| Delaware                              | 13-3054685                           |
|---------------------------------------|--------------------------------------|
| (State or other jurisdiction of  | (I.R.S. Employer Identification No.) |
| incorporation or organization)        |                                 |

| Large accelerated filer [  ]                                                    | Accelerated filer [  ]   |
|-------------------------------------------------------------------------------------------|-------------------------------|
|                                                                                      |                          |
| Non-accelerated filer [  ] (Do not check if a smaller reporting company)   | Smaller reporting company [X] |

----

|     | TABLE OF CONTENTS                                                                                                           |   |     |   |
|----------|-----------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|     |                                                                                                                        |   |     |   |
|     | PART I—FINANCIAL INFORMATION                                                                                          |   |     |   |
|     |                                                                                                                        |   |     |   |
|     | SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS                                                                           |   |     | 1      |   |
|     |                                                                                                                        |   |     |   |   |
| ITEM 1.  | FINANCIAL STATEMENTS.                                                                                                       |   |     |   |   |
|     | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009                                 |   |     | 2      |   |
|     | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009       |   |     | 3      |   |
|     | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 |   |     | 4      |   |
|     | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009                 |   |     | 5      |   |
|     | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                            |   |     | 6      |   |
|     |                                                                                                                        |   |     |   |   |
| ITEM 2.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.                               |   |  21 |   |
| ITEM 3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.                                                                  |   |  31 |   |
| ITEM 4T. | CONTROLS AND PROCEDURES.                                                                                                    |   |  31 |   |
|     |                                                                                                                        |   |     |   |   |
|     | PART II-OTHER INFORMATION                                                                                                   |   |     |   |   |
|     |                                                                                                                        |   |     |   |   |
| ITEM 1.  | LEGAL PROCEEDINGS.                                                                                                          |   |  32 |   |
| ITEM 1A. | RISK FACTORS.                                                                                                               |   |  32 |   |
| ITEM 2.  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.                                                                |   |  33 |   |
| ITEM 3.  | DEFAULTS UPON SENIOR SECURITIES.                                                                                            |   |  33 |   |
| ITEM 4.  | REMOVED AND RESERVED.                                                                                                       |   |  33 |   |
| ITEM 5.  | OTHER INFORMATION.                                                                                                          |   |  33 |   |
| ITEM 6.  | EXHIBITS.                                                                                                                   |   |  33 |   |
|     |                                                                                                                        |   |     |   |   |
|     | SIGNATURES                                                                                                                  |   |  35 |   |

----

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

----

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ANTS SOFTWARE INC.

|                                                                                                                                                                                                                                                                                                                         |   | June 30,2010 |         |   | December 31,2009 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------------|--------|------------------|--------|
| ASSETS                                                                                                                                                                                                                                                                                                                       |   | (Unaudited)  |         |   |             |   |
| Current assets:                                                                                                                                                                                                                                                                                                              |   |         |         |   |             |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                    |   | $            | 1,298,984    |   |             | $      | 1,168,024 |   |
| Accounts receivable, net                                                                                                                                                                                                                                                                                                     |   |         | 560,718      |   |             |   | 560,439 |   |
| Note receivable from customer                                                                                                                                                                                                                                                                                                |   |         | --           |   |             |   | 400,000 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                    |   |         | 362,736      |   |             |   | 308,718 |   |
| Total current assets                                                                                                                                                                                                                                                                                                         |   |         | 2,222,438    |   |             |   | 2,437,181 |   |
|                                                                                                                                                                                                                                                                                                                         |   |         |         |   |             |   |   |   |
| Property and equipment, net of accumulated depreciation of $745,860 and $661,251                                                                                                                                                                                                                                             |   |         | 839,298      |   |             |   | 360,078 |   |
| Intangible assets, net of accumulated amortization of $1,735,416 and $1,318,916                                                                                                                                                                                                                                              |   |         | 4,254,584    |   |             |   | 4,671,084 |   |
| Goodwill                                                                                                                                                                                                                                                                                                                     |   |         | 22,761,517   |   |             |   | 22,761,517 |   |
| Other assets                                                                                                                                                                                                                                                                                                                 |   |         | 39,997       |   |             |   | 39,997 |   |
| Total assets                                                                                                                                                                                                                                                                                                                 |   | $            | 30,117,834   |   |             | $      | 30,269,857 |   |
|                                                                                                                                                                                                                                                                                                                         |   |         |         |   |             |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                                   |   |         |         |   |             |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                         |   |         |         |   |             |   |   |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                        |   | $            | 2,576,608    |   |             | $      | 1,805,157 |   |
| Line of credit                                                                                                                                                                                                                                                                                                               |   |         | 250,000      |   |             |   | 250,000 |   |
| Current portion of convertible promissory notes, net of debt discount of $437,500                                                                                                                                                                                                                                            |   |         | 1,562,500    |   |             |   | -- |   |
| Current portion of other long-term debt                                                                                                                                                                                                                                                                                      |   |         | 53,217       |   |             |   | 63,396 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                             |   |         | 288,061      |   |             |   | 451,568 |   |
| Share-based liabilities                                                                                                                                                                                                                                                                                                      |   |         | 110,742      |   |             |   | -- |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                    |   |         | 4,841,128    |   |             |   | 2,570,121 |   |
|                                                                                                                                                                                                                                                                                                                         |   |         |         |   |             |   |   |   |
| Convertible promissory notes, net of debt discount of $812,500                                                                                                                                                                                                                                                               |   |         | --           |   |             |   | 1,187,500 |   |
| Other long-term debt, less current portion                                                                                                                                                                                                                                                                                   |   |         | 71,661       |   |             |   | 98,709 |   |
| Deferred tax liability                                                                                                                                                                                                                                                                                                       |   |         | 344,000      |   |             |   | 344,000 |   |
| Derivative liabilities                                                                                                                                                                                                                                                                                                       |   |         | 19,741,304   |   |             |   | -- |   |
| Total liabilities                                                                                                                                                                                                                                                                                                            |   |         | 24,998,093   |   |             |   | 4,200,330 |   |
|                                                                                                                                                                                                                                                                                                                         |   |         |         |   |             |   |   |   |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                |   |         |         |   |             |   |   |   |
|                                                                                                                                                                                                                                                                                                                         |   |         |         |   |             |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                  |   |         |         |   |             |   |   |   |
| Preferred stock, 50,000,000 shares authorized                                                                                                                                                                                                                                                                                |   |         | --           |   |             |   | -- |   |
| Series A convertible preferred stock, $0.0001 par value;    12,000,000 shares designated; 9,979,139 and 9,428,387    shares issued and outstanding as of June 30, 2010 and    December 31, 2009, respectively (liquidation preference of    $9,979,139 and $9,428,387, respectively) |   |         | 998          |   |             |   | 943 |   |
| Common stock, $0.0001 par value; 200,000,000 shares    authorized; 113,190,617 and 101,892,993 shares issued and    outstanding at June 30, 2010 and December 31, 2009, respectively                                                                                                                     |   |         | 11,319       |   |             |   | 10,189 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                   |   |         | 146,548,947  |   |             |   | 139,297,697 |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                          |   |         | (141,441,523 | )      |             |   | (113,239,302 | ) |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                             |   |         | 5,119,741    |   |             |   | 26,069,527 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                             |   | $            | 30,117,834   |   |             | $      | 30,269,857 |   |

----

ANTS SOFTWARE INC

|                                                                                     |   | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |   |
|------------------------------------------------------------------------------------------|--------|------------------------------------|-------------|--------|----------------------------------|--------|
|                                                                                     |   | 2010                               |        |   | 2009                             |   |   | 2010 |   |   | 2009 |   |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Revenues, net of trade discounts                                                         |   | $                                  | 1,503,586   |   |                             | $      | 1,369,587 |   |   | $ | 3,010,398 |   |   | $ | 2,757,944 |   |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                                                         |   |                               | 1,339,792   |   |                             |   | 1,231,834 |   |   |   | 3,365,602 |   |   |   | 2,457,603 |   |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                                                                      |   |                               | 163,794     |   |                             |   | 137,753 |   |   |   | (355,204 | ) |   |   | 300,341 |   |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                      |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                                 |   |                               | 743,742     |   |                             |   | 398,331 |   |   |   | 1,885,941 |   |   |   | 934,288 |   |
| Sales and marketing                                                                      |   |                               | 378,562     |   |                             |   | 505,998 |   |   |   | 851,920 |   |   |   | 1,023,303 |   |
| General and administrative                                                               |   |                               | 2,210,425   |   |                             |   | 1,504,871 |   |   |   | 4,296,480 |   |   |   | 2,645,340 |   |
| Total operating expenses                                                                 |   |                               | 3,332,729   |   |                             |   | 2,409,200 |   |   |   | 7,034,341 |   |   |   | 4,602,931 |   |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                                           |   |                               | (3,168,935  | )      |                             |   | (2,271,447 | ) |   |   | (7,389,545 | ) |   |   | (4,302,590 | ) |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Other (expense) income, net:                                                             |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Expense in connection with issuance of derivative liabilities                            |   |                               | --          |   |                             |   | -- |   |   |   | (16,249,080 | ) |   |   | -- |   |
| Net change in fair value of derivative liabilities                                       |   |                               | (2,263,985  | )      |                             |   | -- |   |   |   | (2,112,374 | ) |   |   | -- |   |
| Loss on conversion/ extinguishment of convertible promissory notes                       |   |                               | --          |   |                             |   | (495,833 | ) |   |   | -- |   |   |   | (495,833 | ) |
| Interest expense                                                                         |   |                               | (241,488    | )      |                             |   | (1,141,052 | ) |   |   | (482,405 | ) |   |   | (2,213,539 | ) |
| Interest income                                                                          |   |                               | --          |   |                             |   | 237 |   |   |   | -- |   |   |   | 2,720 |   |
| Other (expense) income, net                                                              |   |                               | (554,956    | )      |                             |   | (1,590 | ) |   |   | (665,112 | ) |   |   | (3,805 | ) |
| Total other (expense) income                                                             |   |                               | (3,060,429  | )      |                             |   | (1,638,238 | ) |   |   | (19,508,971 | ) |   |   | (2,710,457 | ) |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                 |   |                               | (6,229,364  | )      |                             |   | (3,909,685 | ) |   |   | (26,898,516 | ) |   |   | (7,013,047 | ) |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Deemed dividend related to beneficial conversion on Series A convertible preferred stock |   |                               | (910,848    | )      |                             |   | -- |   |   |   | (1,303,705 | ) |   |   | -- |   |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net loss applicable to common stockholders                                               |   | $                                  | (7,140,212  | )      |                             | $      | (3,909,685 | ) |   | $ | (28,202,221 | ) |   | $ | (7,013,047 | ) |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share                                                     |   | $                                  | (0.07       | )      |                             | $      | (0.04 | ) |   | $ | (0.26 | ) |   | $ | (0.08 | ) |
|                                                                                     |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share                            |   |                               | 109,177,067 |   |                             |   | 92,518,076 |   |   |   | 106,846,218 |   |   |   | 91,588,388 |   |

----

ANTS SOFTWARE INC

|                                                                                                                   |   | Series A Convertible |      |   |         |   |   |    |   |   |        |   | Additional |    |   |   |    |   |        |   |   |   |
|------------------------------------------------------------------------------------------------------------------------|--------|----------------------|-----------|--------|--------------|--------|--------|---------|--------|--------|-------------|--------|------------|---------|--------|--------|---------|--------|-------------|--------|--------|--------|
|                                                                                                                   |   | Preferred Stock      |      |   | Common Stock |   |   | Paid-in |   |   | Accumulated |   |       |    |   |   |
|                                                                                                                   |   | Shares               |      |   | Amount       |   |   | Shares  |   |   | Amount      |   |       | Capital |   |   | Deficit |   |        | Total  |   |
|                                                                                                                   |   |                 |      |   |         |   |   |    |   |   |        |   |       |    |   |   |    |   |        |   |   |
| Balance at January 1, 2010                                                                                             |   |                 | 9,428,387 |   |         | $      | 943    |    |   |   | 101,892,993 |   |       | $       | 10,189 |   |    | $      | 139,297,697 |   |   | $      | (113,239,302 | ) |   | $ | 26,069,527 |   |
| Net proceeds from private placement                                                                                    |   |                 | --        |   |         |   | --     |    |   |   | 4,071,088   |   |       |    | 407    |   |    |   | 1,845,722   |   |   |   | -- |   |   |   | 1,846,129 |   |
| Par value of shares issued in private placement with derivative liabilities                                       |   |                 | --        |   |         |   | --     |    |   |   | 1,500,000   |   |       |    | 150    |   |    |   | --          |   |   |   | -- |   |   |   | 150 |   |
| Quarterly share payment to investor per private placement agreement                                                    |   |                 | --        |   |         |   | --     |    |   |   | 128,818     |   |       |    | 13     |   |    |   | 110,729     |   |   |   | -- |   |   |   | 110,742 |   |
| Vesting and issuance of common stock and warrants to purchase common stock granted for consulting arrangements         |   |                 | --        |   |         |   | --     |    |   |   | 200,000     |   |       |    | 20     |   |    |   | 406,381     |   |   |   | -- |   |   |   | 406,401 |   |
| Stock issued for employee and director compensation under the stock plans                                              |   |                 | --        |   |         |   | --     |    |   |   | 4,919,184   |   |       |    | 492    |   |    |   | 1,707,496   |   |   |   | -- |   |   |   | 1,707,988 |   |
| Stock issued for non-employee compensation under the stock plan, subject to vesting                                    |   |                 | --        |   |         |   | --     |    |   |   | 52,891      |   |       |    | 5      |   |    |   | 160,706     |   |   |   | -- |   |   |   | 160,711 |   |
| Stock-based compensation expense – employees                                                                     |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 511,481     |   |   |   | -- |   |   |   | 511,481 |   |
| Stock-based compensation expense – non-employees                                                                 |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 323,494     |   |   |   | -- |   |   |   | 323,494 |   |
| Exercise of common stock warrants                                                                                      |   |                 | --        |   |         |   | --     |    |   |   | 174,993     |   |       |    | 18     |   |    |   | 77,479      |   |   |   | -- |   |   |   | 77,497 |   |
| Exercise of preferred stock warrants                                                                                   |   |                 | 550,752   |   |         |   | 55     |    |   |   | --          |   |       |    | --     |   |    |   | 550,697     |   |   |   | -- |   |   |   | 550,752 |   |
| Exercise of employee stock options                                                                                     |   |                 | --        |   |         |   | --     |    |   |   | 250,650     |   |       |    | 25     |   |    |   | 253,360     |   |   |   |   |   |   |   | 253,385 |   |
| Deemed dividend related to beneficial conversion feature on Series A convertible preferred stock                       |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 1,303,705   |   |   |   | (1,303,705 | ) |   |   | -- |   |
| Net loss                                                                                                               |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | --          |   |   |   | (26,898,516 | ) |   |   | (26,898,516 | ) |
| Balance at June 30, 2010                                                                                               |   |                 | 9,979,139 |   |         | $      | 998    |    |   |   | 113,190,617 |   |       | $       | 11,319 |   |    | $      | 146,548,947 |   |   | $      | (141,441,523 | ) |   | $ | 5,119,741 |   |
|                                                                                                                   |   |                 |      |   |         |   |   |    |   |   |        |   |       |    |   |   |    |   |        |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2009                                                                                             |   |                 | --        |   |         | $      | --     |    |   |   | 90,648,369  |   |       | $       | 9,065  |   |    | $      | 115,963,846 |   |   | $      | (87,929,614 | ) |   | $ | 28,043,297 |   |
| Net proceeds from private placements to accredited investors                                                           |   |                 | --        |   |         |   | --     |    |   |   | 847,500     |   |       |    | 85     |   |    |   | 338,915     |   |   |   | -- |   |   |   | 339,000 |   |
| Issuance of warrants to purchase 287,500 shares of common stock with the issuance of two 1% convertible notes          |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 78,693      |   |   |   | -- |   |   |   | 78,693 |   |
| Beneficial conversion feature of two 1% convertible notes                                                              |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 20,125      |   |   |   | -- |   |   |   | 20,125 |   |
| Conversion of 1% notes                                                                                                 |   |                 | --        |   |         |   | --     |    |   |   | 287,500     |   |       |    | 29     |   |    |   | 114,971     |   |   |   | -- |   |   |   | 115,000 |   |
| Conversion of 10% convertible promissory notes, net of commission                                                      |   |                 | --        |   |         |   | --     |    |   |   | 1,770,833   |   |       |    | 177    |   |    |   | 758,783     |   |   |   | -- |   |   |   | 758,960 |   |
| Stock issued to placement agent for conversion of 10% convertible promissory notes                                     |   |                 | --        |   |         |   | --     |    |   |   | 23,850      |   |       |    | 2      |   |    |   | 12,354      |   |   |   | -- |   |   |   | 12,356 |   |
| Stock issuable for the extension of a 10% convertible promissory note and interest payments                            |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 11,450      |   |   |   | -- |   |   |   | 11,450 |   |
| Issuance of common stock and warrants to purchase common stock granted for consulting arrangements, subject to vesting |   |                 | --        |   |         |   | --     |    |   |   | 200,000     |   |       |    | 20     |   |    |   | 35,306      |   |   |   | -- |   |   |   | 35,326 |   |
| Stock issued for employee compensation under the stock plans, subject to vesting                                       |   |                 | --        |   |         |   | --     |    |   |   | 1,264,743   |   |       |    | 126    |   |    |   | 62,479      |   |   |   | -- |   |   |   | 62,605 |   |
| Stock issued for non-employee compensation under the stock plan, subject to vesting                                    |   |                 | --        |   |         |   | --     |    |   |   | 195,000     |   |       |    | 20     |   |    |   | 9,632       |   |   |   | -- |   |   |   | 9,652 |   |
| Stock issuable for a consulting arrangement                                                                            |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 5,000       |   |   |   | -- |   |   |   | 5,000 |   |
| Stock-based compensation expense – employees                                                                     |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 525,858     |   |   |   | -- |   |   |   | 525,858 |   |
| Stock-based compensation expense – non-employees                                                                 |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | 17,838      |   |   |   | -- |   |   |   | 17,838 |   |
| Net loss                                                                                                               |   |                 | --        |   |         |   | --     |    |   |   | --          |   |       |    | --     |   |    |   | --          |   |   |   | (7,013,047 | ) |   |   | (7,013,047 | ) |
| Balance at June 30, 2009                                                                                               |   |                 | --        |   |         | $      | --     |    |   |   | 95,237,795  |   |       | $       | 9,524  |   |    | $      | 117,955,250 |   |   | $      | (94,942,661 | ) |   | $ | 23,022,113 |   |

----

ANTS SOFTWARE INC.

|                                                                                                                       |   | Six Months EndedJune 30, |        |
|----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-------------|
|                                                                                                                       |   | 2010                     |        |   | 2009 |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                                       |   |                     |        |   |   |   |
| Net loss                                                                                                                   |   | $                        | (26,898,516 | ) |   | $ | (7,013,047 | )  |
| Adjustments to reconcile net loss to net cash used in operating activities:                                                |   |                     |        |   |   |   |   |   |
| Depreciation and amortization                                                                                              |   |                     | 501,109     |   |   |   | 529,209 |   |
| Expense in connection with issuance of derivative liabilities                                                              |   |                     | 16,249,080  |   |   |   | -- |   |
| Net change in fair value of derivative liabilities                                                                         |   |                     | 2,112,374   |   |   |   | -- |   |
| Amortization of debt discount and prepaid debt issuance costs on notes payable                                             |   |                     | 375,000     |   |   |   | 1,657,136 |   |
| Stock issuable for equity financing costs                                                                                  |   |                     | 221,484     |   |   |   | -- |   |
| Stock-based compensation expense                                                                                           |   |                     | 2,219,469   |   |   |   | 588,463 |   |
| Stock-based consulting expense                                                                                             |   |                     | 890,606     |   |   |   | 67,816 |   |
| Stock-based interest expense                                                                                               |   |                     | --          |   |   |   | 11,450 |   |
| Loss on conversion/extinguishment of debt                                                                                  |   |                     | --          |   |   |   | 495,833 |   |
| Changes in operating assets and liabilities:                                                                               |   |                     |        |   |   |   |   |   |
| Accounts receivable                                                                                                        |   |                     | (279        | ) |   |   | (34,929 | )  |
| Prepaid expenses and other assets                                                                                          |   |                     | (54,018     | )  |   |   | 44,418 |   |
| Payments received on notes receivable from customer                                                                        |   |                     | 400,000     |   |   |   | 1,500,000 |   |
| Other assets                                                                                                               |   |                     | --          |   |   |   | 30,320 |   |
| Accounts payable and other accrued expenses                                                                                |   |                     | 771,451     |   |   |   | 990,745 |   |
| Deferred revenue                                                                                                           |   |                     | (163,507    | ) |   |   | (160,614 | )  |
| Net cash used in operating activities                                                                                      |   |                     | (3,375,747  | ) |   |   | (1,293,200 | )  |
|                                                                                                                       |   |                     |        |   |   |   |   |   |
| CASH FLOWS USED IN INVESTING ACTIVITIES                                                                                    |   |                     |        |   |   |   |   |   |
| Capitalization of software development costs                                                                               |   |                     | (504,467    | ) |   |   | -- |   |
| Purchases of property and equipment                                                                                        |   |                     | (59,362     | ) |   |   | (23,059 | )  |
| Net cash used in investing activities                                                                                      |   |                     | (563,829    | ) |   |   | (23,059 | ) |
|                                                                                                                       |   |                     |        |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                                       |   |                     |        |   |   |   |   |   |
| Net proceeds from private placements                                                                                       |   |                     | 3,226,129   |   |   |   | 454,000 |   |
| Proceeds from exercise of preferred stock warrants                                                                         |   |                     | 550,752     |   |   |   | -- |   |
| Proceeds from exercise of common stock options and warrants                                                                |   |                     | 330,882     |   |   |   | -- |   |
| Proceeds from line of credit                                                                                               |   |                     | --          |   |   |   | 50,000 |   |
| Principal payments on long-term debt                                                                                       |   |                     | (37,227     | ) |   |   | (84,365 | )  |
| Net cash provided by financing activities                                                                                  |   |                     | 4,070,536   |   |   |   | 419,635 |   |
|                                                                                                                       |   |                     |        |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                       |   |                     | 130,960     |   |   |   | (896,624 | ) |
| Cash and cash equivalents at beginning of period                                                                           |   |                     | 1,168,024   |   |   |   | 2,051,807 |   |
| Cash and cash equivalents at end of period                                                                                 |   | $                        | 1,298,984   |   |   | $ | 1,155,183 |   |
|                                                                                                                       |   |                     |        |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                                           |   |                     |        |   |   |   |   |   |
| Cash paid for interest                                                                                                     |   | $                        | 107,405     |   |   | $ | 313,636 |   |
|                                                                                                                       |   |                     |        |   |   |   |   |   |
| NON-CASH INVESTING AND FINANCING ACTIVITIES                                                                                |   |                     |        |   |   |   |   |   |
| Deemed dividends related to beneficial conversion feature on Series A convertible preferred stock                          |   | $                        | 1,303,705   |   |   | $ | -- |   |
| Issuance of 123,047 shares of common stock to settle share-based liabilities                                               |   |                     | 110,742     |   |   |   | -- |   |
| Recorded value of common stock issued in private placement with derivative liabilities                                     |   |                     | --          |   |   |   |  -- |   |
| Recorded value of equity rights and obligations issued in private placement with derivative liabilities, net               |   |                     | --          |   |   |   |  -- |   |
| Recorded value of warrants issued to placement agent in connection with private placement of equity rights and obligations |   |                     | --          |   |   |   | -- |   |
| Conversion of promissory notes to common stock                                                                             |   |                     | --          |   |   |   | 886,316 |   |
| Common stock issued to placement agent for note conversion                                                                 |   |                     | --          |   |   |   | 13,356 |   |
| Prepaid insurance premiums financed with a loan                                                                            |   |                     | 38,776      |   |   |   | 69,514 |   |
|                                                                                                                       |   |                     |        |   |   |   |   |   |

----

ANTS SOFTWARE INC.

----

| ·   | valuation of derivative liabilities arising from issuances of common stock and associated warrants and other rights to acquire common stock in the future, |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | assumptions regarding the recoverability of long-lived and intangible assets, |
|--------------------|-------------------------------------------------------------------------------|

| ·   | assumptions regarding software development, including determination of significant enhancements and when technological feasibility is achieved, |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | assumptions incorporated in determining stock-based compensation, and |
|--------------------|-----------------------------------------------------------------------|

| ·   | the allowance for doubtful accounts receivable.   |
|--------------------|-------------------------------------------------------------|

----

| · | Persuasive evidence of an arrangement exists; |
|--------|-----------------------------------------------|

| · | Delivery or performance has occurred; |
|--------|---------------------------------------|

| · | The arrangement fee is fixed or determinable.  If the Company cannot conclude that a fee is fixed and determinable, then assuming all other criteria have been met, revenue is recognized as payments become due; and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Collection is reasonably assured. |
|--------|-----------------------------------|

----

|                                                                                  |   | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |   |
|---------------------------------------------------------------------------------------|--------|------------------------------------|-------------|--------|----------------------------------|--------|
|                                                                                  |   | 2010                               |        |   | 2009                             |   |   | 2010 |   |   | 2009 |   |
|                                                                                  |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Loss applicable to common shares                                                      |   | $                                  | (7,140,212  | )      |                             | $      | (3,909,685 | ) |   | $ | (28,202,221 | ) |   | $ | (7,013,047 | ) |
| Weighted-average common shares                                                        |   |                               | 109,177,067 |   |                             |   | 92,518,076 |   |   |   | 106,846,218 |   |   |   | 91,588,388 |   |
| Basic and diluted net loss per share                                                  |   | $                                  | (0.07       | )      |                             | $      | (0.04 | ) |   | $ | (0.26 | ) |   | $ | (0.08 | ) |
|                                                                                  |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Total anti-dilutive securities excluded from diluted net loss per share calculations: |   |                               |        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Warrants                                                                              |   |                               | 30,416,188  |   |                             |   | -- |   |   |   | 30,416,188 |   |   |   | -- |   |
| Common stock equivalents of convertible preferred stock                               |   |                               | 28,511,826  |   |                             |   | 5,145,441 |   |   |   | 28,511,826 |   |   |   | 5,145,441 |   |
| Stock options                                                                         |   |                               | 14,607,798  |   |                             |   | 10,175,346 |   |   |   | 14,607,798 |   |   |   | 10,175,346 |   |
| Common stock subject to purchase rights held by an investor                           |   |                               | 5,733,333   |   |                             |   | -- |   |   |   | 5,733,333 |   |   |   | -- |   |
| Unvested restricted stock awards                                                      |   |                               | 3,500,000   |   |                             |   | -- |   |   |   | 3,500,000 |   |   |   | -- |   |
| Common stock equivalents of convertible promissory notes                              |   |                               | 2,500,000   |   |                             |   | 11,195,700 |   |   |   | 2,500,000 |   |   |   | 11,195,700 |   |
|                                                                                  |   |                               | 85,269,145  |   |                             |   | 26,516,487 |   |   |   | 85,269,145 |   |   |   | 26,516,487 |   |

----

|                                             |   | June 30,    |      |   | December 31, |   |
|--------------------------------------------------|--------|-------------|-----------|--------|--------------|--------|
|                                             |   | 2010        |      |   | 2009         |   |
|                                             |   | (Unaudited) |      |   |         |   |
| Trade payables                                   |   | $           | 1,564,888 |   |         | $      | 1,410,567 |   |
| Registration penalty, see note 6                 |   |        | 440,018   |   |         |   | -- |   |
| Accrued bonuses and commissions payable          |   |        | 308,891   |   |         |   | 257,236 |   |
| Accrued vacation payable                         |   |        | 212,811   |   |         |   | 87,354 |   |
| Accrued interest on convertible promissory notes |   |        | 50,000    |   |         |   | 50,000 |   |
|                                             |   | $           | 2,576,608 |   |         | $      | 1,805,157 |   |

|                                          |   | Three months ended |     |   | Three months ended |   |
|-----------------------------------------------|--------|--------------------|----------|--------|--------------------|--------|
|                                          |   | June 30, 2010      |     |   | June 30, 2009      |   |
|                                          |   |               |     |   |               |   |
| Beginning balance                             |   |               |     |   |               | $      | 367,538 |   |   |   |   |   |   | $ | 400,530 |   |
| Invoiced during the period                    |   |               |     |   |               |   | 340,537 |   |   |   |   |   |   |   | 408,380 |   |
| Deferred revenue recognized from prior period |   | $                  | (304,729 | )      |               |   |   |   |   | $ | (315,891 | ) |   |   |   |   |
| Invoiced and recognized in current period     |   |               | (115,285 | )      |               |   |   |   |   |   | (166,512 | ) |   |   |   |   |
| Total revenue recognized in current period    |   |               |     |   |               |   | (420,014 | ) |   |   |   |   |   |   | (482,403 | ) |
| Ending balance                                |   |               |     |   |               | $      | 288,061 |   |   |   |   |   |   | $ | 326,507 |   |
|                                          |   |               |     |   |               |   |   |   |   |   |   |   |   |   |   |   |
|                                          |   | Six months ended   |     |   | Six months ended   |   |
|                                          |   | June 30, 2010      |     |   | June 30, 2009      |   |
|                                          |   |               |     |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Beginning balance                             |   |               |     |   |               | $      | 451,568 |   |   |   |   |   |   | $ | 487,121 |   |
| Invoiced during the period                    |   |               |     |   |               |   | 679,255 |   |   |   |   |   |   |   | 932,747 |   |
| Deferred revenue recognized from prior period |   | $                  | (388,760 | )      |               |   |   |   |   | $ | (702,455 | ) |   |   |   |   |
| Invoiced and recognized in current period     |   |               | (454,002 | )      |               |   |   |   |   |   | (390,906 | ) |   |   |   |   |
| Total revenue recognized in current period    |   |               |     |   |               |   | (842,762 | ) |   |   |   |   |   |   | (1,093,361 | ) |
| Ending balance                                |   |               |     |   |               | $      | 288,061 |   |   |   |   |   |   | $ | 326,507 |   |

----

----

|                                                                                                                            |   | Outstanding |       |   | Exercisable |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|--------|-------------|--------|
|                                                                                                                            |   |        |       |   |        |   |
| Warrants to purchase shares of common stock, with exercise prices ranging from $0.01 to $2.31 per share                         |   |        | 30,416,188 |   |        |   | 30,416,188 |   |
| Common stock equivalents of 9,979,139 shares of convertible preferred stock with a conversion price of $0.35 per share          |   |        | 28,511,826 |   |        |   | 28,511,826 |   |
| Options to purchase shares of common stock, with exercise prices ranging from $0.36 to $3.20 per share                          |   |        | 14,607,798 |   |        |   | 7,314,358 |   |
| Common stock subject to purchase rights held by an investor, with assumed exercise prices ranging from $1.25 to $1.50 per share |   |        | 5,733,333  |   |        |   | 5,733,333 |   |
| Common stock equivalents of $2,000,000 face amount convertible promissory notes with a conversion price of $0.80 per share      |   |        | 2,500,000  |   |        |   | 2,500,000 |   |

|                                                          |   | For the Three MonthsEnded June 30, |      |   | For the Six Months Ended June 30, |   |
|---------------------------------------------------------------|--------|------------------------------------|-----------|--------|----------------------------------------|--------|
|                                                          |   | 2010                               |      |   | 2009                                   |   |   | 2010 |   |   | 2009 |   |
|                                                          |   |                               |      |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Employees and non-employee members of the Board of Directors: |   |                               |      |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                 |   | $                                  | 346,464   |   |                                   | $      | 284,989 |   |   | $ | 511,481 |   |   | $ | 525,858 |   |
| Stock awards                                                  |   |                               | 7,026     |   |                                   |   | 62,605 |   |   |   | 1,542,298 |   |   |   | 62,605 |   |
| Restricted stock units                                        |   |                               | 165,690   |   |                                   |   | -- |   |   |   | 165,690 |   |   |   | -- |   |
|                                                          |   |                               | 519,180   |   |                                   |   | 347,594 |   |   |   | 2,219,469 |   |   |   | 588,463 |   |
|                                                          |   |                               |      |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Non-employee consultants:                                     |   |                               |      |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                 |   |                               | 204,106   |   |                                   |   | 4,087 |   |   |   | 323,494 |   |   |   | 17,838 |   |
| Stock awards                                                  |   |                               | 78,180    |   |                                   |   | 14,652 |   |   |   | 126,876 |   |   |   | 14,652 |   |
| Restricted stock units                                        |   |                               | 33,835    |   |                                   |   | -- |   |   |   | 33,835 |   |   |   | -- |   |
| Vesting of non-plan stock awards and warrants                 |   |                               | 200,613   |   |                                   |   | 35,326 |   |   |   | 406,401 |   |   |   | 35,326 |   |
|                                                          |   |                               | 516,734   |   |                                   |   | 54,065 |   |   |   | 890,606 |   |   |   | 67,816 |   |
|                                                          |   | $                                  | 1,035,914 |   |                                   | $      | 401,659 |   |   | $ | 3,110,075 |   |   | $ | 656,279 |   |

----

----

----

|                               |   | June 30, |       |   | March 31, |   |       | March 12, |   |
|------------------------------------|--------|----------|------------|--------|-----------|--------|------------|-----------|--------|
|                               |   | 2010     |       |   | 2010      |   |       | 2010      |   |
|                               |   |     |       |   |      |   |       |      |   |
| Initial Warrant                    |   | $        | 11,121,128 |   |      | $      | 8,800,460  |      |   | $ | 9,049,382 |   |
| Subsequent Warrant                 |   |     | 5,622,352  |   |      |   | 4,437,483  |      |   |   | 4,274,076 |   |
| Warrant down-round provisions      |   |     | 1,989,212  |   |      |   | 2,888,671  |      |   |   | 2,877,631 |   |
| Quarterly Payments                 |   |     | 848,937    |   |      |   | 1,170,301  |      |   |   | 1,219,832 |   |
| Common stock down-round provisions |   |     | 159,675    |   |      |   | 180,404    |      |   |   | 208,009 |   |
|                               |   |     |       |   |      |   |       |      |   |   |   |   |
|                               |   | $        | 19,741,304 |   |      | $      | 17,477,319 |      |   | $ | 17,628,930 |   |

| · | The Company granted to employees options to purchase 6,480,000 shares of common stock at prices ranging from $0.61 to $1.79 per share with fair values ranging from $0.42 to $1.22 per share on the date of grant and 188,750 stock options were forfeited or expired. Of the total stock options granted, 3,500,000 were granted to the chief executive officer and 2,540,000 stock options were granted to other executive officers and directors of the Company. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility ranging from 113.0% to 114.0%, risk-free interest rates ranging from 1.0% to 1.6%, and an expected life of approximately three years. The Company recognized $346,464 and $511,481 in associated compensation expense for the three and six months ended June 30, 2010, respectively. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company granted to non-employee contractors options to purchase 100,000 shares of common stock at prices ranging from $0.88 to $1.12 per share with fair values ranging from $0.65 to $0.74 per share on the date of grant. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility 126.0%, risk-free interest rates ranging from 0.4% to 0.8%, and an expected life of approximately three years. The Company recognized $204,106 and $323,494 in associated compensation expense for the three and six months ended June 30, 2010, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Board of Directors of the Company approved grants of 4,769,184 shares of common stock to employees for compensation under employee stock plans. The total shares include 3,500,000 shares issued to the Company’s chief executive officer on June 28, 2010 that vest over three years. The remaining shares were part of a Company-wide reduction in cash compensation and an effort to increase employee ownership in the Company. The remaining shares vested on March 31, 2010 and are net of 19,319 shares forfeited.  The fair value of the shares ranged from $0.61 to $1.10 based upon the closing price of the stock on the date of grant. The Company recognized $7,026 and $1,413,298 in associated compensation expense for the three and six months ended June 30, 2010, respectively. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company issued 150,000 shares of common stock to members of the Board of Directors under an employee stock plan and recorded compensation expense of $129,000 for the three and six months ended June 30, 2010. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | The Board of Directors of the Company approved grants of 960,196 shares of restricted stock units to employees and 36,709 shares of restricted stock units to non-employee consultants for compensation under an employee stock plan. The fair value of the shares granted to employees was $0.85 per share, based upon the closing price of the stock on the date of grant. The fair value of the shares granted to non-employee consultants is measured on the Company’s stock price at each reporting period and was $1.10 per share as of June 30, 2010. The restricted stock units will vest as of April 1, 2011 and expense will be recognized ratably over 12 months. The Company recognized associated compensation expense of $165,690 for employees and $33,835 for non-employee consultants in the consolidated statement of operations for both the three and six months ended June 30, 2010. The grants were also were part of a Company-wide reduction in cash compensation and an effort to increase employee ownership in the Company. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company issued 252,891 shares of common stock to investor relations consultants. Of the total, 200,000 shares were due to the meeting of performance milestones of 400,000 shares granted in 2009 and the remaining 52,891 shares as part of an agreement to issue $15,000 of common stock on a quarterly basis. The Company recognized aggregate expense for professional fees of $278,793 and $533,277 for the three and six months ended June 30, 2010, respectively, for these shares and the meeting of performance milestones of a warrant to purchase 300,000 shares of common stock issued to one of the consultants in 2009. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company issued a total of 250,650 shares of common stock through the exercise of employee stock options with exercise prices ranging from $0.52 to $1.45 per share, resulting in gross proceeds of $253,385. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company issued a total of 174,993 shares of common stock through the exercise of warrants to purchase shares of common stock with exercise prices ranging from $0.40 to $0.50 per share, resulting in gross proceeds of $77,497. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company issued warrants to purchase 168,641 shares of common stock with exercise prices of $0.90 per share for a period of three years.  The warrants were issued to a placement agent in conjunction with issuing shares through the Agreement with Fletcher. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The shareholders of the Company approved the adoption of the 2010 Stock Plan to allow for the grant of up to 10,000,000 shares of common stock and/or options to purchase common stock to employees, directors and consultants. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Board of Directors of the Company approved the addition of an employee stock ownership plan component to the Company’s 401(k) retirement plan. Adoption of the plan is contingent upon pending approval from the Internal Revenue Service. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | The Board of Directors of the Company approved grants of 1,459,743 shares of common stock to employees and consultants for compensation under employee stock plans. The employees and consultants are entitled to one vote per share and to receive any declared dividends per share as of the date of the grant. The shares were part of a Company-wide reduction in cash compensation and an effort to increase employee ownership in the Company. The fair value of the shares on the date of grant was $0.55 based upon the closing price of the stock on the date of grant. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company granted employees options to purchase 65,000 shares of common stock at prices ranging from $0.35 to $0.37 per share with fair values ranging from $0.24 to $0.25 per share on the date of grant. The fair value of the options was estimated using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility ranging from 98.6% to 105.3%, risk-free interest rates ranging from 1.1% to 1.5%, and an expected life of three years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company issued 200,000 shares of common stock to an investor relations consultant per the terms of the agreement with the Company and that was valued at $0.46 per share, of which 50,000 shares vest every three months. In connection with this same agreement, the Company issued a warrant to purchase 300,000 shares of common stock, of which 25% vest every three months, with an exercise price of $0.01 per share and expiring on May 1, 2012. The fair value of the warrant was estimated to be $0.40 per share using the Black-Scholes model with the following assumptions: dividend yield of 0%, expected stock price volatility of 101.5%, risk-free interest rate of 1.64%, and an expected life of three years. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company entered into an agreement with an investor relations firm whereby the Company agreed to issue 39,216 shares of common stock for the first four months of services under the agreement. If the Company continues to retain their services, the Company is required to issue common stock valued at $5,000 per month thereafter. The Company recorded $5,000 to additional paid-in capital related to a portion of the total fair value of the 39,216 shares of common stock to be issued through June 30, 2009. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The Company recorded $11,450 to additional paid-in capital related to the common stock that was issuable as interest on the $200,000 convertible promissory note. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
|--------|----------------------------------------------------------------------------------------------------------|

| · | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                   |   | DerivativeLiabilities |       |
|------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                   |   |                  |       |
| Balance, January 1, 2010                                               |   | $                     | --         |   |
| Fair value of derivative liabilities upon issuance:                    |   |                  |       |   |
|    Allocated to net proceeds                                 |   |                  | 1,379,850  |   |
|    Expensed at issuance                                      |   |                  | 16,249,080 |   |
|                                                                   |   |                  | 17,628,930 |   |
| Net increase in fair value of derivative liabilities (unrealized loss) |   |                  | 2,112,374  |   |
| Balance, June 30, 2010                                                 |   | $                     | 19,741,304 |   |

| Gross revenues:      |   | Three months endedJune 30, 2010 |      |   |             | Three months endedJune 30, 2009 |     |
|----------------------|--------|---------------------------------|-----------|--------|------------------|---------------------------------|----------|
| Customer A           |   | $                               | 1,030,357 |   |             |                            | 68       | % |   |   | $ | 898,446 |   |   |   | 65 | % |   |
| Customer B           |   |                            | 359,225   |   |             |                            | 24       |   |   |   |   | 340,403 |   |   |   | 25 |   |   |
| Other customers      |   |                            | 128,719   |   |             |                            | 8        |   |   |   |   | 142,858 |   |   |   |  10 |   |   |
|                 |   |                            | 1,518,301 |   |             |                            | 100      |   |   |   |   | 1,381,707 |   |   |   |  100 |   |   |
| Less trade discounts |   |                            | (14,715   | )      |             |                            | 1        |   |   |   |   | (12,120 | ) |   |   | 1 |   |   |
| Net revenues         |   | $                               | 1,503,586 |   |             |                            | 99       | % |   |   | $ | 1,369,587 |   |   |   | 99 | % |   |
|                 |   |                            |      |   |             |                            |     |   |   |   |   |   |   |   |   |   |
|                 |   | Six months ended                |      |   | Six months ended |                            |
|                 |   | June 30, 2010                   |      |   | June 30, 2009    |                            |
| Gross revenues:      |   |                            |      |   |             |                            |     |   |   |   |   |   |   |   |   |   |
| Customer A           |   | $                               | 2,117,518 |   |             |                            | 70       | % |   |   | $ | 1,700,776 |   |   |   | 61 | % |   |
| Customer B           |   |                            | 721,894   |   |             |                            | 24       |   |   |   |   | 746,226 |   |   |   | 27 |   |   |
| Other customers      |   |                            | 201,745   |   |             |                            | 6        |   |   |   |   | 331,819 |   |   |   | 12 |   |   |
|                 |   |                            | 3,041,157 |   |             |                            | 100      |   |   |   |   | 2,778,821 |   |   |   | 100 |   |   |
| Less trade discounts |   |                            | (30,759   | )      |             |                            | 1        |   |   |   |   | (20,877 | ) |   |   | 1 |   |   |
| Net revenues         |   | $                               | 3,010,398 |   |             |                            |  99 | % |   |   | $ | 2,757,944 |   |   |   | 99 | % |   |

----

| · | The original Agreement provided that the Company could require Fletcher to purchase shares of common stock in the future based upon terms as defined in the agreement.  This provision has been eliminated by the amendment with the result that we cannot require that Fletcher purchase additional shares. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The amendment provides that Fletcher has the right, but not the obligation, to purchase additional shares of our common stock at fixed prices and such right is exercisable until July 15, 2016. The original Agreement provided that the purchase price was the greater of a fixed price or a Prevailing Market Price as defined in the original Agreement.  The amendment eliminates the Prevailing Market Price alternative and imposes a deadline for the exercise of the purchase rights. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | The original Agreement provided that the Initial Warrant would be exercisable for a term of approximately nine years, subject to extension if the shares underlying the Initial Warrant were not registered by July 1, 2010 or upon the occurrence of certain other events. The amendment causes the period that the Initial Warrant will be exercisable to be extended based on the date that the underlying shares are registered or upon the occurrence of certain other events. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The amendment changed the conditions under which the Subsequent Warrant would be issued (“Subsequent Warrant Condition”). Under the original Agreement, the Subsequent Warrant Condition would be satisfied if the Average Daily Market Price, as defined in the Agreement, exceeded $3.00 per share for two consecutive quarters after March 12, 2013. The amendment changes the Subsequent Warrant Condition to be satisfied if the Daily Market Price as defined in the amended Agreement, exceeds $3.50 for two consecutive calendar quarters after March 12, 2014, subject to certain extensions. This change in the Subsequent Warrant Condition has the effect of increasing the likely period that Quarterly Payments will be made. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The original Agreement required that all such shares issued or issuable pursuant to the Agreement  and the related warrants be registered for resale under the Securities Act of 1933, as amended, on or before July 1, 2010 and included substantial monetary penalties if the shares were not registered on or before that date. The amendment removed the monetary penalty for failure to register and required that the initial registration statement include only a portion of the shares of common stock issued or to be issued Fletcher.  The Company has agreed, however, to file and cause to become effective registration statements in the future to register all of the shares of common stock for resale on or before certain specified dates. Pursuant to the Agreement, the Company filed with the SEC a registration statement to register for resale the shares of common stock previously issued under the Agreement and a portion of the shares issuable in the future, including the shares issuable upon exercise of the Initial Warrant and the shares of common stock that may be issued in connection with the Quarterly Payments.   The Company is obligated to cause the registration statement to become effective on or before October 8, 2010.   Additionally, the Company is required to file new registration statements with the SEC registering the resale of the shares of common stock not included in the initial registration statement and to cause such new registration statements to be declared effective within 70 days of the issuance such shares.  Likewise, the Company is required to file with the SEC a new registration statement to register the shares of common stock issuable upon exercise of the Subsequent Warrant and cause such new registration statement to be declared effective no later than 70 days following the issuance of the Subsequent Warrant.  If the Company fails to cause such registration statements to be declared effective by the applicable dates, the Company may incur liability for damages.  We are also obligated to use our best efforts to keep the registration statements continuously effective for a period of time. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

----

| · | The original Agreement provided that the Company could require Fletcher to purchase shares of common stock in the future based upon terms as defined in the agreement.  This provision has been eliminated by the amendment with the result that we cannot require that Fletcher purchase additional shares. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The amendment provides that Fletcher has the right, but not the obligation, to purchase additional shares of our common stock at fixed prices and such right is exercisable until July 15, 2016. The original Agreement provided that the purchase price was the greater of a fixed price or a Prevailing Market Price as defined in the original Agreement.  The amendment eliminates the Prevailing Market Price alternative and imposes a deadline for the exercise of the purchase rights. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The original Agreement provided that the Initial Warrant would be exercisable for a term of approximately nine years, subject to extension if the shares underlying the Initial Warrant were not registered by July 1, 2010 or upon the occurrence of certain other events. The amendment causes the period that the Initial Warrant will be exercisable to be extended based on the date that the underlying shares are registered or upon the occurrence of certain other events. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | The amendment changed the Subsequent Warrant Condition under which the Subsequent Warrant would be issued.  Under the original Agreement, the Subsequent Warrant Condition would be satisfied if the Average Daily Market Price, as defined in the Agreement, exceeded $3.00 per share for two consecutive quarters after March 12, 2013. The amendment changes the Subsequent Warrant Condition to be satisfied if the Daily Market Price as defined in the amended Agreement, exceeds $3.50 for two consecutive calendar quarters after March 12, 2014, subject to certain extensions. This change in the Subsequent Warrant Condition has the effect of increasing the likely period that Quarterly Payments will be made. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The original Agreement required that all such shares issued or issuable pursuant to the Agreement  and the related warrants be registered for resale under the Securities Act of 1933, as amended, on or before July 1, 2010 and included substantial monetary penalties if the shares were not registered on or before that date. The amendment removed the monetary penalty for failure to register and required that the initial registration statement include only a portion of the shares of common stock issued or to be issued to Fletcher. The Company has agreed, however, to file and cause to become effective registration statements in the future to register all of the shares of common stock for resale on or before certain specified dates. Pursuant to the Agreement, the Company filed with the SEC a registration statement to register for resale the shares of common stock previously issued under the Agreement and a portion of the shares issuable in the future, including the shares issuable upon exercise of the Initial Warrant and the shares of common stock that may be issued in connection with the Quarterly Payments.   The Company is obligated to cause the registration statement to become effective on or before October 8, 2010.   Additionally, the Company is required to file new registration statements with the SEC registering the resale of the shares of common stock not included in the initial registration statement and to cause such new registration statements to be declared effective within 70 days of the issuance such shares.  Likewise, the Company is required to file with the SEC a new registration statement to register the shares of common stock issuable upon exercise of the Subsequent Warrant and cause such new registration statement to be declared effective no later than 70 days following the issuance of the Subsequent Warrant.  If the Company fails to cause such registration statements to be declared effective by the applicable dates, the Company may incur liability for damages.  We are also obligated to use our best efforts to keep the registration statements continuously effective for a period of time. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                            | Three Months Ended June 30, |        | Six Months Ended June 30, |   |
|-----------------------------------------------------------------|-----------------------------|-------------|---------------------------|--------|
|                                                            | 2010                        |        | Change                    |   | 2009 |   | 2010 |   | Change |   | 2009 |   |
|                                                            |                        |        |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                        | $                           | 1,503,586   |                      | 10     | % |   | $ | 1,369,587 |   | $ | 3,010,398 |   | 9 |  % |   |   | $ | 2,757,944 |   |
| Cost of revenues                                                |                        | 1,339,792   |                      | 9      |   |   |   | 1,231,834 |   |   | 3,365,602 |   | 37 |   |   |   |   | 2,457,603 |   |
| Gross profit (loss)                                             |                        | 163,794     |                      | 19     |   |   |   | 137,753 |   |   | (355,204 | ) | (218 | ) |   |   |   | 300,341 |   |
| Operating expenses                                              |                        | 3,332,729   |                      | 38     |   |   |   | 2,409,200 |   |   | 7,034,341 |   | 53 |   |   |   |   | 4,602,931 |   |
| Operating loss                                                  |                        | (3,168,935  | )                         | 40     |   |   |   | (2,271,447 | ) |   | (7,389,545 | ) | 72 |   |   |   |   | (4,302,590 | ) |
| Other (expense) income, net                                     |                        | (3,060,429  | )                         | 87     |   |   |   | (1,638,238 | ) |   | (19,508,971 | ) | 620 |   |   |   |   | (2,710,457 | ) |
| Net loss                                                        |                        | (6,229,364  | )                         | 59     |   |   |   | (3,909,685 | ) |   | (26,898,516 | ) | 284 |   |   |   |   | (7,013,047 | ) |
| Deemed dividend related to Series A convertible preferred stock |                        | (910,848    | )                         | --     |   |   |   | -- |   |   | (1,303,705 | ) | -- |   |   |   |   | -- |   |
| Net loss applicable to common stockholders                      | $                           | (7,140,212  | )                         | 83     | % |   | $ | (3,909,685 | ) | $ | (28,202,221 | ) | 302 |  % |   |   | $ | (7,013,047 | ) |
|                                                            |                        |        |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per common share                     | $                           | (0.07       | )                         | 75     | % |   | $ | (0.04 | ) | $ | (0.26 | ) | 225 |  % |   |   | $ | (0.08 | ) |
|                                                            |                        |        |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share   |                        | 109,177,067 |                      | 18     | % |   |   | 92,518,076 |   |   | 106,846,218 |   | 17 |  % |   |   |   | 91,588,388 |   |

|                 |   |             | Three months ended |   |             |   | Three months ended |   |
|----------------------|--------|------------------|--------------------|--------|------------------|--------|--------------------|--------|
|                 |   |             | June 30, 2010      |   |             |   | June 30, 2009      |   |
| Gross revenues:      |   |             |               |   |             |   |               |   |   |   |   |   |   |   |   |   |
| Customer A           |   | $                | 1,030,357          |   |             |   |  68           | %      |   |   | $ | 898,446 |   |   |   | 65 | % |   |
| Customer B           |   |             | 359,225            |   |             |   | 24                 |   |   |   |   | 340,403 |   |   |   | 25 |   |   |
| Other customers      |   |             | 128,719            |   |             |   |  8            |   |   |   |   | 142,858 |   |   |   | 10 |   |   |
|                 |   |             | 1,518,301          |   |             |   | 100                |   |   |   |   | 1,381,707 |   |   |   | 100 |   |   |
| Less trade discounts |   |             | (14,715            | )      |             |   | 1                  |   |   |   |   | (12,120 | ) |   |   | 1 |   |   |
| Net revenues         |   | $                | 1,503,586          |   |             |   | 99                 | %      |   |   | $ | 1,369,587 |   |   |   | 99 | % |   |
|                 |   |             |               |   |             |   |               |   |   |   |   |   |   |   |   |   |
|                 |   | Six months ended |               |   | Six months ended |   |
|                 |   | June 30, 2010    |               |   | June 30, 2009    |   |
| Gross revenues:      |   |             |               |   |             |   |               |   |   |   |   |   |   |   |   |   |
| Customer A           |   | $                | 2,117,518          |   |             |   | 70                 | %      |   |   | $ | 1,700,776 |   |   |   | 61 | % |   |
| Customer B           |   |             | 721,894            |   |             |   | 24                 |   |   |   |   | 746,226 |   |   |   | 27 |   |   |
| Other customers      |   |             | 201,745            |   |             |   | 6                  |   |   |   |   | 331,819 |   |   |   | 12 |   |   |
|                 |   |             | 3,041,157          |   |             |   | 100                |   |   |   |   | 2,778,821 |   |   |   | 100 |   |   |
| Less trade discounts |   |             | (30,759            | )      |             |   | 1                  |   |   |   |   | (20,877 | ) |   |   | 1 |   |   |
| Net revenues         |   | $                | 3,010,398          |   |             |   | 99                 | %      |   |   | $ | 2,757,944 |   |   |   | 99 | % |   |

----

|                       | Three Months Ended June 30 |      | Six Months Ended June 30, |   |
|----------------------------|----------------------------|-----------|---------------------------|--------|
|                       | 2010                       |      | Change                    |   | 2009 |   | 2010 |   | Change |   | 2009 |   |
| Research and development   | $                          | 743,742   |                      | 87     |  % |   | $ | 398,331 |   | $ | 1,885,941 |   | 102 |  % |   | $ | 934,288 |   |
| Sales and marketing        |                       | 378,562   |                      | (25    | )  |   |   | 505,998 |   |   | 851,920 |   | (17 | ) |   |   | 1,023,303 |   |
| General and administrative |                       | 2,210,425 |                      | 47     |   |   |   | 1,504,871 |   |   | 4,296,480 |   | 62 |   |   |   | 2,645,340 |   |
|                       | $                          | 3,332,729 |                      | 38     |  % |   | $ | 2,409,200 |   | $ | 7,034,341 |   | 53 |  % |   | $ | 4,602,931 |   |

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| · | Employee compensation and benefits, including director fees and stock-based compensation decreased $0.05 million and increased $0.25 million for the three- and six-month periods, respectively.  The changes include increases of $0.15 million and $0.31 million in stock-based compensation for the three- and six-month periods, respectively. The increases in stock-based compensation are offset by net decreases in cash-based compensation benefits of $0.21 million and $0.06 million for the three- and six-month periods, respectively. The overall changes in employee compensation are largely due to personnel changes and the company-wide 10% reduction in cash compensation for a matching award of fully-vested stock as of March 31, 2010. Stock-based compensation for non-employee contractors increased $0.20 million and $0.30 million for the three- and six-month periods, respectively.  Stock-based compensation subject to vesting that is granted to non-employee contractors is adjusted each period to reflect changes in fair value.  The changes in the associated stock-based compensation are primarily due to changes in our stock price. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Professional fees for legal, accounting and investor relations services increased $0.16 million and $0.72 million for the three- and six-month periods, respectively, primarily due to costs incurred for services associated with the Fletcher Agreement, the annual shareholder meeting on March 17, 2010, an increase in investor relations activities, consultation and design costs for employee compensation plans associated with the salary reduction program, litigation-related legal fees and the use of additional external resources for accounting and compliance activities. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Facilities and general insurance expense decreased by $0.02 million and $0.14 million for the three- and six-month periods, respectively. The decrease for the six months ended June 30, 2010 compared to the similar period in 2009 was primarily due losing an office in California in January 2009. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                               |   | For the Three MonthsEnded June 30, |       |   | For the Six Months Ended June 30, |   |
|--------------------------------------------------------------------|--------|------------------------------------|------------|--------|----------------------------------------|--------|
|                                                               |   | 2010                               |       |   | 2009                                   |   |   | 2010 |   |   | 2009 |   |
| Expense in connection with issuance of derivative liabilities      |   | $                                  | --         |   |                                   | $      | -- |   |   | $ | (16,249,080 | ) |   | $ | -- |   |
| Net change in fair value of derivative liabilities                 |   |                               | (2,263,985 | )      |                                   |   | -- |   |   |   | (2,112,374 | ) |   |   | -- |   |
| Interest expense                                                   |   |                               | (241,488   | )      |                                   |   | (1,141,052 | ) |   |   | (482,405 | ) |   |   | (2,213,539 | ) |
| Loss on conversion/ extinguishment of convertible promissory notes |   |                               | --         |   |                                   |   | (495,833 | ) |   |   | -- |   |   |   | (495,833 | ) |
| Interest income                                                    |   |                               | --         |   |                                   |   | 237 |   |   |   | -- |   |   |   | 2,720 |   |
| Other expense, net                                                 |   |                               | (554,956   | )      |                                   |   | (1,590 | ) |   |   | (665,112 | ) |   |   | (3,805 | ) |
|                                                               |   | $                                  | (3,060,429 | )      |                                   | $      | (1,638,238 | ) |   | $ | (19,508,971 | ) |   | $ | (2,710,457 | ) |

----

|                                      |   | Six Months Ended June 30, |       |
|-------------------------------------------|--------|---------------------------|------------|
|                                      |   | 2010                      |       |   | Change |   |   | 2009 |   |
|                                      |   |                      |       |   |   |   |   |   |   |
| Net cash used in operating activities     |   | $                         | (3,375,747 | ) |   | 161 |  % |   |   | $ | (1,293,200 | ) |
| Net cash used in investing activities     |   |                      | (563,829   | ) |   | 2,345 |   |   |   |   | (23,059 | ) |
| Net cash provided by financing activities |   |                      | 4,070,536  |   |   | 870 |   |   |   |   | 419,635 |   |
| Net increase (decrease) in cash           |   | $                         | 130,960    |   |   | (115 | )% |   |   | $ | (896,624 | ) |

| · | An aggregate of $1.39 million in net proceeds from the sale of 3.47 million shares of the Company’s common stock at a price of $0.40 per share and warrants to purchase 3.47 million shares of common stock exercisable at $0.50 per share that expire in one year as part of a private placement. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An aggregate of $1.84 million in net proceeds from the sale of 2.11 million shares of common stock (including proceeds allocated to derivative liabilities) at an average price of $0.95 per share to Fletcher. The Agreement with Fletcher is discussed further in note 7 to the accompanying consolidated financial statements and in the overview at the beginning of Management’s Discussion and Analysis, beginning on page 21. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An aggregate $0.55 million in proceeds from the exercise of warrants to purchase 0.55 million shares of preferred stock. |
|--------|--------------------------------------------------------------------------------------------------------------------------|

| · | An aggregate of $0.33 million in proceeds from the exercise of options and warrants to purchase 0.43 million shares of common stock. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

| · | An aggregate of $0.04 million in principal payments on long-term debt. |
|--------|------------------------------------------------------------------------|

----

----

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4T. Controls and Procedures.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

----

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3.  Defaults Upon Senior Securities.

Item 4. (Removed and Reserved).

Item 5. Other Information.

Item 6. Exhibits.

| 3.1 | Amended and Restated Certificate of Incorporation of the Company, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, filed with the Commission on September 8, 2008. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.2 | Amended and Restated Bylaws of the Company, as listed in Exhibit 3.2 to our Form 10-K filed with the Commission on March 17, 2008, is hereby incorporated by reference. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.1 | The description of the Company's common stock, incorporated by reference to the Company's Form 10SB12G filed with the Commission on September 14, 1999 including any amendment or report filed for the purpose of updating such description. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.2 | The description of the Company's Series A convertible preferred stock, incorporated by reference to Exhibit 3(i) to the Company's Current Report on Form 8-K filed with the Commission on September 23, 2009. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Amended and restated employment agreement entered into to be effective as of the 28th day of June, 2010, with Joseph Kozak, Chairman, President and Chief Executive Officer. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Employment agreement made and entered into to be effective as of January 18, 2010, with David Buckel, Chief Financial Officer. |
|------|--------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Employment agreement made and entered into to be effective as of May 14, 2008, with Richard M. Cerwonka, Chief Operating Officer and President, Inventa Technologies Inc. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 10.4 | Stock Purchase Agreement entered into by and between ANTs software inc. and Fletcher International, Ltd., as listed in Exhibit 10.1 to our Registration Statement on Form S-1 filed with the Commission on April 23, 2010, is hereby incorporated by reference. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.5 | Warrant to Purchase Shares of Common Stock of ANTs software inc., as listed in Exhibit 10.2 to our Registration Statement on Form S-1 filed with the Commission on April 23, 2010, is hereby incorporated by reference. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.6 | Amendment dated July 15, 2010 to Stock Purchase Agreement entered into by and between ANTs software inc. and Fletcher International, Ltd., as listed in Exhibit 10.2 to our Registration Statement on Form S-1 filed with the Commission on August 9, 2010, is hereby incorporated by reference. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.7 | Amendment dated July 15, 2010 to Warrant to Purchase Shares of Common Stock of ANTs software inc., as listed in Exhibit 10.4 to our Registration Statement on Form S-1 filed with the Commission on August 9, 2010, is hereby incorporated by reference. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 2002. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.2 | 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 2002. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.1 | 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 2002. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.2 | 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. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

----

SIGNATURES

|                             |   | ANTs software inc.                          |
|----------------------------------|--------|---------------------------------------------|
|                             |   |                                        |
| Date:  August 19, 2010 | By:    |     /s/ David A. Buckel |
|                             |   | David A. Buckel, Chief Financial Officer    |

----