UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


_____________________




FORM
10-Q


(Mark
One)





[X]
            
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934








For
the quarterly period ended: March 31, 2008





OR





[   ]
            
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934








For
the transition period from _________________ to ________________





Commission
file number:  000-16299


________________




ANTS
SOFTWARE INC.


(Exact
name of registrant as specified in its charter)





Delaware
            13-3054685(State
      or other jurisdiction of
            (IRS
      Employer Identification Number)Incorporation
      or Organization)700
      Airport Blvd. Suite 300, Burlingame, CA
            94010(Address
      of principal executive offices)
            (Zip
      Code)





(650)
931-0500


(Registrant’s
Telephone Number, including area code)








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]  No [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large
accelerated filer [   ]      
Accelerated filer [X ]       Non-accelerated filer
[   ]       Smaller reporting company
[   ]





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:





59,967,081
shares of common stock as of April 30, 2008









TABLE
OF CONTENTS
  PART I.  Financial InformationItem
    1.
                Condensed Financial StatementsCondensed Balance Sheets as of March 31, 2008 and December
      31, 2007
                
                
                3Condensed Statements of Operations for the Three Months
      ended March 31,2008 and 2007
                
                
                4Condensed Statements of Cash Flows for the Three Months
      ended March 31,2008 and 2007
                
                
                5Notes to Condensed Financial Statements
                
                
                6-18Item 2.
                Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                
                
                19-30Item 3.
                Quantitative and Qualitative Disclosures About Market
      Risk
                
                
                30Item 4.
                Controls and Procedures
                
                
                31PART II.  Other InformationItem 1.
                Legal Proceedings
                
                
                31Item 1A.
                Risk Factors
                
                
                31-36Item
    2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                
                36Item 3.
                Defaults Upon Senior Securities
                
                
                36Item
    4.
                Submission of Matters to a Vote of Security
      Holders
                
                
                36Item 5.
                Other Information
                
                
                36Item 6.
                Exhibits
                
                
                36-37Signatures
                
                
                37
 
 2




PART I.  FINANCIAL INFORMATION





ITEM 1.  CONDENSED FINANCIAL
STATEMENTS




ANTS
      SOFTWARE  INC.CONDENSED BALANCE SHEETSMarch
      31,
              
              
              December
      31,ASSETS
              
              2008
              
              
              2007Unaudited
              
              
              AuditedCurrent
      assets:Cash
      and cash equivalents
              
              $
              2,541,410
              
              
              $
              4,480,694Accounts
      receivable
              
              
              40,165
              
              
              
              8,204Current
      portion of prepaid debt issuance cost
              
              
              373,759
              
              
              
              434,630Restricted
      cash
              
              
              125,000
              
              
              
              192,574Prepaid
      expenses and other current assets
              
              
              145,059
              
              
              
              173,331Prepaid
      expense from warrant issued to customer, net
              
              
              43,255
              
              
              
              57,674Total
      current assets
              
              
              3,268,648
              
              
              
              5,347,107Long-term
      portion of prepaid debt issuance cost
              
              
              -
              
              
              
              47,786Property
      and equipment, net
              
              
              441,665
              
              
              
              510,490Security
      deposits
              
              
              34,420
              
              
              
              34,420Total
      assets
              
              $
              3,744,733
              
              
              $
              5,939,803LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and other accrued expenses
              
              $
              835,801
              
              
              $
              788,460Accrued
      bonuses and commissions payable
              
              
              18,750
              
              
              
              143,750Accrued
      vacation payable
              
              
              104,966
              
              
              
              89,316Current
      portion of convertible promisory notes, includespremium
      of $339,924 and $60,440, respectively
              
              
              6,839,924
              
              
              
              1,060,440Accrued
      interest on convertible promissory notes
              
              
              237,581
              
              
              
              208,780Deferred
      revenues
              
              
              56,999
              
              
              
              48,818Total
      current liabilities
              
              
              8,094,021
              
              
              
              2,339,564Commitments
      and contingencies (Note 12)
              
              
              -
              
              
              
              -Long-term
      liabilities:Convertible
      promissory notes, includes debt premium of $0and
      $380,311, respectively
              
              
              -
              
              
              
              5,880,311Convertible
      promissory notes, net of debt discount of $217,509and
      $238,418, respectively
              
              
              2,785,716
              
              
              
              2,764,808Total
      liabilities
              
              
              10,879,737
              
              
              
              10,984,683Stockholders’
      deficit:Preferred
      stock, $0.0001 par value; 50,000,000 shares authorized,no
      shares issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.0001 par value; 200,000,000 shares authorized;59,291,172
      and 57,398,445 shares issued and outstanding, respectively
              
              
              5,929
              
              
              
              5,740Additional
      paid-in capital
              
              
              72,005,284
              
              
              
              69,914,339Accumulated
      deficit
              
              
              (79,146,217
              )
              
              
              (74,964,959
              )Total
      stockholders’ deficit
              
              
              (7,135,004
              )
              
              
              (5,044,880
              )Total
      liabilities and stockholders' deficit
              
              $
              3,744,733
              
              
              $
              5,939,803




See
      Accompanying Notes to Condensed Financial
  Statements




3




ANTS
      SOFTWARE INC.CONDENSED STATEMENTS OF OPERATIONS(Unaudited)For
      the Three Months EndedMarch
      31,2008
              
              
              2007Revenues:Maintenance
              
              $
              28,219
              
              
              $
              18,502Licenses
      and royalties
              
              
              4,165
              
              
              
              50,625Total
      revenues
              
              
              32,384
              
              
              
              69,127Cost
      of Revenues:Licenses
              
              
              -
              
              
              
              2,712Gross
      profit
              
              
              32,384
              
              
              
              66,415Operating  Expenses:Sales
      and marketing
              
              
              371,311
              
              
              
              1,099,671Research
      and development
              
              
              2,601,123
              
              
              
              1,875,163General
      and administrative
              
              
              1,101,883
              
              
              
              806,798Total
      operating expenses
              
              
              4,074,317
              
              
              
              3,781,632Loss
      from operations
              
              
              (4,041,933
              )
              
              
              (3,715,217
              )Other
      income (expense):Interest
      income
              
              
              27,002
              
              
              
              85,886Interest
      expense
              
              
              (161,112
              )
              
              
              (41,288
              )Other
      (loss) income, net
              
              
              (134,110
              )
              
              
              44,598Net
      loss before income taxes
              
              
              (4,176,043
              )
              
              
              (3,670,619
              )Provision
      for income taxes
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (4,176,043
              )
              
              $
              (3,670,619
              )Basic
      and diluted net loss per common share
              
              $
              (0.07
              )
              
              $
              (0.07
              )Shares
      used in computing basic and dilutednet
      loss per share
              
              
              57,792,266
              
              
              
              55,995,934See
      Accompanying Notes to Condensed Financial
  Statements




4




ANTS
      SOFTWARE INC.CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)For
      the Three Months Ended March 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (4,176,043
              )
              
              $
              (3,670,619
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              93,848
              
              
              
              106,808Amortization
      of accrued rent, net of cash payments
              
              
              (11,315
              )
              
              
              (2,555
              )Amortization
      of warrant issued to customer
              
              
              14,418
              
              
              
              14,418Amortization
      of debt premium and discount, net
              
              
              (79,918
              )
              
              
              (63,386
              )Amortization
      of debt issuance costs
              
              
              108,658
              
              
              
              60,871Stock-based
      compensation expense
              
              
              1,149,019
              
              
              
              306,262Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (31,961
              )
              
              
              (109,946
              )Restricted
      cash
              
              
              67,574
              
              
              
              -Prepaid
      insurance and other expenses
              
              
              28,271
              
              
              
              12,531Accounts
      payable and other accrued expenses
              
              
              87,457
              
              
              
              82,642Accrued
      bonuses and commissions payable
              
              
              (125,000
              )
              
              
              (120,626
              )Accrued
      vacation
              
              
              15,650
              
              
              
              13,912Deferred
      revenue
              
              
              8,181
              
              
              
              45,438Net
      cash used in operating activities
              
              
              (2,851,161
              )
              
              
              (3,324,250
              )Cash
      flows used in investing activities:Purchases
      of office furniture, fixtures and equipment, net
              
              
              (25,023
              )
              
              
              (137,536
              )Net
      cash used in investing activities
              
              
              (25,023
              )
              
              
              (137,536
              )Cash
      flows from financing activities:Proceeds
      from private placements - equity, net of cash commissions
              
              
              936,900
              
              
              
              5,018,574Proceeds
      from private placements - convertible promissory notes,net
      of commission
              
              
              -
              
              
              
              4,881,426Proceeds
      from exercise of options
              
              
              -
              
              
              
              60,600Net
      cash provided by financing activities
              
              
              936,900
              
              
              
              9,960,600Net
      (decrease) increase in cash and cash equivalents
              
              
              (1,939,284
              )
              
              
              6,498,814Cash
      and cash equivalents at beginning of period
              
              
              4,480,694
              
              
              
              4,698,949Cash
      and cash equivalents at end of period
              
              $
              2,541,410
              
              
              $
              11,197,763Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
              
              $
              241,030
              
              
              $
              104,674Non-cash
      investing and financing activities:Allocation
      of stockholders' equity to premium on convertible note
              
              
              -
              
              
              
              685,740Allocation
      of a portion of placement agent commissions to debt issuance
      costs
              
              
              -
              
              
              
              217,042See
      Accompanying Notes to Condensed Financial
  Statements




5




ANTS
SOFTWARE INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 1.   Basis
of Presentation and Continuation as a Going Concern
  
 The
accompanying unaudited condensed financial statements are presented in
accordance with the requirements for Form 10-Q and contemplates continuation of
ANTs software inc. (the “Company”) as a going concern.  However, we
have suffered recurring losses from operations and have a net capital deficiency
that raises substantial doubt about our ability to continue as a going
concern.  Our ability to continue as a going concern is dependent upon
our ability to generate profitable operations in the future and/or obtain the
necessary financing to meet our obligations and repay our liabilities arising
from normal business operations when they come due. We have plans to seek
additional capital through private placements of equity or debt.  If
we are successful in our efforts to generate revenue in 2008, it will be a
source of operating funds through the end of fiscal 2008.  Our plans,
if successful, will mitigate the factors that raise substantial doubt about our
ability to continue as a going concern.
 
 The
accompanying unaudited condensed financial statements are presented in
accordance with the requirements for Form 10-Q. The December 31, 2007 balance
sheet was derived from audited financial statements filed with our 10-K as of
December 31, 2007 and therefore may not include all disclosures required by
accounting principles generally accepted in the United States of America.
Reference should be made to our Form 10-K for the fiscal year ended December 31,
2007, for additional disclosures, including a summary of our accounting
policies.
 
 There have been no significant changes
in our significant accounting policies during the three months ended March 31,
2008 as compared to the significant accounting policies described in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007.
 
 The
information furnished reflects all adjustments (all of which were of a normal
recurring nature), which, in the opinion of management, are necessary to make
the financial statements not misleading and to fairly present the financial
position, results of operations, and cash flows on a consistent basis. Operating
results for the three months ended March 31, 2008 and 2007 are not necessarily
indicative of the results that may be expected in the future.
 
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period.
 
 Management
has evaluated our current financial position and anticipates that cash on hand
will be sufficient to fund operations and investments in capital equipment into
the third fiscal quarter of 2008 at current levels of revenue and
expenditures.
 
 2.    Summary
of Significant Accounting Policies
 
 Revenue
Recognition
 
 We
recognize license and royalty revenue in accordance with the provisions of
Statement of Position (“SOP”) 97-2,“Software Revenue
Recognition”, and SOP 98-9, “Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions.” Revenue
consists primarily of revenue earned under agreements for software licenses,
maintenance and support (otherwise known as post-contract customer support or
“PCS”) and professional services. Maintenance and support revenue is deferred
and recognized over the related contract period, generally twelve months,
beginning with customer acceptance of the product.
  We use the
residual method to recognize revenue when a license agreement includes one or
more elements to be delivered at a future date.  If there is an
undelivered element under the license arrangement, we defer revenue based on
vendor-specific objective evidence, or VSOE, of the fair value of the
undelivered element, as determined by the price charged when the element is sold
separately.  If VSOE of fair value does not exist for all undelivered
elements, we defer all revenue until sufficient evidence exists or all elements
have been delivered.  Under the residual method, discounts are
allocated only to the delivered elements in a multiple element arrangement with
any undelivered elements being deferred based on VSOE of fair values of such
undelivered elements.  Revenue from software license arrangements,
which comprise prepaid license and maintenance and support fees, is recognized
when all of the following criteria are met:
  6




·
              Persuasive
      evidence of an arrangement exists.
 ·
              Delivery
      has occurred and there are no future deliverables except post-contract
      customer support (“PCS”).
 ·
              The
      fee is fixed and determinable.  If we cannot conclude that a fee
      is fixed and determinable, then assuming all other criteria have been met,
      revenue is recognized as payments become due in accordance with paragraph
      29 of SOP 97-2.
 ·
              Collection
      is probable.
 
 Revenue
from professional fees, consisting primarily of consulting services, is
recognized as services are provided.
 
 Research
and Development Expenses
 
 We account
for research and development (“R&D”) costs in accordance with Statement of
Financial Accounting Standards No. 86,“Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed.”
 
 Our
research and development expenses consist primarily of personnel-related
expenses, lab supplies and operational costs, and depreciation on
equipment.  To date, we have expensed all of our R&D costs in the
periods in which they were incurred, as our process for developing our products
has been essentially completed concurrent with the establishment of
technological feasibility.
 
 Stock-Based
Compensation Expense
  We have a
stock-based employee and director compensation plan (the ANTs software inc. 2000
Stock Option Plan or the “Plan”).  Since January 1, 2006, we have been
using the provisions of Statement of Financial Accounting Standards (“SFAS”)
123(R), “Share-Based Payment”(the “Statement” or “SFAS 123(R)”), to account for stock-based award
compensation expense. Our stock-based compensation expense for the three months
ended March 31, 2008 and 2007 includes compensation expense for all stock-based
compensation awards granted prior to, but not fully vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123, “Accounting for Stock Compensation”(“SFAS 123”).  Stock-based compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006 is based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). We recognize compensation expense for stock option awards on a
straight-line basis over the requisite service period of the award, generally
three years.
 
 In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which offers
guidance on SFAS 123(R).  SAB 107 was issued to assist preparers by
simplifying some of the implementation challenges of SFAS 123(R) while enhancing
the information that investors receive.  SAB 107 creates a framework
that is premised on two over arching themes: (a) considerable judgment will be
required by preparers to successfully implement SFAS 123(R), specifically when
valuing employee stock options; and (b) reasonable individuals, acting in good
faith, may conclude differently on the fair value of employee stock
options.  Key topics covered by SAB 107 include valuation models,
expected volatility and expected term.  We apply the principles of SAB
107 in conjunction with SFAS 123(R).
 
 Income
Taxes
 
 The
carrying value of our deferred tax assets is dependent upon our ability to
generate sufficient future taxable income in certain tax jurisdictions. Until
such time as we establish a taxable income in such jurisdictions, the total
amount of the deferred tax assets shall be offset with a valuation
allowance.
 
 Our
judgment, assumptions and estimates used for the current tax provision take into
account the potential impact of the interpretation of FIN No. 48 (“FIN 48”)
“Accounting for Uncertainty in
Income Taxes, an Interpretation of SFAS No. 109,” issued by the Financial
Accounting Standards Board, and its interpretation of current tax laws and
possible future audits conducted by the U.S. tax authorities.  FIN 48
required that we examine the effects of our tax position, based on the use of
our judgments, assumptions, and estimates when it is more likely than not, based
on technical merits, that our tax position will be sustained if an examination
is performed.  We adopted the provisions of FIN 48 on January 1,
2007.
  7




Recent
Accounting Pronouncements
  In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (SFAS 157).  SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.  SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.  The
adoption of SFAS 157 as of January 1, 2008 did not have a material impact
on our financial position, results of operations, or cash flows.  In
February 2008, FASB issued Staff Position 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13 (FSP 157-1).  FSP 157-1 excludes from
the scope of SFAS 157 accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement.  This
scope exception does not apply to assets acquired and liabilities assumed in a
business combination that are required to be measured at fair value, regardless
of whether those assets and liabilities are related to leases.  FSP 157-1
was effective upon the initial adoption of SFAS 157.  Adoption of SFAS
157-1 as of January 1, 2008 did not have a material impact on our financial
position, results of operations, or cash flows.  In February 2008,
FASB issued Staff Position 157-2, Effective Date of FASB Statement
No. 157, (FSP 157-2) that, as of February 12, 2008,
indefinitely delayed the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis.  We are
evaluating the impact, if any that the adoption of FSP 157-2 will have on our
financial condition results of operations, or cash flows.
  In
February 2007, the Financial Accounting Standards Board (the “FASB”) issued
Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for companies beginning in the first quarter of 2008,
although earlier adoption is permitted.   We have evaluated the
impact of SFAS 159 and have determined that the adoption of this Standard would
not have a material impact on the Company’s financial condition, results of
operations, or cash flows.
  In June
2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards” (“EITF
06-11”).  EITF 06-11 provides that a realized income tax benefit from
dividends that is charged to retained earnings and is paid to employees for
equity classified nonvested equity shares and units should be recognized as an
increase to additional paid-in capital. The provisions of this EITF should be
applied prospectively to the income tax benefits of dividends on
equity-classified employee share-based payment awards that are declared in
fiscal years beginning after September 15, 2007.  We do not currently
pay dividends to employees on shares of unvested restricted common stock and
therefore the provisions of EITF Issue No. 06-11 do not impact our financial
condition, results of operations, or cash flows.
  On March
19, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an Amendment of FASB Statement
133”.  Statement 161 enhances required disclosures regarding
derivatives and hedging activities, including enhanced disclosures regarding how
(a) an entity uses derivative instruments; Statement 161 enhances required
disclosures regarding derivatives and hedging activities, including enhanced
disclosures regarding how: (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
and (c) derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows.   SFAS
161 is effective for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged.   SFAS is not expected
to have a material impact on our financial condition, results of operations, or
cash flows.
 
 Reclassifications
  Certain
reclassifications have been made to conform the prior year financial statements
to be consistent with the current period’s presentation.
  8




3.   Basic
and Diluted Net Loss per Share
  Basic net
loss per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128,
“Earnings per Share” using the weighted-average number of common shares
outstanding during the period.  Diluted net loss per share is computed
using the weighted-average number of common and dilutive common equivalent
shares outstanding during the period.
  The
following table presents the calculation of basic and diluted net loss per share
for the three months ending March 31, 2008 and 2007, respectively.
  Loss
                
                
                Shares
                
                
                Loss
      per(Numerator)
                
                
                (Denominator)
                
                
                ShareQuarter
      ended March 31, 2008Basic
      and diluted net loss per share
                
                $
                (4,176,043
                )
                
                
                57,792,266
                
                
                $
                (0.07
                )Quarter
      ended March 31, 2007Basic
      and diluted net loss per share
                
                $
                (3,670,619
                )
                
                
                55,995,934
                
                
                $
                (0.07
                )
  At March
31, 2008 and 2007, stock options and warrants for the purchase of 15,740,616 and
16,414,480 shares of our common stock at prices ranging from $0.52 to $3.50 per
share, respectively, were antidilutive and therefore not included in the
computation of diluted earnings per share.





4.  Prepaid
Debt Issuance Cost




As more
fully discussed in Note 11, we incurred $869,260 in placement agent fees, paid
in cash and equity, related to convertible promissory notes issued from December
2006 through March 2007. These fees are being amortized into general and
administrative expense using the straight-line method, which is not materially
different from the effective interest method, over the 24-month life of the
notes which mature in 2008.  Unamortized fees as of March 31, 2008 and
December 31, 2007 were $373,759 and $482,416, respectively. Amortization of
these costs commenced on January 1, 2007 and totaled $108,658 and $60,871 for
the three months ended March 31, 2008 and 2007,
respectively.





5. Restricted
Cash




Restricted
cash represents a certificate of deposit (“CD”) maintained at a financial
institution.  The CD secures the outstanding balance of Company credit
cards issued by that institution.   During the quarter ended
March 31, 2008 we reduced the quantity of our Company credit cards and reduced
the corresponding CD from $192,574 at December 31, 2007 to $125,000 as of March
31, 2008.





6.  Prepaid
Expenses and Other Current Assets




As of
March 31, 2008, prepaid expenses and other current assets were $145,059,
primarily consisting of $71,397 in prepaid insurance and other employee benefit
costs and $67,700 in prepaid marketing costs for subscriptions to industry
analyst services and conferences.  As of December 31, 2007, prepaid
expenses and other current assets were $173,331, primarily consisting of
$112,440 in prepaid insurance and other employee benefit costs and $37,267 in
prepaid marketing costs for subscriptions to industry analyst services and
conferences.





7.   Prepaid
Expense from Warrant




Prepaid
expense from warrant consists of an original charge of $173,021 related to the
issuance of a warrant to a customer in 2005 to purchase 100,000 shares of the
our Common Stock, in exchange for a guarantee by that customer to provide
maintenance and support services for the ANTs Data Server to our customers
should we be unable to provide such services.  The fair value of the
warrant was calculated using the Black-Scholes valuation model.  The
warrant has an exercise price of $3.50 per share and expires July
2008.  The prepaid expense is being amortized into the statements of
operations on a straight-line basis, over 36 months, commencing January
2006.  We recognized amortization expense of $14,418 and $14,418 in
the three months ending March 31, 2008 and 2007, respectively.  The
unamortized balance of $43,255 will be recognized in the remaining part of
2008.




9




8.  Deferred Revenue
  Deferred
revenue is comprised of license fees and annual maintenance and support fees.
License fees are recognized upon customer acceptance of the product. Annual
maintenance and support fees are amortized ratably into revenue on the
statements of operations over the life of the contract, which is generally a
12-month period beginning with customer acceptance of the product.
 
 Deferred
revenue activity was as follows:
  Three
      Months Ended
                  March
      31, 2008
                
                
                Year
      Ended
                  December
      31, 2007Beginning
      of the period
                
                
                
                
                $
                48,818
                
                
                
                
                
                $
                56,819Invoiced
      current year
                
                
                
                
                
                40,565
                
                
                
                
                
                
                351,705Deferred
      revenue recognized from prior periods
                
                
                (28,219
                )
                
                
                
                
                
                
                (26,820
                )Invoiced
      and recognized current period
                
                
                (4,165
                )
                
                
                
                
                
                
                (332,886
                )Total
      revenue recognized current period
                
                
                
                
                
                
                (32,384
                )
                
                
                
                
                
                
                (359,706
                )End
      of the period
                
                
                
                
                
                $
                56,999
                
                
                
                
                
                
                $
                48,818




9.  Industry
Segment, Customer and Geographic Information
  We operate
in a single industry segment, computer software. Substantially all of our assets
and employees are located at the corporate headquarters in Burlingame,
California. Our organization is primarily structured in a functional
manner.  During the periods presented, our current Chief Executive
Officer was identified as our Chief Operating Decision Maker (CODM) as defined
by SFAS No. 131, “Disclosures
About Segments of an Enterprise and Related Information” (SFAS
131).  We currently generate revenues from ADS and do not segregate
operating expenses between those incurred for maintenance and support of ADS and
research and development expenses incurred on ACS. Therefore our CODM reviews
consolidated financial information on revenues, gross margins and operating
expenses and discrete information regarding between our existing product (ADS)
and our product under development (ACS), is not currently maintained or
reviewed.
 
 Customer
Information
  For the
three months ending March 31, 2008, $32,384, or 100%, of our revenues were
derived from three customers, which represented $24,000, $4,219 and $4,165, or
74%, 13% and 13% of our total revenues, respectively.  For the three
months ending March 31, 2007, $52,725, or 86%, of our revenues were from two
customers, which represented $50,625 and $2,100 or 73% and 13% of our total
revenues, respectively.
 
 Geographic
Information
  Revenues
by geographic area were as follows:
  For
      the Three Months Ended March 31,2008
                
                
                2007Domestic
                
                $
                30,594
                
                
                
                94%
                
                
                $
                69,127
                
                
                
                100%International
                
                
                1,790
                
                
                
                6%
                
                
                
                -
                
                
                
                0%Total
                
                $
                32,384
                
                
                
                100%
                
                
                $
                69,127
                
                
                
                100%




10.  Income
Taxes
  Effective
January 1, 2007, we adopted Financial Accounting Standards Interpretation, FIN
48, “Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement
No. 109.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of uncertain
tax positions taken or expected to be taken in a company’s income tax return,
and also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48
utilizes a two-step approach for evaluating uncertain tax positions accounted
for in accordance with SFAS No. 109, “Accounting for Income Taxes”
(SFAS No. 109).  Step One, Recognition, requires a
company to determine if the weight of available evidence indicates that a tax
position is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any.  Step
Two, Measurement, is
based on the largest amount of benefit, which is more likely than not to be
realized on ultimate settlement.
  10




We have
elected to record interest charges recognized in accordance with FIN 48 in the
financial statements as income tax expense.  Penalties recognized in
accordance with this standard will also be classified in the financial
statements as income taxes.  Any subsequent change in classification
of FIN 48 interest and penalties will be treated as a change in accounting
principle subject to the requirements of FAS 154, “Accounting Changes and Error
Corrections.”




Upon
adoption of FIN 48, our policy to include interest and penalties related to
unrecognized tax benefits within our Provision for (benefit from) income tax
expense did not change. As of March 31, 2008, we had no amount accrued for
payment of interest and penalties related to unrecognized tax benefits (and no
amounts as of the adoption date of FIN 48).  For the three months
ended March 31, 2008, we recognized no amounts of interest and penalties related
to unrecognized tax benefits in our provision for income taxes.




The
cumulative effect of adopting FIN 48 on January 1, 2007 is recognized as a
change in accounting principle, recorded as an adjustment to the opening balance
of retained earnings on the adoption date.  As a result of the
implementation of FIN 48, we recognized no change in the liability for
unrecognized tax benefits related to tax positions taken in prior periods, and
no corresponding change in retained earnings. At December 31, 2007 we recorded a
valuation allowance for the total deferred tax assets as a result of
uncertainties regarding the realization of the asset based upon the lack of
profitability and the uncertainty of future profitability. This valuation
allowance offsets any changes to the liability. Additionally, FIN 48 specifies
that tax positions for which the timing of the ultimate resolution is uncertain
should be recognized as long-term liabilities. We made no reclassifications
between current taxes payable and long-term taxes payable upon adoption of FIN
48.  Our total amount of unrecognized tax benefits as of the January
1, 2007 adoption date and for the three months ended March 31, 2008 was
$685,000. On January 1, 2007, although the implementation of FIN 48 did not
impact the amount of our liability or impact beginning retained earnings, we
reduced our deferred tax asset and valuation allowance by $685,000.




Our only
major tax jurisdiction is the United States.  The tax years 1993
through 2006 remain open and subject to examination by the appropriate
governmental agencies in the U.S.


11.   Convertible
Promissory Notes
  “J” Unit
Sales
  In
December 2006 our Board of Directors approved the terms of a private offering to
raise additional working capital. The private offering consisted of units (the
“J Units”) sold at a per unit price of $50,000 with each J Unit comprised of (i)
14,285 shares of our common stock (issued at a per share price of $1.75) and
(ii) a convertible promissory note (the “Note”) with an initial face value of
$25,000.   The Notes bear interest at the rate of 10% per annum
(simple interest) due and payable at the end of each fiscal quarter. Each Note
matures 24 months from its issuance date, and is convertible into shares of our
common stock, at the election of the holder, at a per share price of
$2.00.  The Notes are prepayable without penalty upon 30 days
notice.  The Notes are convertible at our election in the event the
closing price of our common stock equals or exceeds $4.00 per share, and if
converted at our election, we have agreed to register the shares of stock
issuable upon conversion.
  In
December 2006, we sold 40 J Units to accredited investors, raising $2 million
and issued 571,400 shares of common stock and Notes with an aggregate face value
of $1 million.  In January 2007, we sold 180 J Units to accredited
investors, raising $9 million, and issued 2,571,300 shares of common stock and
Notes with an aggregate face value of $4.5 million.  In March 2007, we
sold 40 J Units to accredited investors, raising $2 million, and issued 571,400
shares of common stock and Notes with an aggregate face value of $1 million. The
sales of these securities were made in reliance upon Rule 506 and Section 4(2)
of the Securities Act of 1933.
  We applied
the guidance in Accounting Principles Board (“APB”) No. 14, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants” and Emerging
Issues Task Force (“EITF”) 00-27, “Application of EITF 98-5, Accounting for
Convertible Securities with Beneficial Conversion Feature or Contingent with
Adjustable Conversion Ratios, to Certain Convertible Instruments” to allocate
the proceeds between the common stock and the Notes based on their relative fair
values. The allocation resulted in a premium of $533,700 and $152,040
respectively, for the January 2007 and March 2007 Notes. The unamortized premium
included in Convertible promissory notes as of March 31, 2008 and December 31,
2007 totals $339,924 and $440,751, respectively. The premium is amortized as a
reduction to Interest Expense using the straight-line method, which is not
materially different than the effective rate method over the life of each
note.
  11




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




For the
sale of the 2006 and 2007 “J” Units, we accreted $100,828 and $63,386 in
interest expense for the three months ended March 31, 2008 and 2007,
respectively.


Convertible Promissory Notes
with Warrants
  During
October 2007 we sold a convertible promissory note in the amount of $2,000,000
to an accredited investor. Pursuant to the sale, we issued a warrant to the
investor covering 1,333,333 shares of our common stock with a per share exercise
price of $3.25. The warrant expires 36 months from issuance. The note bears
interest at the rate of 10% per annum (simple interest) due and payable at the
end of each calendar quarter. The note matures 36 months from issuance and is
convertible into shares of our common stock, at the election of the holder, at a
per share price of $1.50.  The note is prepayable without penalty if
(i) the bid price of our common stock equals or exceeds $4.00 per share for ten
consecutive trading days and (ii) we provide the investor with 20 trading days’
notice of our intent to prepay. The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
  During
December 2007 we sold a convertible promissory note in the amount of
$1,003,226.  Pursuant to the sale, we issued a warrant to the investor
covering 668,817 shares of our common stock with a per share exercise price of
$3.25. The warrant expires 36 months from issuance. The note bears interest at
the rate of 10% per annum (simple interest) due and payable at the end of each
calendar quarter. The note matures 36 months from issuance and is convertible
into shares of our common stock, at the election of the holder, at a per share
price of $1.50.  The note is prepayable without penalty if (i) the bid
price of our common stock equals or exceeds $4.00 per share for ten consecutive
trading days and (ii) we provide the investor with 20 trading days’ notice of
our intent to prepay. The sales of these securities were made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.
  In
accordance with APB 14 and EITF 00-27 we allocated the proceeds of these sales
between the warrants and the notes based on their relative fair
values.  The allocation resulted in a discount of $250,910 which is
being expensed to Interest Expense using the straight-line method, which is not
materially different than the effective rate method, over the life of each
note.  The interest expense related to these notes was $20,909 and $0
for the three months ended March 31, 2008 and 2007, respectively.  The
balance of $217,509 is included in Convertible promissory notes as of March 31,
2008.
 
 12.Commitments and
Contingencies
  Lease
Commitment
  As of
March 31, 2008, we leased office facilities under a non-cancelable operating
lease.  Future minimum lease payments required under the
non-cancelable leases are as follows:
  Payments Due by
      Period
                
                Operating
      LeasesLess
      than 1 Year
                
                $
                362,440More
      than 1 Year
                
                
                68,400Total
      minimum lease payments
                
                $
                430,840




On April
27, 2005, we entered into a lease with Bayside Plaza, a partnership, for
approximately 15,000 square feet of general commercial offices located at 700
Airport Boulevard, Suite 300, Burlingame, California (the “Premises”). The
Premises are used for the purposes of general office use and for software
development. The lease has an initial term of three years and is subject to our
right to extend the term of the lease for a total of six additional
years.  In July 2007 we extended this lease for the period May 1, 2008
through April 30, 2009 at the rate of $34,200 per month.
  12




We are
recognizing rent expense for this lease in accordance with Financial Technical
Bulletin 85-3 (“FTB 85-3”), “Accounting for Operating Leases with
Scheduled Rent Increases.”  The base rent, the effects of the
scheduled rent increases, and the effects of the rent abatement are being
recognized on a straight-line basis over the lease term. For the three months
ended March 31, 2008 and 2007, we recognized $50,004 and $50,004 respectively,
in rental expense for this lease.
 
 Contingencies
 
 We are not
a party to any material pending legal proceedings.
 
 
 13.   Stockholders’
Equity Transactions
 
 Stockholders’
equity transactions by cash and non-cash activity for the three months ended
March 31, 2008 and 2007 is presented below.
  Changes
      in Stockholders' (Deficit) EquityFor
      the three months ended March 31,2008
                
                
                2007Total
      stockholders' (deficit) equity, beginning of period
                
                $
                (5,044,880
                )
                
                $
                3,823,010Cash
      transactions:Proceeds
      from private placements:Sales
      of common stock at $0.60 per share
                
                
                1,041,000
                
                
                
                -Cash
      commissions on sales of common stock
                
                
                (104,100
                )
                
                
                -Sales
      of 220 "J" units at $25,000 per unit (equity portion of
    units)
                
                
                -
                
                
                
                5,500,000Total
      cash commissions on sales of "J" units (equity)
                
                
                -
                
                
                
                (481,426
                )Total
                
                
                936,900
                
                
                
                5,018,574Proceeds
      from stock  exercises:Cash
      proceeds from exercise of stock options
                
                
                -
                
                
                
                60,600Total
                
                
                -
                
                
                
                60,600Total
      cash transactions
                
                $
                936,900
                
                
                $
                5,079,174Non-cash
      transactions:Related
      to private placements:Premium
      on note payable
                
                
                -
                
                
                
                (685,740
                )Common
      stock issued to placement agent on sales of 220 "J' units,
    net
                
                
                -
                
                
                
                217,042Total
                
                
                -
                
                
                
                (468,698
                )Related
      to stock vesting and warrant-based compensation:Employee
      compensation expense
                
                
                1,120,985
                
                
                
                326,596Non-employee
      compensation expense
                
                
                28,034
                
                
                
                14,076Total
                
                
                1,149,019
                
                
                
                340,672Total
      non-cash transactions
                
                $
                1,149,019
                
                
                $
                (128,026
                )Net
      loss for fiscal period
                
                $
                (4,176,043
                )
                
                $
                (3,670,619
                )Total
      stockholders' (deficit) equity, end of period
                
                $
                (7,135,004
                )
                
                $
                5,103,539




Following
is a summary of equity transactions by quarter for the three months ending March
2008 and 2007, respectively. Sales of equity securities (with the exception of
stock option exercises) or equity-linked securities were made in reliance upon
Rule 506 and Section 4(2) of the Securities Act of 1933.




13


Three
months ended March 31, 2008:
  Funds raised through private
offerings to accredited investors:
  In the
first quarter of 2008, we received $1,041,000 from accredited investors, for the
sale of 1,735,000 shares of the Company’s common stock, at a price of $0.60 per
share.  We paid a placement agent a cash commission of $104,100 and
issued 157,727 shares of our common stock to the placement agent in connection
with these investments.  The shares are contractually valued at $0.66
per share or $104,100.  The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
 
 Other equity
transactions:
  On March
26 and March 31, 2008, the Board of Directors approved repricing of certain
stock options and warrants for employees, consultants and Board members to the
then-current market price of the Company’s common stock. Officers and Board
members forfeited 1,193,667 vested and unvested shares in connection with the
repricing. In accordance with the provisions of FAS 123(R), we recognized
$768,024 in stock compensation expense, net of forfeiture credits, as a result
of the repricing.
  For the
three months ended March 31, 2008 we recognized a total of $1,120,985 in
compensation expense related to the vesting of employee stock options and the
repricing and $28,034 in professional fees related to the vesting of
non-employee stock options and warrants in accordance with the accounting
guidelines set forth in SFAS 123 (R) and EITF 96-18, respectively.
 
 Three
months ended March 31, 2007:
  Funds raised through private
offerings to accredited investors:
  In the
first quarter of 2007, we entered into agreements with accredited investors to
purchase 220 J Units, raising $11,000,000. Pursuant to the sale, we issued
3,142,700 shares of our common stock at a share price of $1.75 totaling
$5,500,000 and issued Notes with an initial face value of $5,500,000. The Notes
bear interest at the rate of 10% per annum (simple interest) due and payable at
the end of each fiscal quarter. The Notes mature 24 months from the issuance
date, and are convertible into shares of our common stock, at the election of
the holder, at a per share price of $2.00. The Notes are prepayable without
penalty upon 30 days notice. The Notes are convertible at our election, in the
event the closing price of our common stock equals or exceeds $4.00 per share,
and if converted at our election, we have agreed to register the shares of stock
issuable upon conversion. The sales of these securities were made in reliance
upon Rule 506 and Section 4(2) of the Securities Act of 1933.
  In
connection with the sale, we paid $1,100,000 in cash commissions and issued
199,980 shares of our common stock to a placement agent. The shares are
contractually valued at $1.93 per share or $385,961. The total commission value
of $1,485,961 was allocated between debt issuance costs and additional paid-in
capital as a cost of raising the equity portion of the offering, in the same
proportion that was used to allocate the gross proceeds of the offering between
notes payable, and stockholders’ equity. This resulted in an increase in debt
issuance costs of $835,616. The remaining $650,345 was allocated to additional
paid-in capital.
  Funds raised through cash
exercises of stock options:
  For the
three months ended March 31, 2007, a total of 60,000 shares of common stock were
purchased through the exercise of stock options with an original exercise price
of $1.01, resulting in gross proceeds of $60,600.
 
 Other equity
transactions:
  For the
three months ended March 31, 2007 we recognized $292,186 in compensation expense
related to the vesting of employee stock options and $14,076 in professional
fees related to the vesting of non-employee stock options and warrants in
accordance with the accounting guidelines set forth in SFAS 123 (R) and EITF
96-18, respectively.
 
 14.   Stock-Based
Compensation Expense
  We have a
stock-based compensation program (the ANTs software inc. 2000 Stock Option Plan
or the “Plan”) which is intended to attract, retain and provide incentives for
talented employees, officers, directors and consultants, and to align
stockholder and employee interests.  We consider stock-based
compensation critical to our operation and productivity; essentially all of our
employees and directors participate, as well as certain consultants. Under the
Plan, we may grant incentive stock options and non-qualified stock options to
employees, directors or consultants, at not less than the fair market value on
the date of grant for incentive stock options, and 85% of fair market value for
non-qualified options.  Options are granted at the discretion of the
Board of Directors and the Compensation Committee of the Board of
Directors.
  14




Options
granted under the Plan generally vest within three years after the date of
grant, and expire 10 years after grant.  Stock option vesting is
generally time-based, but stock options sometimes vest as a result of
achievement of milestones. Options granted to new hires generally vest 16.7%
beginning six months after the employee’s date of hire, then at 2.78% each month
thereafter such that the option is fully vested three years from date of hire.
Options granted to existing employees generally start vesting monthly following
their grant.  Following termination of employment or consulting status
there is usually a grace period during which the vested portion of the option is
exercisable. This period is typically three months, but may be shorter or longer
depending on the terms of a given stock option agreement.  Outside
directors generally receive an option to purchase 50,000 shares of common stock
for each 12 months of service, and an additional 10,000 shares for each 12
months of service as chairman of a Board committee, all vesting over the period
of service.  Directors generally serve for terms of three
years.  Options granted to directors may include a one-year lock-up
provision following termination of their director status, during which period
the option cannot be exercised.




As
disclosed above in Note 13, on March 26 and March 31, 2008, the Board of
Directors approved repricing of certain stock options and warrants for
employees, consultants and Board members to the then-current market price of the
Company’s common stock.  Officers and Board members forfeited
1,193,667 vested and unvested shares in connection with the repricing. In
accordance with the provisions of FAS 123(R), we recognized $768,025 in stock
compensation expense, net of forfeiture credits, as a result of the
repricing.




The
following table sets forth the total stock-based compensation expense for
employees, outside directors and consultants for the three months ending March
31, 2008 and 2007.







For
      the Three Months Ended March 31,2008
            
            
            2007Sales
      and marketing ("S&M")
            
            $
            64,936
            
            
            $
            80,953Research
      and development ("R&D")
            
            
            544,940
            
            
            
            127,454General
      and administrative ("G&A")
            
            
            539,143
            
            
            
            97,855Stock-based
      compensation before income taxes
            
            
            1,149,019
            
            
            
            306,262Income
      tax benefit
            
            
            -
            
            
            
            -Total stock-based compensation expense after income taxes
            
            $
            1,149,019
            
            
            $
            306,262Stock-based
      compensation expense charged to:Employee
      compensation expense (includesoutside
      directors)
            
            $
            1,120,985
            
            
            $
            292,186Professional
      fees - S&M consultants
            
            
            2,830
            
            
            
            12,598Professional
      fees - R&D consultants
            
            
            25,204
            
            
            
            1,478Professional
      fees - G&A consultants
            
            
            -
            
            
            
            -Stock-based
      compensation before income taxes
            
            
            1,149,019
            
            
            
            306,262Income
      tax benefit
            
            
            -
            
            
            
            -Total stock-based compensation expense after income taxes
            
            $
            1,149,019
            
            
            $
            306,262




Stock-based
compensation expense for the three months ended March 31, 2008 and 2007
increased basic and diluted net loss per share by $0.02 and $0.01, respectively
and had no impact on cash flows used in operations or cash flows from financing
activities.




The fair
value of employee and non-employee stock-based awards, and the stock-based
compensation expense for the three months ending March 31, 2008 and 2007 was
estimated using the Black-Scholes valuation model with the following
assumptions:




15




Three
      Months Ended March 31,2008
              
              
              2007Expected
      life in years
              
              
              3.00
      - 10.00
              
              
              
              3.00
      - 10.00Average
      Volatility
              
              
              66%
      - 67%
              
              
              
              67%
      - 156%Interest
      rate
              
              
              1.38%
      - 1.99%
              
              
              
              4.32
      %- 4.68%Dividend
      Yield
              
              
              0.00%
              
              
              
              0.00%




The
expected life of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future behavior of employee and non-employees. Expected stock price volatility
is based on historical volatility of our common stock over the expected life of
the options. The risk-free interest rate is based on the yield available on U.S.
Treasury zero-coupon issues with an equivalent remaining expected life. We have
not paid dividends in the past and do not expect to pay any dividends in the
near future.




As of
March 31, 2008, there was approximately $1.5 million of total unrecognized
compensation expense, adjusted for estimated forfeitures, related to unvested
stock-based compensation granted to employees and non-employees, which we expect
to recognize over a remaining weighted-average period of approximately 2.1
years. Total unrecognized compensation cost will be adjusted for future changes
in estimated forfeitures.


15.   Stock
Options and Warrants
  As of
March 31, 2008, we had outstanding options to purchase up to 7,770,611 of common
stock of which 6,304,110 were exercisable and 7,970,005 warrants outstanding to
purchase common stock of which 7,890,005 were exercisable.
  Stock
      Option Shares
                
                
                
                
                
                Total
      OptionsAvailable
                
                
                
                
                
                Warrants
                
                
                and
      Warrantsfor Grant
                
                
                Outstanding
                
                
                Outstanding
                
                
                OutstandingBalance,
      December 31, 2007
                
                
                652,789
                
                
                
                8,689,050
                
                
                
                8,124,380
                
                
                
                16,813,430Granted
                
                
                (436,000
                )
                
                
                436,000
                
                
                
                -
                
                
                
                436,000Exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Retired/forfeited
                
                
                1,354,439
                
                
                
                (1,354,439
                )
                
                
                (154,375
                )
                
                
                (1,508,814
                )Balance,
      March 31, 2008
                
                
                1,571,228
                
                
                
                7,770,611
                
                
                
                7,970,005
                
                
                
                15,740,616Exercisable
      at March 31, 2008
                
                
                
                
                
                
                6,304,110
                
                
                
                7,890,005
                
                
                
                14,194,115




Net cash
proceeds from the exercise of stock options were $0 and $60,600 for the three
months ended March 31, 2008 and 2007 respectively. No income tax benefit was
realized from stock option exercises during these periods due to our net loss
from operations for both periods.  In accordance with SFAS 123(R), we
present excess tax benefits from the exercise of stock options, if any, as
financing cash flows rather than operating cash flows.




Average
exercise prices and aggregate intrinsic values of stock option activity for the
three months ended March 31, 2008, is as follows:




16




Shares
              
              
              
              
              
              Weighted
      Average
              
              
              AggregateAvailable
              
              
              Outstanding
              
              
              Exercise
              
              
              IntrinsicFor Grant
              
              
              Stock Options
              
              
              Price
              
              
              ValueOutstanding
      at January 1, 2008
              
              
              652,789
              
              
              
              8,689,050
              
              
              
              2.05
              
              
              $
              -Granted
              
              
              (436,000
              )
              
              
              436,000
              
              
              
              0.87Exercised
      through cash consideration
              
              
              -
              
              
              
              -
              
              
              
              -Retired
      or forfeited
              
              
              1,354,439
              
              
              
              (1,354,439
              )Outstanding
      at March 31, 2008
              
              
              1,571,228
              
              
              
              7,770,611
              
              
              
              1.10
              
              
              $
              -Exercisable
      at March 31, 2008
              
              
              
              
              
              
              6,304,110
              
              
              
              1.15
              
              
              $
              -




The
aggregate intrinsic value of total stock options outstanding and exercisable and
of total stock options exercised during the three months ended March 31, 2008 in
the table above represent the total pretax intrinsic value (i.e., the difference
between our closing stock price on March 31, 2008 and the weighted average
exercise price, times the number of shares) that would have been received by the
option holders had all option holders exercised their options on March 31, 2008.
Aggregate intrinsic value changes as the fair market value of our stock
changes.  The closing market price of the stock on March 31, 2008 was
$0.94.


The
weighted average grant-date fair value of stock options granted during the three
months ended March 31, 2008 was $0.90.  The range of exercise prices
for options outstanding and exercisable at March 31, 2008 are summarized as
follows:
  Total
      Options Outstanding as of March 31 ,2008Weighted
                
                
                WeightedAverage
      Exercise
                
                
                Average
      RemainingOptions
                
                
                Price per Share
                
                
                Contractual Life (in Years)Range
      of exercise prices:$0.52
      - $0.99
                
                
                
                5,805,775
                
                
                $
                0.87
                
                
                
                9.66$1.00
      - $1.99
                
                
                
                1,209,674
                
                
                $
                1.51
                
                
                
                6.87$2.00
      - $2.99
                
                
                
                736,121
                
                
                $
                2.20
                
                
                
                7.00$3.00
      - $3.99
                
                
                
                19,041
                
                
                $
                3.11
                
                
                
                3.13Total
      stock options outstandingat
      March 31, 2008
                
                7,770,611
                
                
                $
                1.10
                
                
                
                8.96Total
      Options Exercisable at March 31, 2008Weighted
                
                
                WeightedAverage
      Exercise
                
                
                Average
      RemainingOptions
                
                
                Price per Share
                
                
                Contractual Life (in Years)Range
      of exercise prices:$0.52
      - $0.99
                
                
                
                4,385,829
                
                
                $
                0.87
                
                
                
                9.55$1.00
      - $1.99
                
                
                
                1,163,119
                
                
                $
                1.51
                
                
                
                6.76$2.00
      - $2.99
                
                
                
                736,121
                
                
                $
                2.20
                
                
                
                7.00$3.00
      - $3.99
                
                
                
                19,041
                
                
                $
                3.11
                
                
                
                3.13Total
      stock options exercisableat
      March 31, 2008
                
                6,304,110
                
                
                $
                1.15
                
                
                
                8.72




Warrants
outstanding as of March 31, 2008 are summarized in the table below:
  17




Exercise
              
              
              WeightedPrices
              
              
              Average
              
              Year
      ofWarrants
              
              
              per Share
              
              
              Exercise Price
              
              ExpirationWarrants
      purchased in privateplacements:3,342,230
              
              
              $
              3.25
              
              
              
              
              20081,000,000
              
              
              $
              3.25
              
              
              
              
              20092,002,150
              
              
              $
              3.25
              
              
              
              
              2010Subtotal
              
              
              6,344,380
              
              
              
              
              
              
              $
              3.25Warrant
      issued to customer for potentialfuture
      services and consultants forcurrent
      services:
              
              
              100,000
              
              
              $
              3.50
              
              
              
              
              
              2008170,000
              
              
              $
              1.45
      - $1.85
              
              
              
              
              
              2009Subtotal
              
              
              270,000
              
              
              
              
              
              
              $
              2.46Warrants
      issued to outside directorsand
      former employee:50,000
              
              
              $
              0.94
              
              
              
              
              
              2010850,000
              
              
              $
              0.94
      - $2.31
              
              
              
              
              
              2011198,750
              
              
              $
              0.94
              
              
              
              
              
              2015256,875
              
              
              $
              0.94
              
              
              
              
              
              2016Subtotal
              
              
              1,355,625
              
              
              
              
              
              
              
              1.70Total
      warrants outstanding atMarch
      31, 2008
              
              
              7,970,005
              
              
              
              
              
              
              $
              2.96




16.   Subsequent
Events
 
 On April
30, 2008, for consideration of $1.4 million, we entered into a license agreement
with Sybase, Inc. for a perpetual, paid-up, royalty-free, non-exclusive
license:
  (i)
                to
      reproduce, modify, distribute, perform, display, make, have made, use,
      sell, offer to sell, import, export, lease or otherwise make use of or
      exploit the ADS software and certain source code through any means or
      medium or in any way currently known or unknown, for any purpose,
      and(ii)
                the
      further right to sublicense some or all of the foregoing rights through
      multiple tiers of
sublicenses.




The
license agreement is subject to certain terms and conditions including a right
of return within thirty days of the agreement if any portion of the ADS software
and certain source code is incomplete or missing and we are unable to promptly
deliver the incomplete or missing portions.  We received the $1.4
million upon execution of the license agreement.




From April
1, 2008 through May 6, 2008, we received $1,041,000 from accredited investors
for the sale of 1,735,000 shares of our common stock, at a price of $0.60 per
share.  During the quarter ended June 30, 2008, we will pay a
placement agent a cash commission of $104,100 and issue 157,727 shares of our
common stock in connection with this private placement.  The 157,727
shares are contractually valued at $0.66 per share or $104,100.  The
sales of these securities were made in reliance upon Rule 506 and Section 4(2)
of the Securities Act of 1933.




18




ITEM 2.      MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  The
following information should be read in conjunction with the financial
statements and notes thereto in Part 1 Item 1, Financial Statements for this
Quarterly Report on Form 10-Q and with Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, in our Annual Report
on Form 10-K for the year ended December 31, 2007.
  Certain
statements contained in this Form 10-Q constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended.  Such
forward-looking statements herein are based on current expectations that involve
a number of risks and uncertainties. Such forward-looking statements are based
on assumptions that we will have adequate financial resources to fund the
development and operation of our business, that there will be no material
adverse change in our operations or business, that we will meet success in
marketing and selling our products, and that we will be able to continue to
attract and retain skilled employees necessary for our business, among other
things. The foregoing assumptions are based on judgments with respect to, among
other things, information available to our future economic, competitive and
market conditions and future business decisions. All of these assumptions are
difficult or impossible to predict accurately and many are beyond our control.
Accordingly, although we believe that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in the forward-looking statements will be realized. There are a number of risks
presented by our business and operations, which could cause our financial
performance to vary markedly from prior results, or results contemplated by the
forward-looking statements. Such risks include failure of our technology or
products to work as anticipated, failure to develop commercially viable products
or services from our technology, delays or failure in financing efforts, delays
in or lack of market acceptance, failure to recruit adequate personnel, and
problems with protection of intellectual property, among others. The words
“believe,” “estimate,” “expect,” “intend,” “anticipate” “should”, “could”,
“may”, “plan” and similar expressions and variations thereof identify some of
these forward-looking statements. Management decisions, including budgeting, are
subjective in many respects and periodic revisions must be made to reflect
actual conditions and business developments, the impact of which may cause us to
alter our capital investment and other expenditures, which may also adversely
affect our results of operations. In light of significant uncertainties inherent
in forward-looking information included in this Quarterly Report on Form 10-Q,
the inclusion of such information should not be regarded as a representation by
us that our objectives or plans will be achieved. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.
 
 The
Company
  ANTs
software inc. specializes in the development of middleware for the relational
database management market.  We are developing the ANTs Compatibility
Server (“ACS”) and have developed and currently market and support the ANTs Data
Server (“ADS”).
 
 ·
              ACS
      is middleware software that is intended to offer a fast, cost-effective
      method to move applications from one database to another and enable
      enterprises to achieve cost efficiencies by consolidating their
      applications onto fewer databases.  ACS is built on proprietary
      compatibility technologies that we
developed.
 ·
              ADS
      is a relational database management system (“RDBMS”) that can reduce costs
      and improve application performance.  ADS incorporates our
      patented high-performance
technology.
  End-users
of RDBMSs, independent software vendors that bundle an RDBMS with their products
and other RDBMS vendors can use the ADS and ACS to lower costs and gain
competitive advantage.
 
 Corporate History
 
 ANTs
software inc. (sometimes referred to herein as “ANTs” or “we”) is a Delaware
corporation headquartered in Burlingame, California.  Our shares are
traded on the OTC Bulletin Board under the stock symbol ANTS. We are the
successor to Sullivan Computer Corporation, a Delaware corporation incorporated
in January 1979, which, in 1986 changed its name to CHoPP Computer Corporation.
In 1997, we reincorporated from Delaware to Nevada, and in February 1999 changed
our name to ANTs software.com. In July 2000, we merged with Intellectual
Properties and Technologies, Inc., a wholly owned subsidiary with no significant
assets. In December 2000, we reincorporated from Nevada to Delaware and changed
our name from ANTs software.com to ANTs software inc.
  19




Our
development of ACS began in 2006 and is based on research and development
related to ADS which began in 2000.


Technology
and Intellectual Property
 
 Overview
  Beginning
in 2000, we focused on development of ADS and core high-performance database
technologies. In 2006, we began building compatibility technology into ADS and
in early 2007, after identifying a potential market for this compatibility
technology, we began developing ACS. We have developed numerous proprietary
technologies related to ACS and we have patented technologies related to the
ANTs Concurrency Engine at the heart of ADS.
 
 The
ANTs Concurrency Engine
  Applications
that require access to rapidly changing, shared data often suffer from poor
performance and poor scalability because of database locking. The ANTs
Concurrency Engine (ACE), which comprises a highly efficient data-processing
engine coupled with lock-free data structures, eliminates virtually all data
locking. ACE is architected into the core of ADS and enables performance
improvements over other RDBMSs.
 
 ACE
consists of two key components:
 
 ·
              A
      highly efficient data processing
engine
 ·
              Lock-free
      data structures, enabling
concurrency
 
 The
Data Processing Engine
  For many
years, shared data manipulation due to locking in the database has been the
bottleneck in application performance and scalability. Our research and
development team developed a revolutionary way of organizing the work associated
with manipulating data. The data processing engine at the heart of ADS
reorganizes tasks so as to avoid locking. The result is an entirely new approach
to the process by which data is managed.
 
 Lock-Free
Data Structures
  Contention
for shared data produces two significant performance bottlenecks in
data-intensive applications:
 
 ·
              The
      necessity of locking records and in some cases entire indexes, to ensure
      data integrity. This results in significant delays due to lock
      waiting.
 ·
              Cache
      synchronization conflicts that occur when shared data is distributed in
      multiple caches or multiple clients
  Our
innovative lock-free data structure technology, which virtually eliminates index
locking and allows index operations, which, to our knowledge, is not possible
with existing RDBMSs.  Locks not only cause waiting, they also can
cause severe cache synchronization conflicts, which ACE also
eliminates.  Operations that would significantly decrease performance
in an index-dependent application, such as adding or modifying items, should,
when using the ADS, execute concurrently at maximum speed.
  Using ADS,
developers can design applications knowing that they will handle operations
under loads that are now generally impossible, even when the data are rapidly
changing. We have several patented and patent-pending designs for the
implementation and deployment of lock-free data structures.
 
 Patents
  We have
developed several patented technologies, all of which relate to ADS and several
proprietary and patent-pending technologies that relate to both ADS and
ACS.  We have filed thirteen patent applications to obtain protection
for our intellectual property.  We have been granted six
patents.  The remaining seven applications are pending and awaiting
the Patent and Trademark Office’s action.  We also claim copyright,
trade secret and trademark protection in aspects of our business and technology
and new intellectual property is under development on an ongoing
basis.
  20




Products
 
 The
ANTs Data Server (“ADS”)
  ADS is an
RDBMS that can reduce costs and can improve performance in a wide range of
applications. It incorporates the ANTs Concurrency Engine, which provides unique
performance and cost-saving advantages that make ADS an attractive alternative
to other RDBMSs. End-users of RDBMSs, independent software vendors that bundle
an RDBMS with their products and other RDBMS vendors can use ADS or its
technologies to lower costs and gain competitive advantage.
  In
addition to its unique performance technologies, ADS incorporates features that
make it suitable for a wide range of applications, including:
 
 ·
              It
      can be deployed on off-the-shelf
hardware
 ·
              It
      can be deployed on the Linux, Windows, Solaris and AIX operating
      systems
 ·
              It
      supports the SQL-92 language and popular features from
    SQL-99
 ·
              Its
      micro-threaded execution engine maximizes performance of multi-core CPUs
      and multi-processor servers
 ·
              Transactions
      are durably recorded to disk logs for backup, failover and
      recovery
 ·
              Automatic
      failover and recovery are built in
  ADS
contains many additional features and provides a platform on which the ANTs
R&D team can build significant new features as the market
demands.
 
 The ANTs Compatibility
ServerTM(“ACS”)
  Applications
written to work with one RDBMS are typically incompatible with other RDBMSs due
to proprietary extensions developed and popularized by RDBMS
vendors.  This has the effect of locking customers into one RDBMS
vendor because it would generally be cost-prohibitive and too time-consuming to
migrate an application from one RDBMS to another.  ACS natively
translates these proprietary extensions from one RDBMS to another. This product
allows customers to migrate applications from one RDBMS to another more easily
and at less cost.
  Migrating
applications is intended to be a three-step process when using ACS:
 
 1.
              Move
      the data – the large RDBMS vendors all have full-featured tools that allow
      customers to move data from other products to
  theirs.
 2.
              Install
      ACS – once the data is migrated, ACS is installed and connected to the
      application and the new RDBMS.
 3.
              Test
      and deploy – the application is first tested to ensure that it functions
      properly with the new RDBMS, and then the customer goes “live” with the
      application.
  We have
developed the underlying technologies related to ACS. We have conducted
successful pilot tests with various partners.  In April 2008, we
announced the launch of ACS 1.5 as a generally available commercial
product.
 
 Sales
and Marketing
 
 The
Market
 
 According
to IDC Research, the market for RDBMS products was $18.6 billion in
2007.  Oracle, Microsoft and IBM control approximately 84% of this
market. According to the numerous CTOs, database architects and application
developers at the target Global 2000 enterprises with whom we have spoken,
database infrastructure costs have become one of the most expensive line items
in the IT budget. These Global 2000 enterprises typically have annual database
“spends” in excess of tens and, in some cases, hundreds of millions of dollars
and their database budgets are growing annually. The migration cost from one
RDBMS to another, even to a low-cost open-source RDBMS, is extensive due to lack
of compatibility between the products’ proprietary extensions. There is
significant interest, confirmed by our discussions with industry analysts and
user groups, for a product that can provide the capability to migrate an
application from one RDBMS to another.
  21




Strategy
  Our
go-to-market strategy adapts with changes in the competitive structure of the
RDBMS market.  The refinement of our strategy is a continuous and
iterative process, reflecting our goal of providing a cost-effective solution
across a wide variety of applications.  Our strategy has recently
included:
 
 ·
              Developing
      partnerships with Oracle, Microsoft, IBM, Sybase and others to bring ACS
      to market
 ·
              Focusing
      on large enterprise customers who can realize significant savings by
      migrating applications among leading RDBMS
  products.
 ·
              Selling
      ADS through two sales channels:
 
 o
              Through
      independent software vendors that will incorporate ADS with its own
      product which they will sell to their customers,
  and
 o
              Through selling partners such as
      value-added resellers and system integrators that generally have deep
      expertise in certain vertical or geographical markets and that integrate
      the best products to develop complete solutions for their
      customers.
  ACS can
provide a solution for enterprises to address the problems of RDBMS lock-in
and cost escalation by enabling them to migrate applications among
RDBMSs.  ACS can provide a potentially significant competitive
advantage for RDBMS vendors such as Oracle, IBM, Microsoft, Sybase and others
because they would have the ability to cost-effectively migrate
applications from their competitors’ products to their own.
  We intend
to bring ACS to market through partners that will sell and support it. The most
likely partners are the large database vendors with which we are currently in
discussions regarding the resale and support of ACS.
  If we are
successful in this go-to-market strategy for ACS, we intend to generate revenue
through royalties and professional services.  If one or more of the large
RDBMS vendors resells ACS, we would expect to share in the license and
maintenance revenue.  Each sale of ACS will require installation, testing,
tuning and other professional services. It is our intention to generate revenue
by providing those services.
  If
successful, we expect to generate first revenues from ACS in 2008, although it
is premature to discuss product or service pricing or provide revenue estimates.
 It is our goal to ensure that the total cost of migrating an application
is less, the risk lower and the project faster when using ACS.
  ADS is our
high-performance RDBMS technology and is a suitable alternative for new and
existing applications where database performance is critical.  Such
applications include:
 
 ·
              High
      volume on-line transaction processing, such as in capital markets
      applications
 ·
              Telecom
      – messaging applications
 ·
              Real-time
      analytics for security and defense department
  applications
  We have
established relationships with a number of partners that resell ADS. These
partners include selling partners, with which we are engaged as a means of
gaining market distribution and access to customers, and independent software
vendor (“ISV”) partners that bundle ADS with their software products and sell a
“turn-key” solution to customers.  Following are selected results of
our partnering strategy:
  ·
              Sybase
      – In April 2008 we signed a $1.4 million, one-time, non-exclusive ADS
      source code license with Sybase, Inc.  Sybase may now modify and
      incorporate the ADS source code into its products and distribute it to its
      customers and partners.
 22




·
              IBM
      – In January 2007 we announced that through a multinational solutions
      engagement agreement, ADS may be sold through IBM contracts to customers
      worldwide. First success: ADS selected for deployment on IBM blade servers
      in Raytheon, Inc.’s shipboard computing platform for the U.S.
      Navy.
 
 ·
              Four
      Js Development Tools, Ltd.– Four Js sells a turnkey solution comprised of
      its application development tool, Genero, bundled with ADS (which is
      rebranded by Four Js as Genero db).  Genero db was selected by a
      Fortune 100 retailer in mid-2006 for in-store applications and is now
      deployed in over 900 stores.
 
 ·
              Singlepoint,
      Inc. (formerly Wireless Services Corporation) – Singlepoint bundles ADS
      with Singlepoint’s text messaging platform to provide high performance for
      wireless carriers.  ADS replaced Microsoft SQL Server at Sprint,
      processing over 12 million messages per
day.
  We
generate ADS revenue through licensing, maintenance, integration and
customization fees. We intend to continue licensing ADS to partners that we
expect will bundle and resell it for use with their applications. We also intend
to license ADS through re-sellers and system integrators.  We began
selling the first commercial version of ADS in 2005, have generated
approximately $1.1 million in revenues through March 31, 2008, and expect to
recognize an additional $1.4 million in May 2008.
 
 Competition
  We have
not identified any direct competitor for ACS.  Other database vendors
encourage migration from competitive products through use of their proprietary
migration tools. These tools often require substantial investment to rewrite
applications.  Potential customers with which we have spoken are not
receptive to migrating applications due to the expense and risk of such
rewrites.  ACS allows low-cost migration with minimal modification to
the application.
  ADS
operates in the high-performance segment of the RDBMS market and competes
against other high-performance, general-purpose RDBMSs.  Competition
for ADS in the high-performance segment comes from in-memory databases such as
the TimesTen product from Oracle and the Solid Information Technology product
(acquired by IBM in January 2008); from specialty vendors such as Kx Systems,
Inc. and FAME Information Systems, Inc.; and from the general-purpose RDBMS
vendors Oracle, IBM, Microsoft, MySQL (acquired by Sun Microsystems, Inc. in
January 2008), and InterSystems Corporation.  The general-purpose
vendors often encourage customers to solve high-performance problems by
upgrading hardware and by contracting with high-cost consulting services to
develop work-arounds to the bottlenecks found in their products.
  Business
conditions in the high-performance RDBMS market are highly competitive for a
number of reasons, including that the market is dominated by very large
companies with extensive financial, marketing, and engineering resources and the
market is well-established.  Some customers have built up extensive
infrastructure around competitive RDBMS products and expect large amounts of
features and services from an RDBMS vendor.  Our success will likely
require that we win business from established competitors; as a new entrant in
the RDBMS market, our product may have less functionality than customers
require.  This has made our sales of ADS more
challenging.
  
 Current
Operations
  Our
operations consist of:
 
 (i)
              ANTs Compatibility
      Server (ACS) – we are currently developing and marketing
      ACS.  ACS is a middleware product that supplies a fast,
      cost-effective way to move applications from one database to another so
      that customers can consolidate their applications onto fewer
      databases.
 
 (ii)
              ANTs Data Server
      (ADS) – we are currently marketing ADS and supporting its customer
      base.  ADS is a relational database management system that
      reduces costs and improves application
  performance.
 
 Our
headquarters are located in Burlingame, California. We have financed operations
through private offerings to accredited investors to whom we have sold common
stock and issued convertible promissory notes and warrants. We expect to
continue to raise capital for operations through such private offerings until
such time as sales revenue offsets expenses. We believe we have sufficient funds
to cover operations into the third fiscal quarter of 2008 at our expected
expense rate.  We expect that our focus over the next year will be on
continued ACS product development, marketing both our ACS and ADS products and
providing software maintenance and customer support.
  23




Results
of Operations
  Our
results of operations for the three months ended March 31, 2008 and 2007 are
summarized below:
  For
      the Three Months ending March 31,2008
                
                
                2007
                
                
                %
      ChangeRevenues
                
                $
                32,384
                
                
                $
                69,127
                
                
                
                -53%Cost
      of revenues
                
                
                -
                
                
                
                2,712
                
                
                
                -100%Gross
      profit
                
                $
                32,384
                
                
                $
                66,415
                
                
                
                -51%Operating
      expenses
                
                
                4,074,317
                
                
                
                3,781,632
                
                
                
                8%Loss
      from operations
                
                
                (4,041,933
                )
                
                
                (3,715,217
                )
                
                
                9%Other
      (expense) income, net
                
                
                (134,110
                )
                
                
                44,598
                
                
                
                -401%Net
      loss
                
                
                (4,176,043
                )
                
                
                (3,670,619
                )
                
                
                14%Net
      loss per share -basic
      and diluted
                
                $
                (0.07
                )
                
                $
                (0.07
                )
                
                
                0%Shares
      used in computing basic anddiluted
      net loss per share
                
                
                57,792,266
                
                
                
                55,995,934
                
                
                
                3%




Revenues
  Revenues
for both quarters are from ADS license fees, recognition of deferred maintenance
and support of ADS, royalties from third parties that resell ADS and
professional services fees on ADS installations.
  During the
three months ended March 31, 2008, we recognized $32 thousand in revenue, a
decrease of $37 thousand versus the three months ended March 31,
2007.  The decrease is due to a customer licensing our ADS software in
the first quarter of 2007, where we recognized $51 thousand in license revenue
from one customer that which did not renew its license agreement in
2008.  The decrease is offset by a $10 thousand increase in
maintenance revenues, which primarily represent follow-on support services for
two existing customers.
 
 Cost
of Revenues
  Cost of
revenues during the three months ending March 31, 2008 and 2007 was $0 thousand
and $3 thousand, respectively.   Costs of revenues in 2007
consisted of third-party licenses and services.  We did not incur any
similar costs in the first quarter ended March 31, 2008.
 
 Operating
Expenses
 
 Operating
expenses by department for the three months ending March 31, 2008 and 2007 were
as follows:
  Three
      Months ended March 31,2008
                
                
                2007%
                
                
                %
      Change
                
                
                
                
                
                %Sales
      and marketing
                
                $
                371,311
                
                
                
                9%
                
                
                
                -67%
                
                
                $
                1,099,671
                
                
                
                29%Research
      and development
                
                
                2,601,123
                
                
                
                64%
                
                
                
                39%
                
                
                
                1,875,163
                
                
                
                50%General
      and administrative
                
                
                1,101,883
                
                
                
                27%
                
                
                
                37%
                
                
                
                806,798
                
                
                
                21%Total
      operating expenses
                
                $
                4,074,317
                
                
                
                100%
                
                
                
                8%
                
                
                $
                3,781,632
                
                
                
                100%




24




Our
primary expenses are salaries, benefits and consulting fees related to
developing and marketing the ANTs Compatibility Server (“ACS”) and maintenance
and support of the ANTs Data Server (“ADS”). We completed development of ADS in
2005 and began sales and support of that product during that year.  We
began development of ACS in early 2007.  During 2007 and through 2008
we shifted most resources to development of ACS and eliminated direct sales and
marketing of ADS.  Our expenses for the latter half of 2007 and into
the three months ended March 31, 2008 primarily consist of costs incurred in the
development and promotion of our ACS product.




The number
and distribution of full time employees as of March 31, 2008 and 2007 were as
follows:




March
      31,
              
              
              %
      of
              
              
              March
      31,
              
              
              %
      of2008
              
              
              Total
              
              
              2007
              
              
              TotalSales
      and marketing
              
              
              2
              
              
              
              6%
              
              
              
              10
              
              
              
              20%Research
      and development
              
              
              26
              
              
              
              84%
              
              
              
              31
              
              
              
              64%General
      and administrative
              
              
              3
              
              
              
              10%
              
              
              
              8
              
              
              
              16%Totals
              
              
              31
              
              
              
              100%
              
              
              
              49
              
              
              
              100%




Sales
and Marketing
  Sales and
marketing consists primarily of employee salaries and benefits, stock-based
compensation, professional fees for marketing and sales services, travel and
entertainment and corporate overhead allocations.
 
 Sales
and marketing for the three months ended March 31, 2008 and 2007 is presented in
the table below.
  Three
      months ended March 31,2008
                  
                  
                  2007
                  
                  
                  %
      ChangeEmployee
      compensation and benefits
                  
                  
                  156,905
                  
                  
                  
                  551,617
                  
                  
                  
                  -72%Stock-based
      compensation
                  
                  
                  64,936
                  
                  
                  
                  80,953
                  
                  
                  
                  -20%Professional
      fees
                  
                  
                  58,737
                  
                  
                  
                  216,466
                  
                  
                  
                  -73%Travel
      and entertainment
                  
                  
                  36,337
                  
                  
                  
                  113,313
                  
                  
                  
                  -68%Corporate
      allocations from general andadministrative
      expenses
                  
                  
                  9,559
                  
                  
                  
                  81,031
                  
                  
                  
                  -88%Events
      and promotions and other
                  
                  
                  44,837
                  
                  
                  
                  56,291
                  
                  
                  
                  -20%Total
                  
                  $
                  371,311
                  
                  
                  $
                  1,099,671
                  
                  
                  
                  -66%Headcount
      at end of period
                  
                  
                  2
                  
                  
                  
                  10
                  
                  
                  
                  -80%




Total
sales and marketing decreased by $728 thousand, a 66% decrease, due primarily to
the following:




·
              Employee
      compensation and benefits decreased by 72% due to reductions in our direct
      sales team as we implemented our ADS partner strategy and due to the
      transfer of pre-sales technical staff to research and
      development.
  ·
              Stock-based
      compensation decreased 20% primarily due to reduced headcount from ten
      employees at the end of March 31, 2007 to two employees as of March 31,
      2008, offset by a one-time non-cash charge incurred for the repricing of
      stock options effective March 26, 2008 to the then-current market price of
      our common stock.
 ·
              Professional
      fees decreased 73% due to our change in go-to-market strategy. By selling
      through partners rather than selling directly to end-users, we eliminated
      end-user marketing and lead-generation
programs.
 ·
              Travel
      and entertainment decreased 68% as we decreased our sales and marketing
      team by eight between March 31, 2007 and March 31,
  2008.
 ·
              Corporate
      allocations decreased 88% due to lower headcount in sales and marketing
      and cost savings in employee
benefits.
  25
  Research
and Development




Research
and development consists primarily of employee compensation and benefits,
contractor fees to research and development service providers, stock-based
compensation and equipment and computer supplies.  During 2007 we
began developing ACS which significantly increased our contract research and
development expense.
  Research
and development for the three months ended March 31, 2008 and 2007 is presented
in the table below.
 Three
      Months Ended March 31,
                
                
                %2008
                
                
                2007
                
                
                ChangeEmployee
      compensation and benefits
                
                $
                1,301,592
                
                
                $
                1,371,502
                
                
                
                -5%Contractor
      fees
                
                
                659,745
                
                
                
                273,773
                
                
                
                141%Stock-based
      compensation
                
                
                544,940
                
                
                
                127,454
                
                
                
                328%Equipment
      and computer supplies
                
                
                85,312
                
                
                
                92,017
                
                
                
                -7%Other
                
                
                9,534
                
                
                
                10,417
                
                
                
                -8%Total
                
                $
                2,601,123
                
                
                $
                1,875,163
                
                
                
                39%Headcount
      at end of period
                
                
                26
                
                
                
                31
                
                
                
                -16%
  Total
research and development expenses increased by $726 thousand, a 39% decrease,
due primarily to the following:
 ·
                Employee
      compensation and benefits decreased 5% due to decreases in headcount from
      31 as of March 31, 2007 to 26 as of March 31,
  2008.
 ·
                Contractor
      fees increased 141% as we outsourced certain research and development
      efforts.
 ·
                Stock-based
      compensation increased primarily due to the impact of our repricing of the
      exercise price of certain vested and unvested stock options and warrants
      to equal the then-current market value of our common stock as of March 26,
      2008, offset by a reduction in employees and associated vesting expense on
      their options versus the prior
year.
 
 General
and Administrative
  General
and administrative expenses consists primarily of employee salaries and
benefits, stock-based compensation, professional fees (legal, accounting, and
investor relations), facilities expenses, and corporate insurance.
  General
and administrative expensesfor the three months
ended March 31, 2008 and 2007 is presented in the table below.
  Three
      Months Ended March 31,2008
                  
                  
                  2007
                  
                  
                  %
      ChangeEmployee
      compensation and benefits
                  
                  $
                  143,293
                  
                  
                  $
                  315,383
                  
                  
                  
                  -55%Stock-based
      compensation
                  
                  
                  539,143
                  
                  
                  
                  97,855
                  
                  
                  
                  451%Facilities,
      director fees, insurance and other
                  
                  
                  273,724
                  
                  
                  
                  281,139
                  
                  
                  
                  -3%Professional
      fees
                  
                  
                  149,858
                  
                  
                  
                  235,783
                  
                  
                  
                  -36%Debt
      issuance costs
                  
                  
                  108,658
                  
                  
                  
                  60,871
                  
                  
                  
                  79%Corporate
      allocations to Sales and marketing andResearch
      and development
                  
                  
                  (112,793
                  )
                  
                  
                  (184,233
                  )
                  
                  
                  -39%Total
                  
                  $
                  1,101,883
                  
                  
                  $
                  806,798
                  
                  
                  
                  37%Headcount
      at end of period
                  
                  
                  3
                  
                  
                  
                  8
                  
                  
                  
                  -63%




Total
general and administrative expenses increased by $295 thousand, a 37% increase,
due primarily to the following:




·
                Employee
      compensation and benefits expense decreased 55% due primarily to the
      reduction in headcount from eight as of March 31, 2007 to three as of
      March 31, 2007.




26




·
              Stock-based
      compensation increased 451% due primarily to the impact of the repricing
      of the exercise price of certain vested and unvested stock options and
      warrants to the then-current market value of our common stock as of March
      26 and March 31, 2008, offset by a reduction in employees and associated
      vesting expense on their options versus the prior
  year.
 ·
              Facilities,
      director fees, insurance and other changed marginally year over
      year.
 ·
              Professional
      fees decreased 36% primarily due to reduced Sarbanes-Oxley compliance
      costs as activities switched from first-time compliance in 2007 to
      maintenance in 2008.
 ·
              Debt
      issuance costs relate to the amortization of placement agent fees that we
      incurred on debt issuances made in December 2006 and in the first quarter
      of 2007.  These fees were incurred in relation to $13 million
      raised in J Unit convertible promissory note financing.  This
      amortization will continue through the maturity dates of each
      note.
 ·
              Allocations
      of overhead costs decreased 39% versus the prior year. Allocations of
      corporate overhead from general and administrative costs to the other
      functional departments were based on headcount.  These
      allocations decreased as the number of personnel in other functional
      departments decreased.
 ·
              Other
      consists of facilities rent and services, voice and data services,
      corporate insurance and changed minimally year over
  year.
 
 Other
(Expense) Income, Net
  The
components of other (expense) income, net for the three months ended March 31,
2008 and 2007, was as follows:
  Three
      Months Ended March 31,2008
                
                
                2007
                
                
                %
      ChangeOther
      (expense) income:Interest
      expense, convertible notes payable
                
                $
                (237,581
                )
                
                $
                (103,973
                )
                
                
                129%Amortization
      of premium, convertiblepromissory
      note
                
                
                100,828
                
                
                
                63,386
                
                
                
                59%Amortization
      of discount, convertiblepromissory
      note
                
                
                (20,910
                )
                
                
                -
                
                
                
                N/AInterest
      income
                
                
                27,002
                
                
                
                85,886
                
                
                
                -69%Other
      interest expense
                
                
                (3,449
                )
                
                
                (701
                )
                
                
                392%Other
      (expense) income, net
                
                $
                (134,110
                )
                
                $
                44,598
                
                
                
                -401%
  Other
(expense) income, net primarily consists of interest expense on convertible
notes payable and income earned on cash and cash equivalents.  The
following items significantly impacted other (expense) income:
 
 ·
              Interest
      expense increased $134 thousand, or 129%, for the three months ended March
      31, 2008 as compared to the three months ended March 31, 2007 due to the
      issuance of $6.5 million in convertible promissory notes in December 2006
      through March 2007 on which a premium was recorded.  In the
      fourth quarter of fiscal 2007 an additional $3.0 million of convertible
      promissory notes were issued on which a discount was
      recorded.   All convertible promissory notes accrue
      interest at 10% per year, payable
quarterly.
 ·
              The
      amortization of debt premium on convertible promissory notes increased by
      59% versus the first quarter of 2007 due to the additional issuance of
      convertible debt in the first quarter of
2007.
 ·
              Interest
      income decreased by $59 thousand, or 69%, due to lower invested cash
      balances.
 
 Liquidity,
Capital Resources and Financial Condition
 
 Cash flows
as of and for the three months ended March 31, 2008 and 2007, are as
follows:
  Three
      Months Ended March 31,2008
                
                
                2007Net
      cash used in operating activities
                
                $
                (2,851,161
                )
                
                $
                (3,324,250
                )Net
      cash used in investing activities
                
                
                (25,023
                )
                
                
                (137,536
                )Net
      cash provided by financing activities
                
                
                936,900
                
                
                
                9,960,600Net
      (decrease) increase in cash and cash equivalents
                
                $
                (1,939,284
                )
                
                $
                6,498,814




27




From
inception, we have reported negative cash flow from operations.  From
fiscal 2000 through fiscal 2004, we focused primarily on research and
development of ADS with our first sales occurring in the first quarter of 2005.
Total revenues from 2005 through March 31, 2008 were approximately $1.1
million.  These revenues were less than our need for funds during
these years.




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




Details
regarding the cash flows by activity follow.


Cash Used in Operating
Activities
  During the
three months ended March 31, 2008, cash used in operating activities totaled
$2.9 million, a decrease of $473 thousand compared to the three months ended
March 31, 2007.  The following items significantly impacted our cash
used in operating activities in the first quarter of 2008 versus the same period
of 2007:
 
 ·
              Our
      net loss in the first quarter of 2008 included $1.3 million in non-cash
      charges, which were comprised primarily of $1.1 million in stock-based
      compensation and $94 thousand in fixed asset
      depreciation.  Non-cash charges in the first quarter of 2007
      were $422 thousand, consisting primarily of stock-based compensation of
      $306 thousand and $107 thousand in depreciation
      expense.  Stock-based compensation increased in the first
      quarter of 2008 due to the impact of a repricing of certain stock options
      and warrants effective March 26 and March 31, 2008, to the then-current
      market price of our common stock.
 ·
              A
      decrease in salaries and benefits paid due to a decrease in headcount from
      49 at March 31, 2007 to 31 at March 31, 2008, offset by an increase in
      contract research and development
fees.
 ·
              An
      increase in interest payments related to convertible promissory
      notes.
 
 Cash Used in Investing
Activities
  During the
three months ended March 31, 2008, cash used in investing activities totaled $25
thousand, a decrease of $113 thousand versus the same period in 2007, due to a
decrease in the purchase of computer and lab equipment required to design and
test our products.  By early 2007, we had purchased substantially all
of the equipment needed to support our design, testing and quality assurance
requirements.
 
 Cash Provided by Financing
Activities
  During the
three months ended March 31, 2008, cash provided by financing activities totaled
$937 thousand from the following:
 
 ·
              We
      raised $1,041,000 from the sale for the sale of 1,735,000 shares of the
      Company’s common stock, at a price of $0.60 per
  share.
 ·
              Cash
      provided by financing activities was reduced by cash commissions paid to a
      placement agent totaling $104,100.
 
 During the
three months ended March 31, 2007, cash provided by financing activities totaled
$10 million from the following:
  28




·
              We
      entered into agreements with accredited investors to purchase 220 J Units,
      raising $11,000,000. Pursuant to the sale, we issued 3,142,700 shares of
      our common stock at a share price of $1.75 totaling $5,500,000 and issued
      convertible promissory notes with an initial face value of $5,500,000. The
      notes bear interest at the rate of 10% per annum (simple interest) due and
      payable at the end of each fiscal quarter, mature 24 months from the
      issuance date, and are convertible into shares of our common stock, at the
      election of the holder, at a per share price of $2.00. The notes are
      prepayable without penalty upon 30 days notice. The notes are convertible
      at our election, in the event the closing price of our common stock equals
      or exceeds $4.00 per share, and if converted at our election, we have
      agreed to register the shares of stock issuable upon
      conversion.
 ·
              Cash
      provided by financing activities was reduced by cash commissions paid to a
      placement agent totaling $1,100,000.  We also issued 199,980
      shares of our common stock in connection with this private
      placement.
 ·
              Proceeds
      from the exercise of 60,000 stock options at an original exercise price of
      $1.01 per share, resulting in gross proceeds of
    $60,600.
 
 Capital Resources and Going
Concern
  Since
inception, we have recorded losses and have just begun negotiations on sales of
our ACS product.  ADS product sales have been slow; however, on April
30, 2008, we executed a non-exclusive license with Sybase, Inc. for the use of
our ADS source code and received $1.4 million.  The license agreement
is subject to certain terms and conditions including a right of return within
thirty days of the agreement if any portion of the ADS software and certain
source code is incomplete or missing and we are unable to promptly deliver the
incomplete or missing portions to Sybase.  We received $1.4 million
upon execution of the contract and expect to recognize it as revenue in May
2008.  We are in discussions with other partners and customers to
license ADS and ACS; however, our ability to execute significant additional
revenue-generating agreements is uncertain.
  As of May
6, 2008, we had approximately $3.4 million in cash on hand to fund operations
and equipment purchases.  We anticipate this balance will fund
operations into the third quarter of 2008 at our current levels of revenue and
expenditures. We are pursuing the following strategies to raise capital to
finance operations:
 
 ·
              Licensing
      our ADS and ACS products - We have several license and services proposals
      in review by customers and partners which, if accepted, would be a source
      of operating capital.
 ·
              Raising
      funds - through sales of our common stock and the issuance of convertible
      notes to accredited investors through private
  offerings.
  We believe
that due to an uncertain investment climate, securing additional investment will
be difficult.  Our recently executed $1.4 million license agreement is
the largest sale we have made to date and may not recur.  As a result,
the uncertainty regarding our ability to raise additional financing or to
execute additional license and services agreements raises substantial doubt
about our ability to continue as a going concern.
 
 Off-Balance
Sheet Arrangements
  As of
March 31, 2008, we had certain off-balance sheet arrangements as described
below.
  On April
27, 2005, we entered into a lease with Bayside Plaza, a partnership, for
approximately 15,000 square feet of general commercial offices located at 700
Airport Boulevard, Suite 300, Burlingame, California (the “Premises”). We moved
our principal offices to these Premises on May 2, 2005. The Premises are used
for the purposes of general office use and for software development. The lease
has an initial term of three years, subject to our right to extend the term of
the lease for a total of six additional years. The base rent under this lease is
$16,060 per month for the first year, $17,520 per month for the second year and
$20,440 per month for the third year. We received abated rent for the period
from May 1, 2005 to July 30, 2005. In July 2007 we extended this lease for the
period May 1, 2008 through April 30, 2009 at the rate of $34,200 per
month.
  We are
recognizing rent expense for this lease in accordance with Financial Technical
Bulletin 85-3 (“FTB 85-3”), “Accounting for Operating Leases with
Scheduled Rent Increases.”  The base rent, the effects of the
scheduled rent increases, and the effects of the rent abatement are being
recognized on a straight-line basis over the lease term. During the three months
ended March 31, 2008, we recognized a total of $50,004 in rental expense for
this lease. During the same period in 2007, we recognized $50,004 in rental
expense.
  As of
March 31, 2008, the total remaining unamortized deferred rent is $3,772. This
amount is included as a current liability in accounts payable and other accrued
expenses on the balance sheet.  As of March 31, 2008 the total
remaining off-balance sheet lease obligation is $430,840.
  The table
below presents our total long-term contractual obligations as of March 31, 2008,
for both on and off-balance sheet categories.
  29
 
 Payments
      Due by PeriodLess
      than
              
              
              1-3
              
              
              3-5
              
              
              More
      thanContractual
      Obligations
              
              Total
              
              
              1
      Year
              
              
              Years
              
              
              Years
              
              
              5
      YearsOperating
      lease obligations
              
              $
              430,840
              
              
              $
              362,440
              
              
              $
              68,400
              
              
              
              -
              
              
              
              -




Critical
Accounting Estimates
  The
preparation of the financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets, liabilities,
revenues and expenses and disclosure of contingent assets and liabilities. We
evaluate such estimates and assumptions on an ongoing basis and base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates and probably will differ from these estimates under different
assumptions or conditions. On a regular basis we evaluate our assumptions,
judgments and estimates and make changes accordingly. We also discuss our
critical accounting estimates with the Audit Committee of the Board of
Directors. We believe the assumptions, judgments and estimates involved in the
accounting for revenue recognition, stock-based compensation, research and
development and income taxes have the greatest potential impact on our financial
statements. These areas are key components of our results of operations and are
based on complex rules that require us to make judgments and estimates; as a
result, we consider these to be our significant accounting policies.
Historically, our assumptions, judgments and estimates relative to our
significant accounting policies have not differed materially from actual
results.
  There have
been no significant changes in our critical accounting estimates during the
three months ended March 31, 2008 as compared to the critical estimates
disclosed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the year
ended December 31, 2007. Effective January 1, 2007, we implemented the reporting
requirements of Financial Accounting Standards Interpretation, FIN No. 48,
“Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement
No. 109.”
 
 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
 
 Foreign
Currency Exchange Risk
 
 Our
revenue is invoiced and received in United States dollars.  One of our
partners bundles our product with its own and sells to customers in the U.S. and
abroad.  For the three months ended March 31, 2008, approximately 6%
of our revenue was generated through these non-U.S. royalties.  As a
result, our net royalty receipts may have been impacted by any foreign exchange
risk experienced by this partner; however, we believe that our financial results
were not and are not expected to be materially affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets.  We do not enter into foreign currency hedging
transactions to mitigate any potential exposure to foreign currency exchange
risks.
 
 Interest Rates
  Our
exposure to market risk for changes in interest rates relates primarily to the
increase or decrease in the amount of interest income we earn on our investment
portfolio. Our investment portfolio consists of liquid investments that have
maturities of three months or less. Our risk associated with fluctuating
interest income is limited to investments in interest rate sensitive financial
instruments. Under our current policy, we do not use interest rate derivative
instruments to manage this exposure to interest rate changes. We seek to ensure
the safety and preservation of its invested principal by limiting default risk,
market risk, and reinvestment risk.  We mitigate default risk by
investing in short-term investment grade securities.
 
 ITEM 4. CONTROLS AND PROCEDURES
  The
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) was evaluated under the supervision and with
the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, as of the end of the period covered by this quarterly
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective in providing reasonable assurance that the information required to be
disclosed in this quarterly report is recorded, processed, summarized and
reported within the time period required for the filing of this quarterly
report.
  30
  There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended)
identified in connection with the evaluation of our internal control performed
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system no matter how
well conceived and operated can provide only reasonable, not absolute assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints and the
benefits of control systems must be considered relative to their cost. As a
result of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues of fraud, if
any, have been detected.
 
 PART II. OTHER INFORMATION
 
 ITEM 1.  LEGAL PROCEEDINGS
  We are not
a party to any material pending legal proceeding.
 
 ITEM 1A.   RISK FACTORS
  In
addition to other information in this Form 10-Q, the following risk factors
should be carefully considered in evaluating our business since we operate in a
highly changing and complex business environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights a few
of these risk factors, any one of which may have a significant adverse impact on
our business, operating results and financial condition.  As a result
of the risk factors set forth below and elsewhere in this 10-Q, and the risks
discussed in our other Securities and Exchange Commission filings, actual
results could differ materially from those projected in any forward-looking
statements.
  We face
significant risks, and the risks described below may not be the only risks we
face.  Additional risks that we do not know of or that we currently
consider immaterial may also impair our business operations.  If any
of the events or circumstances described in the following risks actually occurs,
our business, financial condition or results of operations could be harmed and
the trading price of our common stock could decline.
 
 Market acceptance
of our products and services is not guaranteed and our business model is
evolving.
  We are at
an early stage of development and our revenue will depend upon market acceptance
and utilization of our products and services. Our products are under constant
development and are still maturing. Customers may be reluctant to purchase
products from us because they are unproven they may be concerned about our
financial viability and our ability to provide a full range of support services.
Given these risks, customers may only be willing to purchase our products
through partners who are not faced with similar challenges. We may have
difficulty finding partners to resell our products. Also, due to economic
conditions, including a possible recession, some potential customers may have
tightened budgets for evaluating new products and technologies and the
evaluation cycles may be much longer than in the past. There can be no assurance
that our product and technology development or support efforts will result in
new products and services, or that they will be successfully
introduced.
 
 If we deliver
products with defects, our credibility will be harmed and the sales and market
acceptance of our products will decrease.
  Our
product and services are complex and have at times contained errors, defects and
bugs.  If we deliver products with errors, defects or bugs, our
credibility and the market acceptance and sales of our products would be
harmed.  Further, if our products contain errors, defects or bugs, we
may be required to expend significant capital and resources to alleviate such
problems.  We may agree to indemnify our customers in some
circumstances against liability arising from defects in our products. Defects
could also lead to product liability as a result of product liability lawsuits
against us or against our customers. We carry product and information liability
and errors and omissions insurance, but in the event that we are required to
defend more than a few such actions, or in the event that we are found liable in
connection with such an action, our business and operations may be severely and
materially adversely affected.
 
 31
  A
failure to obtain financing could prevent us from executing our business plan or
operate as a going concern.
  We
anticipate that current cash resources will be sufficient for us to execute our
business plan into the third  fiscal quarter of 2008.  If
further financing is not obtained we will not be able to continue to operate as
a going concern.  We believe that securing additional sources of
financing to enable us to continue the development and commercialization of our
proprietary technologies will be difficult and there is no assurance of our
ability to secure such financing.  A failure to obtain additional
financing could prevent us from making expenditures that are needed to pay
current obligations, allow us to hire additional personnel and continue
development of our product and technology.  If we raise additional
financing by selling equity or convertible debt securities, the relative equity
ownership of our existing investors could be diluted or the new investors could
obtain terms more favorable than previous investors.  If we raise
additional funds through debt financing, we could incur significant borrowing
costs and be subject to adverse consequences in the event of a
default.
 
 We depend on a
limited number of customers for a significant portion of our
revenue.
  For the
three months ended March 31, 2008 one of our largest customers accounted for
approximately 74% of our revenue. A decrease in revenue from any of our largest
customers for any reason, including a decrease in pricing or activity, or a
decision to either utilize another vendor or to no longer use some or all of the
products and services we provide, could have a material adverse affect on our
revenue.
 
 Our ANTs Data
Server product competes with products offered by large
companies.
  We operate
in a highly competitive industry.  Although we believe that our
technology is unique, can be protected, and, if adopted, will confer benefits to
customers, we face very large competitors with greater resources that may adopt
various strategies to block or slow our market penetration, thereby straining
our more limited resources.  We are aware of efforts by competitors to
introduce doubt about our financial stability as we compete to make sales and
win customers and business.  Large competitors may also seek to hinder
our operations through attempts to recruit key staff with exceptionally
attractive terms of employment, including signing bonuses, or by offer of highly
competitive terms to potential or newly acquired customers.
 
 Our
ANTs Compatibility Server (ACS) product is at an early stage and a business
model is not yet established.
  We began
developing the ANTs Compatibility Server in 2007 and have not yet begun selling
the product. We anticipate that we will sell ACS through partners, although we
have not yet executed reselling agreements with any partner. Consequently, we
have not yet established pricing for ACS and have only preliminary estimates as
to the possible revenues and expenses associated with sales, support and
delivery. It is possible that we will not generate enough revenue to offset the
expenses and that the ACS line of business will not be profitable.
  We
have incurred indebtedness.
  We
have incurred debt in the past and may incur substantial additional debt in the
future.  A significant portion of our future cash flow from operating
activities may be dedicated to the payment of interest and the repayment of
principal on our indebtedness.  There is no guarantee that we will be
able to meet our debt service obligations.  If we are unable to
generate sufficient cash flow or obtain funds for required payments, or if we
fail to comply with our debt obligations, we will be in default.  In
addition, we may not be able to refinance our debt on terms acceptable to us, or
at all.  Our indebtedness could limit our ability to obtain additional
financing for working capital, capital expenditures, debt service requirements,
acquisitions or other purposes in the future, as needed; to plan for, or react
to, changes in technology and in our business and competition; and to react in
the event of an economic downturn.
 
 We will need to
continue our product development efforts.
  We believe
that the market for our products will be characterized by increasing technical
sophistication.  We also believe that our eventual success will depend
on our ability to continue to provide increased and specialized technical
expertise.  There is no assurance that we will not fall
technologically behind competitors with greater resources.  Although
we believe that we enjoy a lead in our product development, and believe that our
patents on ADS and the ACE and trade secrets provide some protection, we will
likely need significant additional capital in order to maintain that lead over
competitors with more resources.
 
 32
  We rely upon
reselling partners and independent software vendors for product
sales.
  A
significant portion of our sales has been and we believe, will continue to be
made through reselling partners and independent software vendors (together
“Partners”). As a result, our success may depend on the continued sales efforts
of Partners, and identifying and entering into agreements with additional
Partners.  The use of Partners involves certain risks, including risks
that they will not effectively sell or support our products, that they will be
unable to satisfy their financial obligations with us, and that they will cease
operations.  Any reduction, delay or loss of orders from Partners may
harm our results.  There can be no assurance that we will identify or
engage qualified Partners in a timely manner, and the failure to do so could
have a material adverse affect on our business, financial condition and results
of operations.
 
 If we are unable
to protect our intellectual property, our competitive position would be
adversely affected.
  We rely on
patent protection, as well as trademark and copyright law, trade secret
protection and confidentiality agreements with our employees and others to
protect our intellectual property.  However, we have not yet filed any
patent applications on any technology or inventions included or incorporated in
the ACS product.  Despite our precautions, unauthorized third parties
may copy our products and services or reverse engineer or obtain and use
information that we regard as proprietary.  We have filed thirteen
patent applications with the United States Patent and Trademark Office and
intend to file more.  Six patents have been granted; however, we do
not know if the remaining seven applications will be granted or whether we will
be successful in prosecuting any future patents.  In addition, the
laws of some foreign countries do not protect proprietary rights to the same
extent as do the laws of the United States.  Our means of protecting
our proprietary rights may not be adequate and third parties may infringe or
misappropriate our patents, copyrights, trademarks and similar proprietary
rights.  If we fail to protect our intellectual property and
proprietary rights, our business, financial condition and results of operations
would suffer.  We believe that we do not infringe upon the proprietary
rights of any third party, and no third party has asserted an infringement claim
against us.  It is possible, however, that such a claim might be
asserted successfully against us in the future.  We may be forced to
suspend our operations to pay significant amounts to defend our rights, and a
substantial amount of the attention of our management may be diverted from our
ongoing business, all of which would materially adversely affect our
business.
 
 We focus on the
research and development of our proprietary technologies.
  We believe
that these technologies are the basis for marketable commercial
products.  However, there can be no assurance of this, and it is
possible that our proprietary technologies and products will have little
commercial benefit or potential.  In addition, from our inception to
the present, we have not recognized any substantial operating
revenues.
 
 We depend on our
key personnel and may have difficulty attracting and retaining the skilled staff
we need to execute our growth plans.
  Our
success will be dependent largely upon the personal efforts of our Chief
Executive Officer, Joseph Kozak and other senior managers.  The loss
of key staff could have a material adverse effect on our business and
prospects.  To execute our plans, we will have to retain current
employees. Competition for highly skilled employees with technical, management,
marketing, sales, product development and other specialized training is
intense.  We may not be successful in retaining such qualified
personnel. Specifically, we may experience increased costs in order to retain
skilled employees. If we are unable to retain experienced employees as needed,
we would be unable to execute our business plan.
 
 We face rapid
technological change.
  The market
for our products and services is characterized by rapidly changing technologies,
extensive research and the introduction of new products and services. We believe
that our future success will depend in part upon our ability to continue to
develop and enhance ACS and to develop, manufacture and market new products and
services. As a result, we expect to continue to make a significant investment in
engineering, research and development.  There can be no assurance that
we will be able to develop and introduce new products and services or enhance
our initial products in a timely manner to satisfy customer needs, achieve
market acceptance or address technological changes in our target markets.
Failure to develop products and services and introduce them successfully and in
a timely manner could adversely affect our competitive position, financial
condition and results of operations.
  33
 
 If we experience
rapid growth, we will need to manage such growth well.
  We may
experience substantial growth in the size of our staff and the scope of our
operations, resulting in increased responsibilities for
management.  To manage this possible growth effectively, we will need
to continue to improve our operational, financial and management information
systems, will possibly need to create departments that do not now exist, and
hire, train, motivate and manage a growing number of staff.  Due to a
competitive employment environment for qualified technical, marketing and sales
personnel, we expect to experience difficulty in filling our needs for qualified
personnel.  There can be no assurance that we will be able to
effectively achieve or manage any future growth, and our failure to do so could
delay product development cycles and market penetration or otherwise have a
material adverse effect on our financial condition and results of
operations.
 
 We could face
information and product liability risks and may not have adequate
insurance.
  Our
products may be used to manage data from critical business applications. We may
become the subject of litigation alleging that our products were ineffective or
disruptive in our treatment of data, or in the compilation, processing or
manipulation of critical business information.  Thus, we may become
the target of lawsuits from injured or disgruntled businesses or other users. We
carry product and information liability and errors and omissions insurance, but
in the event that we are required to defend more than a few such actions, or in
the event our products are found liable in connection with such an action, our
business and operations may be severely and materially adversely
affected.
 
 Future
profitability is not guaranteed.
  We have
not recognized any substantial operating revenues to date.  Assuming
we can attract sufficient financing, and revenues increase, there is no
assurance that our plans will be realized or that we will achieve break-even
status or profitability in the future.
 
 Changes to
financial accounting standards may affect our results of operations and cause us
to change business practices.
  We prepare
financial statements in conformity with U.S. generally accepted accounting
principles.  These accounting principles are subject to interpretation
by the American Institute of Certified Public Accountants, the Public Company
Accounting Oversight Board, the Securities and Exchange Commission and various
other bodies formed to interpret and create appropriate accounting
principles.  A change in those principles can have a significant
affect on our reported results and may affect the way we report a transaction
which is completed before a change in those principles is
announced.  Changes to those rules or the questioning of current
practices may adversely affect our reported financial results or the way we
conduct business.  For example, accounting principles affecting many
aspects of our business, including rules relating to equity-related
compensation, have recently been revised and new regulations have been
added.  The Financial Accounting Standards Board and other agencies
finalized changes to U.S. generally accepted accounting principles that required
us, starting January 1, 2006, to record a charge to earnings for employee stock
option grants and other equity incentives. We will have significant ongoing
accounting charges resulting from option grant and other equity incentive
expensing that could reduce net income or increase losses.  In
addition, since we historically used equity-related compensation as a component
of our total employee compensation program, the accounting and regulation
changes could make the use of equity-related compensation less attractive and
therefore make it more difficult to attract and retain employees.
 
 There is a
limited market for our common stock.
  Our common
stock is not listed on any exchange and trades in the over-the-counter (the
“OTC”) market.  As such, the market for our common stock is limited
and is not regulated by the rules and regulations of any exchange. Further, the
price of our common stock and its volume in the OTC market may be subject to
wide fluctuations. Our stock price could decline regardless of our actual
operating performance, and stockholders could lose a substantial part of their
investment as a result of industry or market-based fluctuations. Our stock
trades relatively thinly.  If a more active public market for our
stock is not sustained, it may be difficult for stockholders to sell shares of
our common stock.  Because we do not anticipate paying cash dividends
on our common stock for the foreseeable future, stockholders will not be able to
receive a return on their shares unless they are able to sell
them.  The market price of our common stock will likely fluctuate in
response to a number of factors, including but not limited to, the
following:
  34
 
 ·
              sales,
      sales cycle and market acceptance or rejection of our
      products;
 ·
              our
      ability to sign Partners who are successful in selling our
      products
 ·
              economic
      conditions within the database
industry;
 ·
              our
      failure to develop and commercialize the
ACS;
 ·
              the
      timing of announcements by us or our competitors of significant products,
      contracts or acquisitions or publicity regarding actual or potential
      results or performance thereof; and
 ·
              domestic
      and international economic, business and political
    conditions.
 
 We have a long
corporate existence and were inactive during much of our corporate
history.
  We were
formed as the Sullivan Computer Corporation, incorporated in Delaware in January
1979.  We were privately owned until late 1986, at which time our
common stock began trading on the over-the-counter market.  This was a
result of the registration of our common stock pursuant to a merger with CHoPP
Computer Corporation, a British Columbia corporation.  During the
period from mid-1987 through late 1999, we had few or no employees. Our
operating activities were limited and were largely administered personally by
our former Chairman. Due to the passage of time and the poor condition of
financial and other records, there can be no assurance that all matters have
been addressed at this date.
 
 Failure to
maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock
price.
  Section 404
of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the
SEC require annual management assessments of the effectiveness of our internal
control over financial reporting and a report by our independent registered
public accounting firm on these internal controls.  If we fail to
adequately maintain compliance with, or maintain the adequacy of, our internal
control over financial reporting, as such standards are modified, supplemented
or amended from time to time, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
and the related rules and regulations of the SEC.  If we cannot
favorably assess, or our independent registered public accounting firm is unable
to provide an unqualified attestation report on the effectiveness of our
internal controls over financial reporting, investor confidence in the
reliability of our financial reports may be adversely affected, which could have
a material adverse effect on our stock price.
 
 We have
indemnified our officers and directors.
  We have
indemnified our Officers and Directors against possible monetary liability to
the maximum extent permitted under Delaware law.
 
 Limitation on
ability for control through proxy contest.
  Our Bylaws
provide for a Board of Directors to be elected in three classes.  This
classified Board may make it more difficult for a potential acquirer to gain
control of us by using a proxy contest, since the acquirer would only be able to
elect approximately one-third of the directors at each shareholders’ meeting
held for that purpose.
 
 Our actual
results could differ materially from those anticipated in our forward-looking
statements.
 
 This report contains forward-looking
statements within the meaning of the federal securities laws that relate to
future events or future financial performance.  When used in this
report, you can identify forward-looking statements by terminology such as
“believes,” “anticipates,” “plans,” “predicts,” “expects,” “estimates,”
“intends,” “will,” “continue,” “may,” “potential,” “should” and similar
expressions.  These statements are only expressions of
expectation.  Our actual results could, and likely will, differ
materially from those anticipated in such forward-looking statements as a result
of many factors, including those set forth above and elsewhere in this report
and including factors unanticipated by us and not included
herein.  Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.  Neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We assume no duty to update any of the forward-looking statements
after the date of this report or to conform these statements to actual
results.  Accordingly, we caution readers not to place undue reliance
on these statements.
  35
 
 ITEM 2.  UNREGISTERED SALES OF EQUITY
SECURITIES
  In the
first quarter of 2008, we received $1,041,000 from accredited investors, for the
sale of 1,735,000 shares of the Company’s common stock, at a price of $0.60 per
share.  We paid a placement agent a cash commission of $104,100 and issued
157,727 shares of our common stock to the placement agent in connection with the
private placement.  The 157,727 shares are contractually valued at $0.66
per share or $104,100.  The sales of these securities were made
in reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.  These securities (and the securities issued in the other
private placements discussed herein) have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements.
  From April
1, 2008 through May 6, 2008, we received an additional $1,041,000 from
accredited investors for the sale of 1,735,000 shares of our common stock, at a
price of $0.60 per share.  During the quarter ended June 30, 2008, we
will pay a placement agent a cash commission of $104,100 and issue the placement
agent 157,727 shares of our common stock in connection with this private
placement.  The 157,727 shares are contractually valued at $0.66 per
share or $104,100.  The sales of these securities were made in
reliance upon Rule 506 and Section 4(2) of the Securities Act of
1933.
  The
proceeds from these sales of unregistered securities will be used for product
development and general working capital purposes.  This quarterly
report is neither an offer to sell, nor a solicitation of offers to purchase,
securities.
 
 ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES
  None
 
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  No matter
was submitted to a vote of security holders during the period covered by this
report.
 
 ITEM 5.  OTHER INFORMATION
  None
 
 ITEM 6.  EXHIBITS
  (a)
Exhibits
  3.1
                  Amended
      and Restated Certificate of Incorporation of the Company, as listed in
      Exhibit 3.1 to the Company’s 10-QSB filed on August 14, 2003, is hereby
      incorporated by reference.3.2
                  Amended
      and Restated Bylaws of the Company, as listed in Exhibit 3.2 to our 10-K
      filed on March 17, 2008, 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 200231.2
                  Certification
      of the Chief Financial Officer required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
                  Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                  Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002




b) Reports
on Form 8-K
  36




During the
fiscal quarter covered by this report, we filed no reports on Form
8-K.
 
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  ANTs
      software inc.Date:   May
      9, 2008
                  
                  By:
                  
                  /s/ Joe
    KozakJoe
      Kozak, Chief Executive Officer and PresidentDate:  May
      9, 2008
                  
                  By:
                  
                  /s/ Kenneth
      RuotoloKenneth
      Ruotolo, Secretary and Chief Financial
Officer
  37