006, investors exercised warrants to purchase 229,168 shares of our common
stock (or “shares”) at $2.00 per share for a total of $458,336. The sale of
these securities was made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





During the three months ended March 31,
2006, an investor exercised a warrant to purchase 73,332 shares at $2.00 per
share for a discounted price of $1.50 per share, resulting in gross proceeds to
the Company of $109,998. The sale of these securities was made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.  We paid
$39,125 in cash commissions in connection with the warrant exercises that
occurred during the fourth quarter of 2005. The sales of these securities were
made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.





Funds
raised through cash exercises of stock options:





For the fiscal year ended December 31,
2006, stock options covering a total of 477,902 shares were exercised,
generating $713,854 in cash proceeds to us.





Other equity
transactions:





For the fiscal year ended December 31,
2006, we recognized $1,253,159 in compensation expense related to vesting of
employee stock options, and $79,087 in professional fees related to the vesting
of non-employee stock options in accordance with the accounting guidelines set
forth in SFAS 123 (R).





During fiscal 2006, we recognized
$16,000 in non-cash professional fee expense related to issuing 10,666
restricted shares of our common stock at a price of $1.50 per share to a
vendor.





Fiscal Year
2005





Funds
raised through private offerings to accredited investors:





On or about November 15, 2005, we sold
to one accredited investor, through a private offering, 1,000,000 I Units at a
price of one dollar and sixty cents ($1.60) per I Unit, with each I Unit
consisting of (i) one (1) share of our common stock, and (ii) a warrant to
purchase up to one (1) share of our common stock at a per share exercise price
of three dollars and twenty-five cents ($3.25), exercisable until November 9,
2009. The gross proceeds from the offering were $1,600,000. The sale of these
securities was made in reliance upon Rule 506 and Section 4(2) of the Securities
Act of 1933.





From November 1, 2005 through December
31, 2005, we sold to accredited investors, through a private offering, 848,750 H
Units at a price of one dollar and sixty cents ($1.60) per H Unit, with each H
Unit consisting of (i) one (1) share of our common stock, and (ii) a warrant to
purchase up to one (1) share of our common stock at a per share exercise price
of three dollars and twenty-five cents ($3.25), exercisable until April 14,
2008. The gross proceeds from the offering were $1,358,000. In connection with
this private offering, we paid cash commissions of $64,000 in 2005 and $20,000
in the first quarter of 2006, and issued 41,364 H Units, to a placement agent in
February 2006. At December 31, 2005, the placement agent shares were recorded in
common stock subscribed at a value of $72,801, or $1.76 per share, the
contractual value paid to the placement agent. We also issued 4,375 H Units as
finders’ fees.   The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.


52


From July 1, 2005 through September 30,
2005, we sold to accredited investors, through a private offering, 778,125 H
Units at a price of one dollar and sixty cents ($1.60) per H Unit, with each H
Unit consisting of (i) one (1) share of our common stock, and (ii) a warrant to
purchase up to one (1) share of our common stock a per share exercise price of
three dollars and twenty-five cents ($3.25), exercisable until April 14, 2008.
The gross proceeds from the offering were $1,245,000. We paid cash commissions
of $124,500, and issued 41,563 H Units in February 2006, to a placement agent in
connection with this private offering. At December 31, 2005, these shares were
recorded in Common Stock Subscribed at a value of $73,151.The sales of these
securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





On or about September 2, 2005, our
Board of Directors agreed to reduce the warrant exercise price of the 1,901,250
outstanding G Units from three dollars and fifty cents ($3.50) per share to
three dollars and twenty-five cents ($3.25) per share.





From July 1, 2005 through September 30,
2005, we sold to one accredited investor, through a private offering, 250,000 G
Units at a price of one dollar and sixty cents ($1.60) per G Unit, with each G
Unit consisting of (i) one (1) share of our common stock, and (ii) a warrant to
purchase up to one (1) share of our common stock at a per share exercise price
of three dollars and fifty cents ($3.50), exercisable until April 14, 2008. The
gross proceeds from the offering were $400,000. The sales of these securities
were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.





From April 14, 2005 through June 30,
2005, we sold to accredited investors, through a private offering, 1,651,250 G
Units at a price of one dollar and sixty cents ($1.60) per G Unit, with each G
Unit consisting of (i) one (1) share of our common stock, and (ii) a warrant to
purchase up to one (1) share of our common stock at a per share exercise price
of three dollars and fifty cents ($3.50), exercisable until April 14, 2008. The
gross proceeds from the offering were $2,642,000. We paid cash commissions of
$75,000, and issued 29,829 G Units to the placement agent in connection with
this private offering. The sales of these securities were made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.





From November 12, 2004 through January
12, 2005, we sold to accredited investors, through a private offering, 2,123,000
F Units at a price of one dollar ($1.00) per F Unit, with each F Unit consisting
of (i) one (1) share of our common stock, and (ii) a warrant to purchase up to
one (1) share of our common stock at a per share exercise price of two dollars
($2.00), exercisable until November 12, 2007. The gross proceeds from the
offering were $2,123,000, of which $933,000 was received in January 2005. We
issued 963,000 shares in January 2005, including 30,000 shares that had been
recorded as common stock subscribed as of December 31, 2004. We paid cash
commissions totaling $90,350 and issued 63,181 F Units to the placement agent in
January 2005 in connection with this private offering.  The sales of
these securities were made in reliance upon Rule 506 and Section 4(2) of the
Securities Act of 1933.





Funds
raised through cash exercises of warrants:





From November 28, 2005 through December
31, 2005, we offered all shareholders who owned warrants with an exercise price
of $2.00 the right to exercise their warrants at a discounted price of $1.50 per
share. A total of 1,067,687 warrants were exercised, resulting in gross proceeds
of $1,601,531. We paid cash commissions of $39,125 to a placement agent in
connection with these warrants exercises in the first quarter of 2006. The
sales of these securities were made in reliance upon Rule 506 and Section 4(2)
of the Securities Act of 1933.





From April 14, 2005 through May 31,
2005, we offered certain shareholders who owned warrants with an exercise price
of $2.00 the right to exercise their warrants at a discounted price of $1.40 per
share. A total of 671,000 warrants were exercised, resulting in gross proceeds
of $939,400.  We paid cash commissions of $84,000 in connection with
these warrant exercises in May 2005.  The sales of these securities
were made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.





From February 1, 2005 through March 31,
2005, we offered all shareholders who owned warrants with an exercise price of
$2.00 the right to exercise their warrants at a discounted price of $1.40 per
share. Warrants covering a total of 2,140,283 shares were exercised, resulting
in gross proceeds of $2,996,396. We paid cash commissions of $109,800 in
connection with the exercise of these warrants in March and April of 2005. The
sales of these securities were made in reliance upon Rule 506 and Section 4(2)
of the Securities Act of 1933.


53


Funds
raised through cash exercises of stock options:





During the fiscal year ended December
31, 2005, a total of 103,704 shares of our common stock were purchased through
the exercise of stock options, resulting in cash proceeds of
$125,592.





Other equity
transactions:





For the fiscal year ended December 31,
2005, $18,266 in non-employee stock compensation expense was recognized related
to the vesting of options held by continuing consultants. Also in fiscal 2005, a
total of $20,790 related to an employee exercise of stock options was recorded
as compensation expense.





During fiscal 2005, we recognized
$15,158 in expense related to issuing 9,474 H Units to a vendor for
services.  At December 31, 2005, the shares were in common stock
subscribed.  They were subsequently issued in February
2006.





During fiscal 2005, we recognized
$30,000 in investor relations expense related to issuing 15,000 restricted
shares of our common stock to an investment firm for services. At December 31,
2005, the shares were in common stock subscribed.  They were
subsequently issued in February 2006.





On December 29, 2005 our Board of
Directors approved the acceleration of vesting for all unvested employee stock
options granted under the ANTs software inc. 2000 Stock Option Plan, as amended,
excluding those stock options held by non-employee directors whose options had
an exercise price less than $2.10, and certain employees who did not consent to
such acceleration.  The closing sale price of our common stock on
December 29, 2005 was $2.10.  This was the price used to determine
which options were in or out of the money.  We accelerated a total of
2,621,004 options, of which 687,866 were in the money, and 1,933,138 were out of
the money. In accordance with APB No. 25, we calculated the expense associated
with accelerating the options using the intrinsic value method.  Also
in accordance with APB No. 25, we recorded the compensation expense of $3,742
with vesting of in-the-money options in the statement of operations with a
corresponding credit to additional paid-in-capital.





As of December 31, 2005, prepaid
expenses and additional paid-in-capital included $173,021 related to the
issuance of a warrant to purchase 100,000 shares of our common stock to a
customer in exchange for a guarantee by that customer to provide maintenance and
support services for the ANTs Data Server to our customers should we be unable
to provide such services.  The fair value of the warrant was
calculated using the Black-Scholes valuation model.





On February 25, 2005, a prior
consultant exercised an option for 12,886 shares, generating cash proceeds of
$24,999.  The cash proceeds are included in total funds raised through
cash exercises of stock options in 2005 as described above.  The
option was granted in 2004 in lieu of cash compensation. Non-employee stock
compensation expense of $3,526 related to the exercise was recognized during the
six months ended June 30, 2005.





In January 2005 a sales consultant’s
contract terminated, and as part of the termination agreement, we agreed to
extend the period for exercising certain stock options from the standard 90 days
allowed under the 2002 Stock Option Plan to one year.  On May 1, 2005,
we recognized non-employee stock compensation expense of $30,130 related to the
extension.





13.
Stock-Based Compensation




2000 Stock Option
Plan




We have a
stock-based compensation program (the ANTs software inc. 2000 Stock Option Plan
or the “Plan”) which is intended to attract, retain and provide incentives for
talented employees, officers, directors and consultants, and to align
stockholder and employee interests.  We consider stock-based
compensation critical to our operations and productivity and generally all of
our employees and directors participate, as well as certain consultants. Under
the Plan, we may grant incentive stock options and non-qualified stock options
to employees, directors or consultants, at not less than the fair market value
on the date of grant for incentive stock options, and 85% of fair market value
for non-qualified options.  Options are granted at the discretion of
the Board of Directors and the Compensation Committee of the Board of
Directors.


54


Options
granted under the Plan generally vest within three years after the date of
grant, and expire 10 years after grant. Stock option vesting is generally
time-based; however, we have also issued grants with certain performance-based
vesting criteria.  Options granted to new hires generally vest 16.7%
beginning six months after the employee’s date of hire, then at 2.78% each month
thereafter such that the option is fully vested three years from date of hire.
Options granted to existing employees generally start vesting monthly following
their grant. These options vest evenly over 36 months, at which time they are
fully vested.  Following termination of employment or consulting
status there is usually a grace period during which the vested portion of the
option is exercisable. This period is typically three months, but may be shorter
or longer depending on the terms of a given stock option agreement or upon
managements’ discretion. Non-employee directors are typically granted stock
options in recognition of their service. Such directors are granted an option to
purchase up to 150,000 shares, which vest monthly over their three-year board
service term. Non-employee directors who chair a committee are granted an
additional 30,000-share option with the same vesting schedule. Directors
generally serve for terms of three years.  Options granted to
directors may include a one-year lock-up provision following termination of
their director status, during which period the option cannot be
exercised.




Stock-Based Compensation
Expense




The
following table sets forth the total stock-based compensation expense for
employees, non-employee directors and consultants for the fiscal years ended
December 31, 2007, 2006 and 2005, respectively.




2007
              
              
              2006
              
              
              2005Sales
      and marketing
              
              $
              189,188
              
              
              $
              221,586
              
              
              $
              52,791Research
      and development
              
              
              741,312
              
              
              
              507,600
              
              
              
              20,137General
      and administrative
              
              
              657,322
              
              
              
              619,060
              
              
              
              48,684Stock-based
      compensation before income taxes
              
              
              1,587,822
              
              
              
              1,348,246
              
              
              
              121,612Income
      tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -Total
      stock-based compensation expense after income taxes
              
              $
              1,587,822
              
              
              $
              1,348,246
              
              
              $
              121,612Stock-based
      compensation expense charged to:Employee
      compensation expense (includes outside directors)
              
              $
              1,488,405
              
              
              $
              1,253,159
              
              
              $
              24,532Professional
      fees - S&M consultants
              
              
              55,650
              
              
              
              13,500
              
              
              
              30,130Professional
      fees - R&D consultants
              
              
              11,837
              
              
              
              65,587
              
              
              
              18,266Professional
      fees - G&A consultants
              
              
              31,930
              
              
              
              16,000
              
              
              
              48,684Stock-based
      compensation before income taxes
              
              
              1,587,822
              
              
              
              1,348,246
              
              
              
              121,612Income
      tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -Total
      stock-based compensation expense after income taxes
              
              $
              1,587,822
              
              
              $
              1,348,246
              
              
              $
              121,612




As of
December 31, 2007, there was approximately $1,712,879 of total unrecognized
compensation cost, adjusted for forfeitures, related to non-vested stock-based
payments granted to Company employees and contractors, which is expected to be
recognized over a weighted-average period of approximately 1.67
years.  Total unrecognized compensation cost will be adjusted for
future changes in estimated forfeitures.
  Stock-based
compensation expense increased our per share net loss and basic and diluted net
loss, by the same amount, $0.03 per share, in both fiscal 2006 and fiscal 2007.
Stock-based compensation expense had no impact on cash flows used in operations
or cash flows from financing activities for either year.  Stock based
compensation for the year ended December 31, 2005 represents expenses recognized
in accordance with EITF 96-18 “Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services” and SFAS 123 ““Accounting for Stock-Based Compensation”, as amended by
SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”
(“SFAS 148”).  We have recorded the fair value of each stock option
issued to non-employees as determined at the date of grant and at each interim
reporting period using the Black-Scholes option pricing model.
  Net cash
proceeds from the exercise of stock options were $60,600 and $713,854 for the
years ended December 31, 2007 and 2006, respectively. No income tax benefit was
realized from stock option exercises during the fiscal year, due to our net loss
from operations for the period.  In accordance with SFAS 123(R), if
there had been excess tax benefits from the exercise of stock options, these
would have been shown as financing cash flows rather than operating cash
flows.
 55


Pro-forma Disclosure under
SFAS 123(R) and SFAS 148






Prior to
the adoption of SFAS 123(R) on January 1, 2006, we applied SFAS 123 as amended
by SFAS 148.  These rules allowed companies to apply the existing
accounting rules under Accounting Principles Board No. 25, “Accounting for Stock
Issued to Employees,” (“APB 25”) and related Interpretations. In general, as the
exercise price of options granted under these plans was equal to the market
price of the underlying common stock on the grant date, no stock-based
compensation cost was recognized in our statements of operations for periods
prior to the adoption of SFAS 123(R). As required by SFAS 148 prior to the
adoption of SFAS 123(R), we disclosed reported net loss, which included
stock-based compensation expense of $0, calculated in accordance with APB 25,
and then pro forma net loss as if the fair-value-based compensation expense
calculated in accordance with SFAS 123 had been recorded in the financial
statements.   The following table illustrates the effect on net
loss after tax, and net loss per common share, as if we had applied the fair
value recognition provisions of SFAS 123 to stock-based compensation during the
fiscal year ended December 31, 2005.




Net
      loss as reported for fiscal year ended December 31, 2005
            
            $
            (8,704,497
            )Less:
      total stock-based compensation expense foremployees
      determined under the SFAS 123 fair-value method, net
            
            
            (7,215,475
            )Net
      loss, pro forma
            
            $
            (15,919,972
            )Basic
      and diluted net loss per share:As
      reported
            
            $
            (0.22
            )Pro
      forma
            
            $
            (0.40
            )




Valuation
Assumptions




The fair value of employee and
non-employee stock-based awards was estimated using the Black-Scholes valuation
model with the following weighted-average assumptions for the fiscal years ended
December 31, 2007, 2006 and 2005.




Fiscal
      Years ended December 31,2007
            
            
            2006
            
            
            2005Expected
      Life in Years
            
            
            3.00
            
            
            
            3.00
      - 6.00
            
            
            
            5.00Volatility
            
            
            66%
      - 67%
            
            
            
            79%
      - 96%
            
            
            
            116%Interest
      Rate
            
            
            3.50% -
      4.76%
            
            
            
            4.55%
      - 5.00%
            
            
            
            4.02%Yield
      Rate
            
            
            0.00%
            
            
            
            0.00%
            
            
            
            0.00%




The
computation of expected volatility for the fiscal years ended December 31, 2007,
2006 and 2005 is based on a combination of historical and market-based
implied volatility. The computation of expected life is based on historical
exercise patterns which generally represent the full vesting date for employee
grants and contractual life of the award for non-employee grants. The
interest rate for periods within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of grant.




Prior to
the adoption of SFAS 123(R), on December 29, 2005, our Board of Directors
approved the acceleration of vesting for all unvested employee stock options
granted under the ANTs software inc. 2000 Stock Option Plan (the “Plan”), as
amended, excluding those stock options held by non-employee directors whose
options had an exercise price less than $2.10, and certain employees who did not
consent to such acceleration.  The closing sale price of our common
stock on December 29, 2005 was $2.10.  This was the price used to
determine which options were “in” or “out of the money”.  We
accelerated a total of 2,621,004 options, of which 687,866 were in the money,
and 1,933,138 were out of the money. The vesting of the stock options was
accelerated to December 29, 2005 so that we would not incur approximately $4.6
million in compensation expense in the 2006-2008 fiscal years that otherwise
would have been recorded under SFAS 123(R).


56


14.  Stock
Options and Warrants




Stock
option and warrant activity for the year ending December 31, 2007 is as
follows:




Stock
      Option Shares
              
              
              
              
              
              Total
      OptionsAvailable
              
              
              
              
              
              Warrants
              
              
              and
      Warrantsfor Grant
              
              
              Outstanding
              
              
              Outstanding
              
              
              OutstandingBalance,
      December 31, 2006
              
              
              1,310,270
              
              
              
              8,091,569
              
              
              
              8,262,911
              
              
              
              16,354,480Granted
              
              
              (1,804,167
              )
              
              
              1,804,167
              
              
              
              2,122,150
              
              
              
              3,926,317Exercised
              
              
              -
              
              
              
              (60,000
              )
              
              
              (796,900
              )
              
              
              (856,900
              )Retired/forfeited
              
              
              1,146,686
              
              
              
              (1,146,686
              )
              
              
              (1,463,781
              )
              
              
              (2,610,467
              )Balance,
      December 31, 2007
              
              
              652,789
              
              
              
              8,689,050
              
              
              
              8,124,380
              
              
              
              16,813,430Exercisable
      at December 31, 2007
              
              
              
              6,734,741
              
              
              
              8,014,380
              
              
              
              14,749,121




Stock Option Activity




The
following table summarizes stock option plan activity and shares available for
grant for the years ended December 31, 2007, 2006 and 2005:




Outstanding
      OptionsSharesAvailablefor
    Grant
              
              
              Number
      of
                  Shares
              
              
              Weighted
                    Average
                  Exercise
      Price
              
              
              Weighted
                    AverageRemainingContractualTerm
      (in years)
              
              
              Aggregate
                  Intrinsic
      ValueOutstanding
      at December 31, 2004
              
              
              35,883
              
              
              
              4,969,448
              
              
              $
              1.93
              
              
              
              7.66
              
              
              
              1,242,362Additional
      shares reserved
              
              
              5,000,000
              
              
              
              -
              
              
              
              -Granted
              
              
              (3,671,500
              )
              
              
              3,671,500
              
              
              
              2.48Exercised
      through cash consideration
              
              
              -
              
              
              
              (103,704
              )
              
              
              1.21Exercised
      through non-cash consideration
              
              
              -
              
              
              
              (21,886
              )
              
              
              2.09Expired/forfeited/cancelled
              
              
              454,557
              
              
              
              (454,557
              )
              
              
              2.25Outstanding
      at December 31, 2005
              
              
              1,818,940
              
              
              
              8,060,801
              
              
              
              2.17
              
              
              
              7.96
              
              
              
              (725,472
              )Granted
              
              
              (3,350,000
              )
              
              
              3,350,000
              
              
              
              2.25Exercised
      through cash consideration
              
              
              -
              
              
              
              (477,902
              )
              
              
              1.49Expired/forfeited/cancelled
              
              
              2,841,330
              
              
              
              (2,841,330
              )
              
              
              2.45Outstanding
      at December 31, 2006
              
              
              1,310,270
              
              
              
              8,091,569
              
              
              
              2.14
              
              
              
              7.01
              
              
              $
              2,265,639Granted
              
              
              (1,804,167
              )
              
              
              1,804,167
              
              
              
              1.77Exercised
      through cash consideration
              
              
              -
              
              
              
              (60,000
              )
              
              
              1.01Expired/forfeited/cancelled
              
              
              1,146,686
              
              
              
              (1,146,686
              )
              
              
              2.32Outstanding
      at December 31, 2007
              
              
              652,789
              
              
              
              8,689,050
              
              
              $
              2.05
              
              
              
              6.87
              
              
              $
              (11,643,327
              )Exercisable
      at December 31, 2007
              
              
              
              
              
              
              6,734,741
              
              
              $
              2.09
              
              
              
              6.20
              
              
              $
              (9,293,943
              )


57


The
aggregate intrinsic value of total stock options outstanding and
exercisable during the fiscal year ended December 31, 2007 in the table
above, represents the total pretax intrinsic value (i.e., the difference between
our closing stock price on December 31, 2007 and the exercise price, times the
number of shares) that would have been received by the option holders had all
option holders exercised their options on December 31, 2007. Aggregate intrinsic
value changes as the fair market value of our stock changes.  The
closing market price of the stock on December 31, 2007 was $0.71.  The
weighted average grant date fair value of stock options granted during 2007,
2006 and 2005 was $0.76, $1.44 and $2.05, respectively.




The range
of exercise prices for stock options outstanding and exercisable at December 31,
2007 are summarized as follows:




Total Options Outstanding as of December 31,
      2007Weighted
              
              
              WeightedAverage
      Exercise
              
              
              Average
      RemainingOptions
              
              
              Price per Share
              
              
              Contractual LifeRange
      of exercise prices:$0.52
      - $0.99
              
              
              417,500
              
              
              $
              0.70
              
              
              
              5.57$1.00
      - $1.99
              
              
              3,512,661
              
              
              $
              1.66
              
              
              
              7.81$2.00
      - $2.99
              
              
              4,033,448
              
              
              $
              2.35
              
              
              
              6.45$3.00
      - $3.99
              
              
              725,441
              
              
              $
              3.05
              
              
              
              5.43Total
      stock options outstandingat
      December 31, 2007
              
              
              8,689,050
              
              
              $
              2.05
              
              
              
              6.87
  Total Options Exercisable at December 31,
      2007Weighted
              
              
              WeightedAverage
      Exercise
              
              
              Average
      RemainingOptions
              
              
              Price per Share
              
              
              Contractual LifeRange
      of exercise prices:$0.52
      - $0.99
              
              
              407,500
              
              
              $
              0.70
              
              
              
              5.46$1.00
      - $1.99
              
              
              2,293,653
              
              
              $
              1.62
              
              
              
              6.91$2.00
      - $2.99
              
              
              3,308,147
              
              
              $
              2.39
              
              
              
              5.97$3.00
      - $3.99
              
              
              725,441
              
              
              $
              3.05
              
              
              
              5.43Total
      stock options exercisableat
      December 31, 2007
              
              
              6,734,741
              
              
              $
              2.09
              
              
              
              6.20




Stock-based Awards to Board
of Directors
  On August
16, 2006, Mr. Boyd Pearce, our former CEO, resigned, and we entered into a
separation agreement pursuant to which (i) a stock option granted to Mr. Pearce
in April 2005, covering 750,000 shares of our common stock was cancelled and
replaced by a five-year warrant covering the same number of shares at the same
exercise price; (ii) stock options granted in October 2004 covering a total of
750,000 shares of common stock were modified to have a five-year exercise
period, and; (iii) restrictions were placed on Mr. Pearce’s ability to sell
stock purchased under both the newly granted warrant and the modified options.
We recorded no expense in our Statements of Operations related to the
cancellation of the April 2005 option grant and the subsequent warrant grant
since the exercise price of the warrant was greater than the market price of our
common stock on the date of the warrant grant, and the fair value of the
warrant, calculated using the Black-Scholes valuation model, was less than the
fair value of the original option grant. We recorded compensation expense of
$198,750 during the period ending September 30, 2006 related to the modification
of the October 2004 option grants. No future expense is anticipated as both the
warrant and options were fully vested at the date of modification.
  On
August 22, 2006, we entered into Cancellation and Regrant Agreements with
directors Thomas Holt, Homer Dunn, John Gaulding, and Robert Henry
Kite.  Under these Agreements certain non-qualified options to
purchase shares of our common stock were replaced with Warrants to purchase
shares of our common stock.  The exercise prices and terms of the
warrants mirrored the exercise prices and terms of the non-qualified stock
options.  The exercise prices ranged from $2.60 per share to $6.38 per
share for Thomas Holt, from $2.60 per share to $2.85 per share for John
Gaulding, from $2.60 per share to $2.85 per share for Homer Dunn, and from $2.35
per share to $2.85 per share for Robert Henry Kite.  The cancelled
stock options and granted warrants covered an aggregate of 192,500 shares for
Thomas Holt, 322,500 shares for John Gaulding, 262,500 shares for Homer Dunn,
and 245,000 shares for Robert Henry Kite.  No financial benefit was
conferred on the directors from the exchange of their stock options for warrants
as the exercise prices and terms of the warrants mirrored the exercise prices
and terms of the options. These option cancellations and warrant grants helped
us through a period of heavy recruiting.  We intend to reduce the
number of shares in one or more future intended stock option or equity incentive
plans by the aggregate number of shares covered by these warrants.  We
recorded no expense in our Statements of Operations for these transactions since
the warrants all had exercise prices greater than the market price of the stock
on the date of grant, and the fair value of the warrant awards calculated using
the Black-Scholes valuation model was less than the fair value of the original
option awards.
 58


On
September 8, 2006, Mr. Girish Mundada, our former vice president of engineering,
resigned and we entered into a separation agreement pursuant to which: (i) stock
options covering an aggregate of 410,000 shares of Company common stock were
modified to extend the standard post-termination exercise period from three
months following termination through June 8, 2008; (ii) restrictions were placed
on Mr. Mundada’s ability to sell stock purchased under the stock options, and;
(iii) stock options covering an aggregate of 210,000 shares of our common
stock  were cancelled. We recorded compensation expense of $66,000
during the period ending September 30, 2006 related to the modification of Mr.
Mundada’s options. No future expense is anticipated as the options were fully
vested at the date of modification.




Warrants
Outstanding





Warrants
outstanding as of December 31, 2007 are summarized in the table
below:





Exercise
      Prices
            
            
            Weighted
              Average
            
            Year
      ofWarrants
            
            
            per Share
            
            
            Exercise Price
            
            ExpirationWarrants
      purchased in privateplacements:3,342,230
            
            
            $
            3.25
            
            
            
            
            20081,000,000
            
            
            $
            3.25
            
            
            
            
            20092,002,150
            
            
            $
            3.25
            
            
            $
            3.25
            
            2010Subtotal
            
            
            6,344,380Warrants
      issued to customer andvendors:100,000
            
            
            $
            3.50
            
            
            
            
            
            2008170,000
            
            
            $
            1.45
      - $1.99
            
            
            
            
            
            2009Subtotal
            
            
            270,000
            
            
            
            
            
            
            $
            2.46Warrants
      issued to outside directorsand
      former employee:50,000
            
            
            $
            6.38
            
            
            
            
            
            2010850,000
            
            
            $
            2.31
      - $2.75
            
            
            
            
            
            2011260,000
            
            
            $
            2.35
      - $2.60
            
            
            
            
            
            2015350,000
            
            
            $
            2.85
            
            
            
            
            
            2016Subtotal
            
            
            1,510,000
            
            
            
            
            
            
            $
            2.63Total
      warrants outstanding atDecember
      31, 2007
            
            
            8,124,380




Of the total warrants outstanding at
December 31, 2007, 8,014,380 were fully vested and exercisable, and 110,000 were
not yet vested or exercisable.  The unvested warrants, held by the
outside directors, vest fully during the period May 8, 2008 through May 8, 2009
and have an exercise price of $2.85 per share.


59


15.  Concentration
of Credit Risk




We
maintain cash balances at one financial institution in excess of the federally
insured limit of $100,000 per institution.  At December 31, 2007, our
uninsured cash balances totaled $4,380,694.  At December 31, 2007, one
customer accounted for 100% of our trade accounts receivable balance of $8,204.
The entire balance was collected in January 2008.





16.  Employee
Benefit Plans




We have a
401(k) Income Deferral Plan (the “401K Plan”) immediately open to all employees
regardless of age or tenure.  We may make a discretionary contribution
to the 401K Plan each year, allocable to all 401K Plan
participants.  However, we elected to make no contributions for the
years ended December 31, 2007, 2006 and 2005.  Administrative fees for
the 401K Plan totaled $4,378, $3,600 and $3,200 for the years ended December 31,
2007, 2006 and 2005, respectively.




60


SIGNATURES


Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf as of the 15th day of March 2007
by the undersigned, thereunto duly authorized.
  ANTs
      software inc.By
                /s/ Joseph
      KozakJoseph
      Kozak,Chairman,
      Chief Executive Officer and
President




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 By
                    /s/ Joseph
      KozakJoseph
      Kozak,Chief
      Executive Officer and PresidentDate
                    March
      14,
      2008By
                    /s/
      Kenneth
      RuotoloKenneth
      Ruotolo, Secretary and
                      Chief
      Financial OfficerDate
                    March
      14,
      2008
  61




DIRECTORSBy
                /s/ Joseph
      KozakJoseph
      Kozak, Chairman,
      Chief Executive Officer
                  and
      PresidentDate
                March
      14,
      2008By
                /s/
      Craig L.
      CampbellCraig
      Campbell, DirectorDate
                March
      14,
      2008By
                /s/
      John R.
      GauldingJohn
      R. Gaulding, DirectorDate
                March
      14,
      2008By
                /s/
      Thomas
      HoltThomas
      Holt, DirectorDate
                March
      14,
      2008By
                /s/
      Robert T.
      JettRobert
      Jett, DirectorDate
                March
      14,
      2008By
                /s/
      Ari
      KaplanAri
      Kaplan, DirectorDate
                March
      14,
      2008By
                /s/
      Robert H.
      KiteRobert
      H. Kite, DirectorDate
                March
      14,
      2008By
                /s/
      Francis K. RuotoloFrancis
      K. Ruotolo, DirectorDate
                March
      14, 2008




62




(a)
                Exhibits3.1
                Amended
      and Restated Certificate of Incorporation of the Company, as listed in
      Exhibit 3.1 to the Company’s 10-QSB filed on August 14, 2003, is hereby
      incorporated by reference.3.2
                Amended
      and Restated Bylaws of the Company.3.3
                2000
      Stock Option Plan of the Company, amended April 5, 2005, as listed in
      Exhibit 10.1 to the Company’s 8-K filed on April 12, 2005, is hereby
      incorporated by reference.10.1
                Agreement
      to Terminate Separation Agreement, between the Company andFrancis K.
      Ruotolo, as listed in Exhibit 10.1 to the Company’s 8-K filed on January
      1, 2005, is hereby incorporated by reference.10.2
                Form
      of Indemnification Agreement signed with officers and directors of the
      Company, as listed in Exhibit 10.5 to the Company’s 10-KSB filed on March
      22, 2001, is hereby incorporated by reference.10.3
                Termination
      of Contingent Bonus Agreements, signed with officers and directors of the
      Company, as listed in Exhibits 10.9 through 10.14 to the Company’s 8-K
      filed on April 29, 2005, are hereby incorporated by
    reference.10.4
                Standard
      Multi-Tenant Office Lease, as listed in Exhibit 10.6 to the Company’s
      10-QSB filed on November 14, 2005, is hereby incorporated by
      reference.14
                Code
      of Ethics, as listed in Exhibit 14 to the Company’s 10-KSB filed on March
      30, 2004, is hereby incorporated by reference.20.
                Transcript
      of disclosures made during a teleconference for shareholders held October
      18, 2005, as listed in the Company’s 8-K filed on October 19, 2005, is
      hereby incorporated by reference.23.1
                Letter
      of Consent from Independent Registered Accountants, Burr, Pilger &
      Mayer, LLP.31.1
                Certification
      of the Chief Executive Officer required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
                Certification
      of the Chief Financial Officer required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
                Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002(b)
                Reports
      on Form 8-KWe
      filed the following reports on Form 8-K during the period from October 1,
      2007 through December 31, 2007:
  1)
                  On
      November 19, 2007, we disclosed that we had issued a press release that
      contained information regarding our results of operations and financial
      condition for the three and nine months ended September 30, 2007 and
      2006.2)
                  On
      December 18, 2007, we released a letter to our shareholders providing an
      update on the Company.3)
                  On
      December 21, 2007, we disclosed an unregistered sale of our debt and
      equity securities in the amount of
  $1,003,225.50.