**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 THE SECURITIES EXCHANGE ACT OF
                1934**





**For
      the quarterly period ended: June 30, 2007**





**OR**





**[   ]**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 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, or a non-accelerated filer.  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 [   ]





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:





56,601,545
      shares of common stock as of July 31, 2007











**TABLE
        OF CONTENTS**











PART
      I.  Financial Information





Item
                  1.
              Condensed
                  Financial StatementsCondensed
                  Balance Sheets as of June 30, 2007 and December 31, 2006
              3Condensed
                  Statements of Operations for the Three & Six Months ended June
                  30,  2007 & 2006
              4Condensed
                  Statements of Cash Flows for the Three & Six Months ended
                  June30,  2007 & 2006
              5Notes
                  to Condensed Financial Statements
              6-18Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              18-30Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              30Item
                  4.
              Controls
                  and Procedures
              30






PART
        II.  Other Information




Item
                  1.
              Legal
                  Proceedings
              30Item
                  1A.
              Risk
                  Factors
              30-35Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              35Item
                  3.
              Defaults
                  Upon Senior Securities
              35Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              35Item
                  5.
              Other
                  Information
              35Item
                  6.
              Exhibits
              36Signatures
              36





2




**PART
      I.  FINANCIAL INFORMATION**





**ITEM
      1.  CONDENSED FINANCIAL STATEMENTS**




**ANTS
                  SOFTWARE INC.****CONDENSED
                  BALANCE SHEETS**June
                  30,
              
              
              December
                  31,ASSETS
              
              2007
              
              
              2006(Unaudited)
              
              
              (Audited)Current
                  assets:Cash
                  and cash equivalents
              
              $
              7,219,212
              
              
              $
              4,698,949Accounts
                  receivable, net of allowance for doubtful accounts of $30,000 and
                  $0in
                  2007 and 2006, respectively
              
              
              34,692
              
              
              
              68,145Prepaid
                  insurance and other expenses
              
              
              243,620
              
              
              
              118,654Total
                  current assets
              
              
              7,497,524
              
              
              
              4,885,748Restricted
                  cash
              
              
              190,958
              
              
              
              190,958Prepaid
                  expense from warrant issued to customer
              
              
              86,510
              
              
              
              115,347Prepaid
                  debt issuance cost
              
              
              699,731
              
              
              
              33,645Property
                  and equipment, net
              
              
              712,137
              
              
              
              736,053Other
                  assets
              
              
              34,420
              
              
              
              34,420Total
                  assets
              
              $
              9,221,280
              
              
              $
              5,996,171LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable and other accrued expenses
              
              $
              507,928
              
              
              $
              626,011Accrued
                  bonuses, commissions and severance payable
              
              
              540,375
              
              
              
              179,127Accrued
                  vacation payable
              
              
              198,397
              
              
              
              175,237Deferred
                  revenues
              
              
              50,790
              
              
              
              56,819Total
                  current liabilities
              
              
              1,297,490
              
              
              
              1,037,194Long-term
                  liabilities:Accrued
                  rent
              
              
              —
              
              
              
              15,087Notes
                  Payable, includes debt premium of $642,406 and $120,880,
                  netin
                  2007 and 2006, respectively
              
              
              7,142,406
              
              
              
              1,120,880Total
                  liabilities
              
              
              8,439,896
              
              
              
              2,173,161Commitment
                  and contingencies
              
              
              —
              
              
              
              —Stockholders’
                  equity:Preferred
                  stock, $0.0001 par value; 50,000,000 shares authorized,no
                  shares issued and outstanding, respectively
              
              
              —
              
              
              
              —Common
                  stock, $0.0001 par value; 200,000,000 shares authorized;56,601,545
                  and 53,188,485 shares issued and outstanding, respectively
              
              
              5,661
              
              
              
              5,319Common
                  stock subscribed, not issued
              
              
              —
              
              
              
              1Additional
                  paid-in capital
              
              
              67,797,217
              
              
              
              62,469,426Accumulated
                  deficit
              
              
              (67,021,494
              )
              
              
              (58,651,736
              )Total
                  stockholders’ equity
              
              
              781,384
              
              
              
              3,823,010Total
                  liabilities and stockholders' equity
              
              $
              9,221,280
              
              
              $
              5,996,171See
                  Accompanying Notes to Financial Statements






3




**ANTS
                  SOFTWARE INC.****STATEMENTS
                  OF OPERATIONS****(Unaudited)**For
                  the Three Months Ended
                June
                  30,
              
              
              For
                  the Six Months Ended
                June
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Revenues:Licenses
                  and royalties
              
              $
              —
              
              
              $
              50,062
              
              
              $
              50,625
              
              
              $
              92,062Maintenance
              
              
              21,467
              
              
              
              33,196
              
              
              
              39,969
              
              
              
              59,585Total
                  revenues
              
              
              21,467
              
              
              
              83,258
              
              
              
              90,594
              
              
              
              151,647Cost
                  of Revenues:Licenses
              
              
              6,764
              
              
              
              15,096
              
              
              
              9,476
              
              
              
              15,096Gross
                  profit
              
              
              14,703
              
              
              
              68,162
              
              
              
              81,118
              
              
              
              136,551Operating  Expenses:Sales
                  and marketing
              
              
              749,630
              
              
              
              1,559,546
              
              
              
              1,849,301
              
              
              
              2,631,570Research
                  and development
              
              
              2,395,854
              
              
              
              1,479,556
              
              
              
              4,271,017
              
              
              
              2,709,811General
                  and administrative
              
              
              1,620,707
              
              
              
              978,274
              
              
              
              2,429,005
              
              
              
              1,504,605Total
                  operating expenses
              
              
              4,766,191
              
              
              
              4,017,376
              
              
              
              8,549,323
              
              
              
              6,845,986Loss
                  from operations
              
              
              (4,751,488
              )
              
              
              (3,949,214
              )
              
              
              (8,468,205
              )
              
              
              (6,709,435
              )Other
                  income (expense):Interest
                  income
              
              
              114,175
              
              
              
              54,330
              
              
              
              200,061
              
              
              
              64,041Gain
                  on legal settlement
              
              
              500
              
              
              
              2,000
              
              
              
              2,000
              
              
              
              3,000Interest
                  expense
              
              
              (62,326
              )
              
              
              (2,297
              )
              
              
              (103,614
              )
              
              
              (3,766
              )Other
                  income, net
              
              
              52,349
              
              
              
              54,033
              
              
              
              98,447
              
              
              
              63,275Net
                  loss
              
              $
              (4,699,139
              )
              
              $
              (3,895,181
              )
              
              $
              (8,369,758
              )
              
              $
              (6,646,160
              )Basic
                  and diluted net loss per common share
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (0.15
              )
              
              $
              (0.14
              )Shares
                  used in computing basic and dilutednet
                  loss per share
              
              
              56,460,534
              
              
              
              51,775,813
              
              
              
              56,229,518
              
              
              
              48,496,266See
                  Accompanying Notes to Financial Statements





4









**ANTS
                  SOFTWARE, INC.****CONDENSED
                  STATEMENT OF CASH FLOWS****(Unaudited)**For
                  the Six MonthsEnded
                  June 30,2007
              
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (8,369,758
              )
              
              $
              (6,646,160
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              215,908
              
              
              
              150,934Amortization
                  of accrued rent, net of cash payments
              
              
              (10,950
              )
              
              
              730Amortization
                  of warrant issued to customer
              
              
              28,836
              
              
              
              28,837Accretion
                  of premium on note payable
              
              
              (164,214
              )
              
              
              —Amortization
                  of debt issuance cost
              
              
              169,529
              
              
              
              —Bad
                  debt expense, net of write-offs of uncollectible accounts
              
              
              —
              
              
              
              33,738Compensation
                  expense on modification of stock options
              
              
              50,512
              
              
              
              —Compensation
                  expense recognized on vesting of non-employee stock
                  options
              
              
              15,497
              
              
              
              23,189Compensation
                  expense recognized on vesting of employee stock options
              
              
              617,238
              
              
              
              302,399Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              33,453
              
              
              
              (71,888
              )Prepaid
                  insurance, other expenses
              
              
              (124,966
              )
              
              
              (84,705
              )Accounts
                  payable and other accrued expenses
              
              
              (87,809
              )
              
              
              (317,396
              )Accrued
                  bonuses, commissions and severance payable
              
              
              361,248
              
              
              
              (197,500
              )Accrued
                  vacation
              
              
              23,160
              
              
              
              62,009Deferred
                  revenue
              
              
              (6,029
              )
              
              
              34,121Net
                  cash used in operating activities
              
              
              (7,248,345
              )
              
              
              (6,681,692
              )Cash
                  flows used in investing activities:Transfer
                  operating funds to restricted cash
              
              
              —
              
              
              
              (80,559
              )Purchases
                  of office furniture, fixtures and equipment and security
                  deposits
              
              
              (191,992
              )
              
              
              (284,159
              )Net
                  cash used in investing activities
              
              
              (191,992
              )
              
              
              (364,718
              )Cash
                  flows from financing activities:Proceeds
                  from private placements - equity, net of commissions
              
              
              5,018,574
              
              
              
              9,072,253Proceeds
                  from private placements - convertible promissory note, net of
                  commissions
              
              
              4,881,426Proceeds
                  from exercise of options
              
              
              60,600
              
              
              
              550,250Proceeds
                  from exercise of warrants, net of commissions
              
              
              —
              
              
              
              70,873Proceeds
                  from common stock subscribed for private placement units
              
              
              —
              
              
              
              6,755Net
                  cash provided by financing activities
              
              
              9,960,600
              
              
              
              9,700,131Net
                  increase (decrease) in cash and cash equivalents
              
              
              2,520,263
              
              
              
              2,653,721Cash
                  and cash equivalents at beginning of period
              
              
              4,698,949
              
              
              
              6,381,932Cash
                  and cash equivalents at end of period
              
              $
              7,219,212
              
              
              $
              9,035,653Supplemental
                  disclosure of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              267,828
              
              
              $
              —Non-cash
                  investing and financing activities:Common
                  stock issued for subscribed shares at December 31, 2005
              
              $
              —
              
              
              $
              243,608Common
                  stock subscribed at June 30, 2006 to be issued to private
                  placementagent
                  as commission
              
              
              
              
              
              $
              496,475Allocation
                  of stockholders' equity to premium on convertible note
              
              $
              685,740
              
              
              $
              —Allocation
                  of a portion of placement agent commissions to debt issuance
                  costs
              
              $
              835,616
              
              
              $
              —Adjustment
                  for stock options exercised
              
              $
              34,410See
                  Accompanying Notes to Financial Statements






5




**ANTS
      SOFTWARE INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**(Unaudited)**





**1.   Basis
      of Presentation**





The
      accompanying unaudited condensed financial statements are presented in
      accordance with the requirements for Form 10-Q. The December 31, 2006 balance
      sheet was derived from audited financial statements filed with our 10-K as
      of
      December 31, 2006 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 twelve months ended December
      31, 2006, for additional disclosures, including a summary of our accounting
      policies.





The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplates continuation of the Company as a going concern.





There
      have been no significant changes
      in our significant accounting policies during the three months ended June 30,
      2007 as compared to the significant accounting policies described in our Annual
      Report on Form 10-K for the fiscal year ended December 31, 2006. 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.”*





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 and six months ended June 30, 2007 and 2006 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
      through fiscal year 2007 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 and the revenues are earned.





***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 and six month periods ended June 30, 2007 and 2006
      includes compensation expense for all stock-based compensation awards granted
      prior to, but not fully vested, as of January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      123, *“Accounting for Stock Compensation”*(“SFAS
      123”).  Stock-based compensation expense for all stock-based
      compensation awards granted subsequent to January 1, 2006 is based on the grant
      date fair value estimated in accordance with the provisions of SFAS 123(R).
      We
      recognize compensation expense for 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
      Taxe****s*





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***




With
      the exception of the Financial
      Accounting Standards Board Statement discussed below, there have been no
      significant changes in recent accounting pronouncements during the three months
      ended June 30, 2007 as compared to the recent accounting pronouncements
      described in our Annual Report on Form 10-K for the fiscal year ended December
      31, 2006.





In
      February 2007, the Financial
      Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting
      Standards 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 are currently evaluating the impact SFAS 159 will have on our
      financial statements.





***Reclassifications***




Certain
      reclassifications have been
      made to conform the prior year financial statements to the presentation of
      the
      current period.





**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
              
              
              For
                  the Six MonthsEnded
                  June 30,
              
              
              Ended
                  June 30,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
                  Loss
              
              $
              (4,699,139
              )
              
              $
              (3,895,181
              )
              
              $
              (8,369,758
              )
              
              $
              (6,646,160
              )Weighted
                  average shares of common stockoutstanding
                  - basic and dilutive
              
              
              56,460,534
              
              
              
              51,775,813
              
              
              
              56,229,518
              
              
              
              48,496,266Basic
                  and diluted net loss per share
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (0.15
              )
              
              $
              (0.14
              )








As
      of June 30, 2007, we had $6.5
      million in promissory notes outstanding, which are convertible into 3,250,000
      shares of common stock at a price of $2.00 per share and if all notes are
      converted, we will issue 183,980 shares of common stock to a placement agent
      in
      consideration for services, at a price of $2.20 per share. As of June 30, 2006,
      we had no convertible promissory notes.  As of June 30, 2007 we had
      outstanding stock options for the purchase of up to 8,524,495 shares of common
      stock at prices ranging from $0.52 to $3.20 and as of June 30, 2006, we had
      outstanding stock options for the purchase of up to 9,133,062 shares of common
      stock at prices ranging from $0.52 to $6.38.  As of June 30, 2007 and
      2006, we had outstanding warrants for the purchase of up to 8,000,411 and
      13,252,141 shares of common stock at prices ranging from $1.99 to $6.38 and
      $1.99 to $7.25, respectively. At June 30, 2007 and 2006, shares of common stock
      that were anti-dilutive and therefore not included in the computation of diluted
      net loss per share totaled 19,958,886 at prices ranging from $0.52 to $3.20
      per
      share, and 22,385,203 at prices ranging from $0.52 to $7.25 per share,
      respectively.







**4.    Prepaid
      Expense from Warrant Issued to Customer**




Prepaid
      expense from warrant issued to
      customer, net, consists of the original charge of $173,021 related to the
      issuance of a warrant to a customer in 2005 to purchase 100,000 shares of our
      Common Stock, in exchange for a guarantee by that customer to provide
      maintenance and support services for the ANTs Data Server to our customers
      should we be unable to provide such services.  The fair value of the
      warrant was calculated using the Black-Scholes valuation model.  The
      warrant has an exercise price of $3.50 per share and may be exercised until
      July
      2008.  The prepaid expense is being amortized into the statements of
      operations on a straight-line basis, over 36 months, commencing January
      2006.  Amortized expense for the three and six months ended June 30,
      2007 was $14,418 and $28,837, respectively. Amortized expense for the three
      and
      six months ended June 30, 2006 was $14,418 and $28,837, respectively. The
      remaining balance in the prepaid asset account related to this warrant was
      $86,510 on June 30, 2007.






8




The
      prepaid expense is being evaluated periodically for signs of impairment, and
      will be written down to its impaired value as necessary, in accordance with
      the
      guidance in Statement of Financial Accounting Standards No. 144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets.”*




**5.** **Prepaid
      Debt Issuance Costs**





As
      of June 30, 2007, prepaid debt
      issuance costs are $699,731. The debt issuance costs are being amortized into
      the statement of operations ratably over the life of the associated debt, 24
      months. Amortization of these costs commenced on January 1, 2007 and totaled
      $108,658 and $169,529, respectively, for the three and six months ended June
      30,
      2007. There were no such costs for the three and six months ended June 30,
      2006.
      The prepaid debt issuance costs are discussed in greater detail in Note 8 to
      these financial statements.




**6.** **Deferred
      Revenues**





Deferred
      revenue is comprised of
      license fees and annual maintenance and support fees. License fees are
      recognized upon customer acceptance of the product. Annual maintenance and
      support fees are being amortized ratably into revenue on the statement of
      operations over the life of the contract, which is generally a 12-month period
      beginning with customer acceptance of the product. The amount of deferred
      revenue on the balance sheet at June 30, 2007 is $50,790, all of which is
      maintenance and support fees. During the three and six months ended June 30,
      2007, we recognized $21,467 and $39,969, respectively, in deferred revenue
      in
      the statement of operations. During the three and six months ended June 30,
      2006, we recognized $33,196 and $59,585, respectively, in deferred revenue
      in
      the statement of operations.





**7.** **Income
      Taxes**




Effective
      January 1, 2007, we have 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.




We
      have
      elected to record interest charges recognized in accordance with FIN 48 in
      the
      financial statements as income taxes.  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 Taxes
      did not change. As of June 30, 2007, 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 and six months ended
      June 30, 2007, 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, 2006 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 and six months ended June 30, 2007
      was
      $685,000 and $685,000, respectively. Also, we had no amounts of unrecognized
      tax
      benefits that, if recognized, would affect our effective tax rate for January
      1,
      2007 and June 30, 2007.





9




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.





As
      a
      result of the implementation of FIN 48, we have not recognized an increase
      in
      the liability for unrecognized tax benefits.




**8.   
      Convertible Promissory Notes**





In
      December 2006 our Board of Directors
      approved the terms of a private offering to raise additional working capital.
      The private offering consists 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. In January 2007, we entered
      into agreements with accredited investors to purchase 180 J Units, raising
      $9,000,000. Pursuant to the sale, we issued 2,571,300 shares of common stock
      and
      issued Notes with an initial face value of $4,500,000. In March 2007 we entered
      into agreements with accredited investors to purchase 40 J Units, raising
      $2,000,000. Pursuant to the sale, we issued 571,400 shares of common stock
      and
      issued Notes with an initial face value of $1,000,000. 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
      accordance with generally accepted accounting principles (“GAAP”), 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 and March Notes. The premium is included
      in total notes payable on the balance sheet at June 30, 2007. The premium is
      being accreted as a reduction to interest expense ratably over the remaining
      life of the notes. For the three and six months ended June 30, 2007 the amount
      accreted was $100,828 and $164,214 respectively.





As
      of June 30, 2007, we paid $1,100,000
      in cash commissions and issued 199,980 shares of common stock to a placement
      agent for services related to sales of the January and March J Units. 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 an increase to debt issuance
      costs by $835,616, which is included in prepaid expense on the balance sheet
      at
      June 30, 2007.  The remaining $650,345 was allocated to additional
      paid-in capital. The debt issuance cost is being amortized ratably over the
      remaining life of the notes. For the three and six months ended June 30, 2007
      the amount amortized was $108,658 and $169,529 respectively. The shares issued
      to the placement agent in the second quarter of 2007 for all J Unit sales
      beginning in December 2006, total 210,360 and are shown on the balance sheet
      in
      common stock at their par value of $21.




**9.** ******Commitments
      and Contingencies**




***Lease
      Commitments***





As
      of June 30, 2007, 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
              
              
              
              
              $               204,400More
                  than 1 Year
              
              
              
              -Total
                  minimum lease payments
              $               204,400






10


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 the event the lease is not extended, our total obligations related
      to
      the lease amounts to $600,060.





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.  This results in monthly
      rental expense of $16,668. During the three and six months ended June 30, 2007
      and 2006 we recognized a total of $50,004 and $50,004 respectively, in rental
      expense for this lease.





***Contingencies***





In
      the second quarter of 2007 we
      cancelled a warrant that would have been issued as part of a customer License
      Agreement (“Agreement”) dated August 1, 2005. The warrant was to be issued
      pursuant to the Agreement based upon acceptance of our product. It is our
      opinion the customer does not intend to accept our product, that no warrant
      will
      be issued and therefore there is no contingency associated with the
      warrant.




**10.** **Stockholders’ Equity Transactions**





A
      comprehensive summary of transactions occurring in stockholders’ equity for the
      six-month periods ending June 30, 2007 and 2006 is presented in the table
      below.







11




Changes
                  in Stockholders' EquityFor
                  the Six Months Ended June 30,2007
              
              
              2006Total
                  stockholders' equity, beginning of period
              
              $
              3,823,010
              
              
              $
              6,412,586Cash
                  transactions:Proceeds
                  from private placements:Sales
                  of "H" units at $1.60 per unit
              
              
              —
              
              
              
              204,000Cash
                  commissions on sales of "H" units
              
              
              —
              
              
              
              (20,000
              )Sales
                  of restricted shares of common stock at $1.50 per share
              
              
              
              
              
              
              9,597,503Cash
                  commissions on sales of restricted shares of common stock
              
              
              
              
              
              
              (709,250
              )Sales
                  of "J" units at $25,000 per unit (equity portion of units)
              
              
              5,500,000
              
              
              
              —Total
                  cash commissions on sales of "J" units (equity)
              
              
              (481,426
              )
              
              
              —Net
                  proceeds from private placements
              
              
              5,018,574
              
              
              
              9,072,253Proceeds
                  from warrant exercises:Warrants
                  with exercise price of $2.00 per share discounted to$1.50
                  and $1.40 per share in 2006 and 2005, respectively
              
              
              —
              
              
              
              109,998Cash
                  commissions on exercise of warrants
              
              
              —
              
              
              
              (39,125
              )Net
                  proceeds from warrant exercises
              
              
              —
              
              
              
              70,873Cash
                  proceeds from exercise of stock options
              
              
              60,600
              
              
              
              557,005Total
                  cash transactions
              
              $
              5,079,174
              
              
              $
              9,700,131Non-cash
                  transactions:Premium
                  on note payable
              
              
              (685,740
              )
              
              
              —Common
                  stock issued to placement agent on sales of "J' units, net
              
              
              217,042
              
              
              
              —Employee
                  compensation expense - vesting of stock options
              
              
              617,237
              
              
              
              302,399Compensation
                  expense due to modification of stock options
              
              
              50,512
              
              
              
              —Total
                  employee compensation expense
              
              
              199,051
              
              
              
              302,399Non-employee
                  compensation expense:Restricted
                  stock/stock options issued to vendors
              
              
              —
              
              
              
              16,000Vesting
                  of stock options/warrants  issued to consultants
              
              
              15,497
              
              
              
              7,189Extension
                  of stock option grant
              
              
              34,410
              
              
              
              —Total
                  non-employee compensation expense
              
              
              49,907
              
              
              
              23,189Total
                  non-cash transactions
              
              
              248,958
              
              
              
              325,588Net
                  loss for fiscal period
              
              
              (8,369,758
              )
              
              
              (6,646,160
              )Total
                  stockholders' equity, end of period
              
              $
              781,384
              
              
              $
              9,792,145




**Transactions
      for the three months ended June 30, 2007:**





For
      the three months ended June 30,
      2006 we did not enter into any agreements with new or existing accredited
      investors.





For
      the three months ended June 30,
      2007 there were no purchases of common stock through the exercise of stock
      options.





For
      the three months ended June 30,
      2007 we recognized $375,564 in compensation expense related to the vesting
      of
      employee stock options and $1,421 in professional fees related to the vesting
      of
      non-employee stock options. $50,512 of the employee compensation expense is
      attributable to the modification of grants made to terminated employees whereby
      their exercise period was extended from three months to two years.





**Transactions
      for the three months ended March 31, 2007:**





For
      the three months ended March 31,
      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.






12




For
      the
      three months ended March 31, 2007, we paid $1,100,000 in cash commissions and
      will issue 199,980 shares of our common stock to a placement agent for services
      related to the sale of J Units in January and March 2007. 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, which are included in prepaid expense on
      the
      balance sheet at March 31, 2007.  The remaining $650,345 was allocated
      to additional paid-in capital.




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.




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.





**Transactions
      for the six months ended June 30, 2007:**





For
      the
      three and six month periods ending June 30, 2007, the Company recognized
      $375,564 and $667,751 in compensation expense related to vesting of employee
      stock options, respectively, and $1,421 and $15,497 in professional fees related
      to the vesting of non-employee stock options, respectively, in accordance with
      the accounting guidelines set forth in SFAS 123(R).





**Transactions
      for the three months ended June 30, 2006:**





During
      the
      three months ended June 30, 2006, the Company sold to accredited investors,
      through a private offering, 6,398,335 restricted shares of the Company’s Common
      Stock at a price of one dollar and fifty cents ($1.50) per share.  The
      Company received $9,597,503 in gross proceeds from the offering.  The
      Company paid $709,250 in cash commissions on these sales to the placement
      agent.  Commissions to be paid in Common Stock to the placement agent
      totaled $496,475.  These shares had not been issued as of June 30,
      2006, and are recorded in Common Stock Subscribed as of that date. The sales
      of
      these securities were made in reliance upon Rule 506 and Section 4(2) of the
      Securities Act of 1933.





During
      the
      three months ended June 30, 2006, a total of 225,000 shares of common stock
      of
      the Company were purchased through the exercise of stock options, resulting
      in
      cash proceeds to the Company of**$446,000.  As of June
      30, 2006, Common Stock Subscribed included $6,755 related to 3,500 shares of
      common stock purchased through the exercise of stock options.





**Transactions
      for the three months ended March 31, 2006:**





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





During
      the
      three months ended March 31, 2006, one investor exercised a warrant to purchase
      73,332 shares with an original exercise price of $2.00 at a discounted price
      of
      $1.50, resulting in gross proceeds of $109,998. The sales of these securities
      were made in reliance upon Rule 506 and Section 4(2) of the Securities Act
      of
      1933.






13




During
        the
        three months ended March 31, 2006, we paid cash commissions totaling $20,000
        in
        connection with the H Unit offering that occurred during the fourth quarter
        of
        2005, and we paid $39,125 in cash commissions in connection with the warrant
        exercises that occurred during the fourth quarter of 2005.
  During
        the
        three months ended March 31, 2006, a total of 93,902 shares of our common
        stock
        were purchased through the exercise of stock options, resulting in cash proceeds
        of  $111,005.




For
      the
      three months ended March 31, 2006 we recognized $88,188 in compensation expense
      related to the vesting of employee stock options and $3,851 in professional
      fees
      related to the vesting of non-employee stock options.





**Transactions
      for the six months ended June 30, 2006:**





For
      the
      three and six month periods ending June 30, 2006, the Company recognized
      $214,212 and $302,400 in compensation expense related to vesting of employee
      stock options, respectively, and $3,338 and $7,189 in professional fees related
      to the vesting of non-employee stock options, respectively, in accordance with
      the accounting guidelines set forth in SFAS 123(R).





During
      the
      six months ending June 30, 2006, the Company incurred $16,000 in legal fees
      to
      be paid in the form of 10,666 restricted shares of the Company’s Common Stock at
      $1.50 per share.  As of June 30, 2006, this amount was recorded in
      Common Stock Subscribed.





**11.   
      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.





Options
      granted under the Plan generally vest within three years after the date of
      grant, and expire 10 years after issuance.  Stock option vesting is
      generally time-based. Options granted to new hires vest 16.7% beginning six
      months after the employee’s date of hire, then at 2.78% each month thereafter
      such that the option is fully vested three years from date of hire. Options
      granted to existing employees generally start vesting monthly following their
      grant. These options vest evenly over 36 months, at which time they are fully
      vested.  Following termination of employment or consulting status
      there is usually a grace period during which the vested portion of the option
      is
      exercisable. This period is typically three months, but may be shorter or longer
      depending on the terms of a given stock option agreement.  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.





The
      following table sets forth the total stock-based compensation expense for
      employees, outside directors and consultants for the three and six month periods
      ending June 30, 2007 and 2006.





14






For
                  the Three Months Ended
                June
                  30,
              
              
              For
                  the Six Months Ended
                June
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Sales
                  and marketing ("S&M")
              
              $
              27,060
              
              
              $
              48,472
              
              
              $
              108,013
              
              
              $
              72,911Research
                  and development ("R&D")
              
              
              178,216
              
              
              
              70,240
              
              
              
              305,671
              
              
              
              130,043General
                  and administrative ("G&A")
              
              
              171,709
              
              
              
              98,838
              
              
              
              269,564
              
              
              
              106,635Stock-based
                  compensation before income taxes
              
              
              376,985
              
              
              
              217,550
              
              
              
              683,248
              
              
              
              309,589Income
                  tax benefit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
                  stock-based compensation expense after income taxes
              
              $
              376,985
              
              
              $
              217,550
              
              
              $
              683,248
              
              
              $
              309,589Stock-based
                  compensation expense charged to:Employee
                  compensation expense (includesoutside
                  directors)
              
              $
              375,564
              
              
              $
              214,212
              
              
              $
              667,751
              
              
              $
              302,400Professional
                  fees - S&M consultants
              
              
              —
              
              
              
              3,338
              
              
              
              12,598
              
              
              
              7,189Professional
                  fees - R&D consultants
              
              
              1,421
              
              
              
              —-
              
              
              
              2,899
              
              
              
              —Stock-based
                  compensation before income taxes
              
              
              376,985
              
              
              
              217,550
              
              
              
              683,248
              
              
              
              309,589Income
                  tax benefit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
                  stock-based compensation expense after income taxes
              
              $
              376,985
              
              
              $
              217,550
              
              
              $
              683,248
              
              
              $
              309,589






Total
      stock-based compensation expense for the three and six months ending June 30,
      2007 is $376,985 and $683,248 respectively. For the three and six month period
      ending June 30, 2006 stock based compensation was $217,550 and 309,589
      respectively. For the three and six month period ended June 30, 2007 stock
      compensation expense increased our net loss for those periods by the same
      amount, and increased reported basic and diluted net loss per share by $.01.
      Basic and diluted net loss per share did change for the three-month period
      ended
      June 30, 2006 and increased $.01 for the six-month period ended June 30, 2006.
      Stock-based compensation expense had no impact on cash flows used in operations
      or cash flows from financing activities for the three and six months ended
      June
      30, 2007 and 2006.





Net
      cash
      proceeds from the exercise of stock options were $60,600 and $60,600 for the
      three and six month ended June 30, 2007 and $111,005 and $557,005 for the three
      and six month period ended June 30, 2006, 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.





The
      fair
      value of employee and non-employee stock-based awards, and the stock-based
      compensation expense for the three months ending June 30, 2007 and 2006, was
      estimated using the Black-Scholes valuation model with the following
      weighted-average assumptions:




Three
                  MonthsEnded
                  June 30,2007
              2006Employees:Expected
                  life in years
              3.00
              3.00
                  - 6.00Volatility
              66%
                  - 156%
              86%
                  - 96%Interest
                  Rate
              4.32%
                  - 4.76%
              4.98%
                  - 5.00%Yield
                  Rate
              0.00%
              0.00%


The
      computation of expected volatility for the three months ended June 30, 2007
      and
      2006 is based on a combination of historical and market-based implied
      volatility. The computation of expected life is based on historical exercise
      patterns. The interest rate for periods within the contractual life of the
      award
      is based on the U.S. Treasury yield curve in effect at the time of
      grant.






15




Stock
      option activity (including both employee and non-employee grants) for the six
      months ended June 30, 2007 was as follows:




WeightedShares
              
              
              
              
              
              Average
              
              
              AggregateAvailable
              
              
              Outstanding
              
              
              Exercise
              
              
              IntrinsicFor
                  Grant
              
              
              Stock
                  Options
              
              
              Price
              
              
              ValueOutstanding
                  at January 1, 2007
              
              
              1,310,270
              
              
              
              8,091,569
              
              
              $
              2.14
              
              
              N/AGranted
              
              
              (1,014,167
              )
              
              
              1,014,167
              
              
              $
              1.87
              
              
              N/AExercised
                  through cash consideration
              
              
              -
              
              
              
              (60,000
              )
              
              $
              1.01
              
              
              $
              58,200Retired
                  or forfeited
              
              
              521,241
              
              
              
              (521,241
              )
              
              
              
              
              
              N/AOutstanding
                  at June 30, 2007
              
              
              817,344
              
              
              
              8,524,495
              
              
              $
              2.11
              
              
              $
              (1,108,184
              )Exercisable
                  at June 30, 2007
              
              
              
              
              
              
              6,193,977
              
              
              $
              2.12
              
              
              $
              (867,157
              )






The
      aggregate intrinsic value of total stock options outstanding and exercisable,
      and of total stock options exercised during the three months ended June 30,
      2007
      in the table above represent the total pretax intrinsic value (i.e., the
      difference between our closing stock price on June 30, 2007 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
      June 30, 2007. Aggregate intrinsic value changes as the fair market value of
      our
      stock changes.  The closing market price of the stock on June 30, 2007
      was $1.98.





As
      of June
      30, 2007 there was approximately $3.6 million of total unrecognized compensation
      expense, adjusted for forfeitures, related to unvested stock-based payments
      granted to employees and contractors, which is expected to be recognized over
      a
      weighted-average period of approximately 1.9 years. Total unrecognized
      compensation cost will be adjusted for future changes in estimated
      forfeitures.





Stock
      options outstanding and exercisable at June 30, 2007 are summarized in the
      table
      below.







Total
                  Options Outstanding as of June 30, 2007Weighted
              
              WeightedAverage
                  Exercise
              
              Average
                  RemainingOptions
              
              Price
                  per Share
              
              Contractual
                  LifeRange
                  of exercise prices:$0.52
                  - $0.99
              407,500
              
              $                        0.70
              
              5.74$1.00
                  - $1.99
              2,809,328
              
              $                        1.67
              
              6.57$2.00
                  - $2.99
              4,582,226
              
              $                        2.35
              
              7.01$3.00
                  - $3.99
              725,441
              
              $                        3.05
              
              5.93Total
                  stock options outstandingat
                  June 30, 2007
              8,524,495
              
              $                        2.11
              
              6.71
 
 Options
                  Exercisable at June 30, 2007Weighted
              
              WeightedAverage
                  Exercise
              
              Average
                  RemainingOptions
              
              Price
                  per Share
              
              Contractual
                  LifeRange
                  of exercise prices:$0.52
                  - $0.99
              407,500
              
              $                        0.70
              
              5.74$1.00
                  - $1.99
              1,894,765
              
              $                        1.58
              
              5.00$2.00
                  - $2.99
              3,166,271
              
              $                        2.41
              
              6.08$3.00
                  - $3.99
              725,441
              
              $                        3.05
              
              5.93Total
                  stock options exercisableat
                  June 30, 2007
              6,193,977
              
              $                        2.12
              
              5.71






16




**12.   
      Warrants and Stock Options**





As
      of June
      30, 2007, we had outstanding options to purchase up to 8,524,495 shares of
      common stock, and warrants to purchase up to 8,000,411 shares of common stock.
      These securities give the holder the right to purchase shares of our common
      stock in accordance with the terms of the instrument.




Stock
                  Options OutstandingShares
                  Available
              
              Number
                  of
              
              Weighted
                  Average
              
              Warrants
              
              Total
                  Stock
                Options
                  &
                Warrantsfor
                  Grant
              
              Shares
              
              Exercise
                  Price
              
              Outstanding
              
              OutstandingBalance,
                  December 31, 2006
              1,310,270
              
              8,091,569
              
              $             2.14
              
              8,262,911
              
              16,354,480Granted
              (1,014,167)
              
              1,014,167
              
              $             1.87
              
              —
              
              1,014,167Exercised
              —
              
              (60,000)
              
              $             1.01
              
              —
              
              (60,000)Retired/forfeited
              521,241
              
              (521,241)
              
              
              
              (262,500)
              
              (783,741)Balance,
                  June 30, 2007
              817,344
              
              8,524,495
              
              $             2.11
              
              8,000,411
              
              16,524,906Exercisable
                  at June 30, 2007
              
              
              6,193,977
              
              
              
              7,813,814
              
              14,007,791Weighted
                  average exercise price
              
              
              
              
              $             2.12
              
              $             2.89
              
              $             2.55Weighted
                  average remainingcontractual
                  life - years
              
              
              
              
              6.71
              
              1.87
              
              4.37




The
      weighted average grant-date fair value of stock options granted during the
      three
      months ended June 30, 2007 was $0.87.





As
      of June
      30, 2007, there were 817,344 options available in the option reserve for future
      grants.





The
      warrants outstanding as of June 30, 2007 are summarized in the table
      below:







ExercisePrices
              
              Year
                  ofWarrants
              
              per
                  Share
              
              ExpirationWarrants
                  purchased in privateplacements:1,558,181
              
              $                 2.00
              
              20073,782,230
              
              $                 3.25
              
              20081,000,000
              
              $                 3.25
              
              2009Subtotal
              6,340,411Warrant
                  issued to customer for potentialfuture
                  services and consultant forcurrent
                  services:100,000
              
              $                 3.50
              
              200850,000
              
              $                 1.99
              
              2009Subtotal
              150,000Warrants
                  issued to outside directorsand
                  former employee:50,000
              
              $                 6.38
              
              2010850,000
              
              $    
                  2.31 -  2.75
              
              2011260,000
              
              $    
                  2.35 -  2.60
              
              2015350,000
              
              $                 2.85
              
              2016Subtotal
              1,510,000Total
                  warrants outstanding atJune
                  30, 2007
              8,000,411






17




**13.
         Subsequent Event**





On
      July 3, 2007, we reached agreement
      with our landlord, Bayside Plaza, a partnership, to extend our lease by one
      year. Our current lease runs through April 30, 2008 at $20,440 per month. The
      extension covers the period May 1, 2008 through April 30, 2009 at the rate
      of
      $34,200 per month. This represents a $410,400 rent commitment for the one-year
      extension period. The lease extension also includes an option, but not a
      commitment, to extend for the one-year period beginning on May 1, 2009 at the
      rate of $35,100 per month.





**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, 2006.





*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 the 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. develops, markets and supports the ANTs Data Server (“ADS”) and is
      developing and pre-marketing the ANTs Compatibility Server (“ACS”). The ANTs
      Data Server is a relational database management system (“RDBMS”) that can
      dramatically reduce costs and can improve performance in a wide range of
      applications. The ANTs Compatibility Server is middleware that, for the first
      time, may allow portability of applications from one RDBMS to another with
      less
      cost and little to no code changes. ADS incorporates patented high-performance
      technologies developed by us. ACS is built on proprietary compatibility
      technologies developed by us. End-users of RDBMS’s, independent software vendors
      who bundle an RDBMS with their products and other RDBMS vendors can use the
      ADS
      and ACS to lower costs and gain competitive advantage.





**Corporate
      History**





ANTs
      software inc. (sometimes referred to herein as “ANTs” or “we”) is a Delaware
      corporation headquartered in Burlingame, California.  Our shares are
      traded on the OTC Bulletin Board under the stock symbol ANTS. We are the
      successor to Sullivan Computer Corporation, a Delaware corporation incorporated
      in January 1979, which, in 1986 changed its name to CHoPP Computer Corporation.
      In 1997, we reincorporated from Delaware to Nevada, and in February 1999 changed
      names 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.





18




Research
      and development related to the ANTs Data Server began in 2000, with the first
      beta version of the product released in late 2004 and the first commercial
      version released in 2005. Research and development related to the ANTs
      Compatibility Server began in 2006.





**Technology
      and Intellectual Property**





**Overview**





Beginning
      in 2000, we focused on
      development of the ANTs Data Server and core high-performance database
      technologies. In 2006, we began building compatibility technology into ADS
      and
      during the 2nd
      calendar quarter of 2007, after identifying a potential market for this
      compatibility technology, we began developing and pre-marketing the ANTs
      Compatibility Server as a separate middleware product. To date, our patented
      technologies and the majority of our proprietary technologies are related to
      the
      ANTs Concurrency Engine (“ACE”), the core engine at the heart of
      ADS.





**The
      ANTs Concurrency Engine**





Applications
      which require access to
      rapidly changing, shared data often suffer from poor performance and scalability
      because of database locking. The ANTs Concurrency Engine (ACE), which comprises
      a highly efficient data-processing engine coupled with lock-free data
      structures, eliminates virtually all data locking. ACE is architected into
      the
      core of the ANTs Data Server and enables performance improvements over other
      RDBMS’s. We have applied for eleven patents on the concepts, which underlie ACE,
      six of which have been granted by the United States Patent and Trademark
      Office.





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 R & D team
      studied this problem and developed a revolutionary way of organizing the work
      associated with manipulating data. The data processing engine at the heart
      of
      the ANTs Data Server reorganizes tasks so as to avoid locking. The result is
      an
      entirely new approach to the process by which data is managed.





**Lock-Free
      Data Structures**





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





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


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





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






19




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





**Patents**





We
      have
      developed several patented technologies, all of which relate to ADS and several
      proprietary technologies which relate to both ADS and ACS. We have filed eleven
      patent applications to obtain protection for our intellectual property. We
      have
      been granted six patents. The remaining five applications are pending and we
      await the Patent and Trademark Office’s action on those. 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.





**Product–The
      ANTs Data Server**





The
      ANTs
      Data Server is an RDBMS that can dramatically reduce costs and can improve
      performance in a wide range of applications. The ANTs Concurrency Engine
      provides unique performance and cost-saving advantages that make ADS an
      attractive alternative to other RDBMS’s. End-users of RDBMS’s, independent
      software vendors who 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
                supports the SQL-92 language and popular features from
                SQL-99


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


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


·
            Automatic
                failover and recovery are built in





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





**The
      ANTs Compatibility Server**





Applications
      written to work with one
      RDBMS are typically incompatible with other RDBMSs due to proprietary extensions
      developed and popularized by other RDBMS vendors. This has the effect of locking
      in customers to one RDBMS vendor because it will generally be cost-prohibitive
      and time-consuming to migrate an application, which currently works with one
      RDBMS to work with another RDBMS. We are developing middleware technology that
      natively translates these proprietary extensions from one RDBMS to another.
      This
      technology should allow customers to migrate applications from one RDBMS to
      another more easily and at less cost.





We
      are developing the underlying
      technologies related to ACS. We anticipate that we will begin limited pilot
      testing and product refinement during the remainder of 2007.





**Sales
      and Marketing**





**The
      Market**





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




20
 
  **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
                middleware that helps customers migrate applications among
                RDBMS’s.


·
            Focusing
                on large enterprise customers who can realize significant savings
                by
                migrating applications away from expensive RDBMS’s and to the ANTs Data
                Server.


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


·
            Selling
                the ANTs Data Server through two sales
                channels;


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


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





ACS
      provides a solution to the problem of RDBMS lock-in and cost escalation for
      major enterprises by enabling them to migrate applications among
      RDBMS’s.




Our
      high-performance technology makes ADS suitable as an alternative for new and
      existing applications where database performance is critical.  Such
      applications include:





·
            High
                volume on-line transaction processing, in capital markets applications
                for
                example


·
            Telecom
                – messaging applications


*·*
            Real-time
                analytics for security and defense department
                applications





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





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





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





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





We
      intend to generate revenue through
      licensing, maintenance, and integration/customization fees. We intend to license
      ADS to independent software vendors and other partners whom we expect will
      customize it for use with their applications and use it for database
      compatibility purposes. We also intend to license ADS through re-sellers and
      system integrators.  We began selling the first commercial version of
      ADS in 2005, and have generated approximately $844,000 in revenues through
      June
      30, 2007.





We
      intend to bring ACS to market
      through partners who will sell and support it. The most likely partners are
      the
      large database vendors. We are currently in early discussions with Oracle,
      Microsoft, IBM and Sybase regarding the resale and support of ACS.








21




**Competition**





We
      operate
      in the RDBMS segment of the software market and compete against other
      high-performance, general-purpose and compatible RDBMS’s.




Competition
      in the high-performance
      segment comes from in-memory databases such as TimesTen (acquired by Oracle,
      June 2005) and Solid Information Technology, Inc., from specialty vendors such
      as Kx Systems, Inc. and FAME Information Systems, Inc., and also from the
      traditional RDBMS vendors: Oracle, IBM, and Microsoft. The traditional vendors
      often encourage customers to solve their high-performance problem by upgrading
      hardware and by contracting with high-cost consulting services to develop
      work-arounds to the bottlenecks found in their products.




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





We
      have identified one competitor in
      the “compatibility” segment. Enterprise DB, an open-source RDBMS. Currently
      applications must be ported to and hosted on the Enterprise DB product. In
      contrast, the ACS middleware is being developed to allow applications to be
      ported to and hosted on any of the major RDBMSs. The three largest RDBMS
      vendors, Oracle, IBM and Microsoft also encourage migration from competitive
      products through use of their migration tools. These tools often require
      substantial investment related to rewriting applications, retraining developers
      and purchasing additional database licenses. Customers with whom we have spoken
      are not receptive to migrating applications under such conditions with these
      tools.




**Current
      Operations**





Our
      operations currently comprise (i) marketing and supporting the ANTs Data Server,
      a relational database management system that can dramatically reduce costs
      and
      can improve performance in a wide range of applications, and (ii) research,
      development and early-stage business development related to the ANTs
      Compatibility Server. Our headquarters are located in Burlingame, California.
      We
      work with two contract development organizations in India and have individual
      contractors who provide development and consulting services from Europe,
      Australia and India as well as other parts of the United States.





We
      have
      financed operations through sales of the Company’s common stock and issuance of
      convertible promissory notes in private offerings to accredited investors.
      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 at the expected expense rate through fiscal
      year 2007. We anticipate our focus will be on research, development and business
      development of ACS and supporting ADS customers.





**Results
      of Operations**





Results
      of operations for the three and
      six months ended June 30, 2007 and 2006 are summarized below.





22










Summary
                  of Statements of Operations(in
                  000's)For
                  Three Months Ended June 30,
              
              
              For
                  Six Months Ended June 30,2007
              
              
              2006
              
              
              %
                  Change
              
              
              2007
              
              
              2006
              
              
              %
                  ChangeRevenues
              
              $
              21
              
              
              $
              83
              
              
              
              -75%
              
              
              $
              91
              
              
              $
              152
              
              
              
              -40%Cost
                  of goods sold
              
              
              7
              
              
              
              15
              
              
              
              -53%
              
              
              
              9
              
              
              
              15
              
              
              
              -40%Gross
                  profit
              
              $
              14
              
              
              $
              68
              
              
              
              -79%
              
              
              $
              82
              
              
              $
              137
              
              
              
              -40%Operating
                  expenses
              
              
              4,765
              
              
              
              4,017
              
              
              
              19%
              
              
              
              8,549
              
              
              
              6,846
              
              
              
              25%Loss
                  from operations
              
              
              (4,751
              )
              
              
              (3,949
              )
              
              
              20%
              
              
              
              (8,467
              )
              
              
              (6,709
              )
              
              
              26%Other
                  income (expense), net
              
              
              52
              
              
              
              54
              
              
              
              -4%
              
              
              
              98
              
              
              
              63
              
              
              
              56%Net
                  loss
              
              
              (4,699
              )
              
              
              (3,895
              )
              
              
              21%
              
              
              
              (8,369
              )
              
              
              (6,646
              )
              
              
              26%Net
                  loss per share -basic
                  and diluted
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              
              0%
              
              
              $
              (0.15
              )
              
              $
              (0.14
              )
              
              
              7%Shares
                  used in computing basic anddiluted
                  net loss per share (in 000's)
              
              
              56,461
              
              
              
              51,776
              
              
              
              9%
              
              
              
              56,230
              
              
              
              48,496
              
              
              
              16%






**Revenues**





Revenues
      consist of license fees earned on the ANTs Data Server, amortization of prepaid
      deferred maintenance and support, royalties from third parties who resell ADS
      under their own label, and professional fees for consulting.





During
      the
      three and six-month periods ending June 30, 2007, we recognized $21 thousand
      and
      $91 thousand, respectively, in revenue, in accordance with our revenue
      recognition policy, of which:





$0
      thousand and $51 thousand, respectively, was license fees


$21
      thousand and $40 thousand were maintenance and support fees from the current
      and
      prior periods





Royalties
      from our partner Four Js for license of Genero db (ADS) to the Fortune 100
      retailer were recognized in the 2nd quarter
      of
      2006.





We
      deferred $64 thousand of maintenance and support fees invoiced during the three
      and six-month periods ending June 30, 2007.  These deferred fees are
      reflected on the balance sheets as deferred revenue.





During
      the
      three and six-month periods ending June 30, 2006, we recognized $83 thousand
      and
      $152 thousand, respectively, in revenue, in accordance with our revenue
      recognition policy, of which:





$10
      thousand and $52 thousand, respectively, was license fees


$33
      thousand and $60 thousand were maintenance and support fees from the current
      and
      prior periods





We
      deferred $15 thousand and $67 thousand of the maintenance and support fees
      invoiced during the three and six-month periods ending June 30, 2006. These
      deferred fees were reflected on the balance sheets as deferred
      revenue.





**Cost
      of Goods Sold**





Cost
      of
      goods sold during the three and six-month periods ending June 30, 2007 was
      $7
      thousand and $9 thousand, respectively. Cost of goods sold during the three
      and
      six-month periods ending June 30, 2006 was $15 thousand and $15 thousand,
      respectively. Costs of goods sold comprise payments for third-party commissions
      and services, and equipment needed to install the ANTs Data Server at a customer
      site.






23




**Overview
      of Operating Expenses**





During
      the
      second quarter of 2007 we accelerated the change in strategic direction begun
      during the last quarter of fiscal 2006 by (i) significantly ramping up
      development of the ANTs Compatibility Server and (ii) re-focusing marketing
      and
      selling efforts towards partners rather than end-users. Toward these ends,
      we
      shifted R&D staff and technical sales staff to ACS development, implemented
      an aggressive recruiting campaign to attract engineering resources and
      significantly reduced sales personnel and marketing programs. As a result,
      research and development expenses increased significantly, while sales and
      marketing expenses decreased significantly when comparing the quarters ending
      June 30, 2006 and 2007.





General
      and administrative expense increased substantially over 2006 primarily due
      to
      (i) one-time events - separation agreements for our chairman and two former
      employees; (ii) as we increased staff in order to meet the extensive process
      and
      reporting requirements related to our first-time compliance with Section 404
      of
      the Sarbanes-Oxley Act of 2002 and; (iii) a revised salary and bonus agreement
      for our president and CEO.





The
      change
      in average full-time equivalent employees (“FTE”) from the second quarter of
      2006 to the second quarter of 2007 is shown in the table below.




Change
                  fromAvg.
                  FTE
              
              %
                  of
              
              Avg.
                  FTE
              
              %
                  of
              
              2006
                  to 2007FYTD
                  2007
              
              Total
              
              FYTD
                  2006
              
              Total
              
              No.
              
              %Sales
                  and Marketing
              
              8
              
              17%
              
              15
              
              35%
              
              (7)
              
              -47%Research
                  and Development
              32
              
              67%
              
              22
              
              51%
              
              10
              
              45%General
                  and Administrative
              8
              
              17%
              
              6
              
              14%
              
              2
              
              33%Totals
              
              48
              
              100%
              
              43
              
              100%
              
              5
              
              12%






Operating
      expenses by department for the three and six months ending June 30, 2007 and
      2006 were as follows:











Operating
                  Expenses - Three Months ended June 30,2007
              
              
              2006%
                  Change vs.$
                  in
                  000's
              
              
              %
                  of
                  Total
              
              
              Prior
                  Period
              
              
              $
                  in
                  000's
              
              
              %
                  of
                  TotalSales
                  and marketing
              
              $
              749
              
              
              
              16
              %
              
              
              -52
              %
              
              $
              1,560
              
              
              
              39%Research
                  and development
              
              
              2,396
              
              
              
              50
              %
              
              
              62
              %
              
              
              1,479
              
              
              
              37%General
                  and administrative
              
              
              1,621
              
              
              
              34
              %
              
              
              66
              %
              
              
              978
              
              
              
              24%Total
                  operating expenses
              
              $
              4,766
              
              
              
              100
              %
              
              
              19
              %
              
              $
              4,017
              
              
              
              100%
 
 Operating
                  Expenses - Six Months ended June 30,2007
              
              
              2006%
                  Change vs.$
                  in
                  000's
              
              
              %
                  of
                  Total
              
              
              Prior
                  Period
              
              
              $
                  in
                  000's
              
              
              %
                  of
                  TotalSales
                  and marketing
              
              $
              1,849
              
              
              
              22
              %
              
              
              -30
              %
              
              $
              2,631
              
              
              
              38%Research
                  and development
              
              
              4,271
              
              
              
              50
              %
              
              
              58
              %
              
              
              2,710
              
              
              
              40%General
                  and administrative
              
              
              2,429
              
              
              
              28
              %
              
              
              61
              %
              
              
              1,505
              
              
              
              22%Total
                  operating expenses
              
              $
              8,549
              
              
              
              100
              %
              
              
              25
              %
              
              $
              6,846
              
              
              
              100%






In
      accordance with Financial Accounting Standards Board Statement No. 123 (R)
      “Share-Based Payment”(“SFAS 123R”), as of January 1, 2006, we began recognizing
      employee stock-based compensation expense related to employee stock option
      vesting in the statement of operations. The Statement and its application to
      our
      financial statements are discussed in greater detail in “Critical Accounting
      Estimates” below.





24




The
      total
      stock-based employee compensation expense recognized in the three months ending
      June 30, 2007 and 2006 was $377 thousand and $218 thousand, respectively. The
      total stock-based employee compensation expense recognized in the six months
      ending June 30, 2007 and 2006 was $683 thousand and $310 thousand, respectively.
      The reason for the large variance in stock-based compensation expense is that
      at
      the end of 2005 we accelerated vesting of existing options and recorded the
      associated expense at December 31, 2005. When SFAS 123R was implemented at
      the
      beginning of 2006 we had few options subject to the new accounting standard.
      Options issued during the first half of 2006 and through the second quarter
      of
      2007 began generating vesting expense under SFAS 123R. By the end of the second
      quarter of 2007 we were recording the cumulative effect of all stock options
      granted and vesting over six quarters compared to just two quarters in the
      first
      half of 2006.





As
      in
      prior years, we continued to recognize stock option vesting expense related
      to
      stock option awards to outside consultants in professional fees. During the
      three-month period ended June 30, 2007 professional fees included $1.4 thousand
      of this expense, compared to $3.3 thousand during the same period of 2006.
      Expense details, including employee stock-based compensation expense, by
      functional area (departments) are discussed below.





During
      the
      six month period ended June 30, 2007, professional fees accounted for $15.5
      thousand of stock-based compensation expense, compared to $7.2 thousand during
      the same period of 2006. Expense details, including employee stock-based
      compensation expense, by functional area (departments) are discussed
      below.





**Sales
      and Marketing Expenses**





Sales
      and
      marketing expenses during the first two quarters of 2006 and 2007 consisted
      primarily of employee salaries and benefits (including stock-based
      compensation), consultants’ fees, travel, marketing programs (trade shows,
      public relations, lead generation programs), marketing and sales literature
      and
      presentations, technical pre-sales consulting and allocation of corporate
      overhead.




Changes
                  to key sales and marketing expenses for the three and six months
                  ended
                  June 30, from 2006 to 2007 (in 000's):Three
                  Months
              
              Percent
              
              Six
                  Months
              
              Percent2007
              
              2006
              
              Change
              
              2007
              
              2006
              
              ChangeEmployee
                  compensation and benefits
              
              333
              
              638
              
              -48%
              
              966
              
              1,228
              
              -21%Marketing
                  & presales support
              
              305
              
              644
              
              -53%
              
              557
              
              975
              
              -43%Travel
                  & Entertainment
              
              63
              
              204
              
              -69%
              
              177
              
              309
              
              -43%Stock-based
                  compensation
              
              27
              
              48
              
              -44%
              
              95
              
              73
              
              30%






Total
      S&M expenses decreased by $811 thousand in the second quarter of 2007
      compared to the same period in 2006 as a result of our change in go-to-market
      strategy, selling through partners, rather than selling directly to end-users
      and shifting pre-sales technical staff to R&D. Employee-related expenses
      decreased due to personnel reductions (average FTE of 15 in 2006 to 8 in 2007),
      and expenses related to direct marketing activities such as trade shows,
      advertising other marketing events travel and entertainment expenses decreased
      as we participated in fewer outbound marketing and sales events and instead
      focused our efforts on marketing and selling to a smaller number of larger
      partners.





Total
      S&M expenses decreased by $782 thousand in the first half of 2007 compared
      to the same period in 2006 as a result of our change in go-to-market strategy,
      selling through partners, rather than selling directly to end-users.
      Employee-related expenses decreased due to personnel reductions (average FTE
      of
      14 in 2006 to 8 in 2007), and expenses related to direct marketing activities
      such as trade shows, advertising other marketing events travel and entertainment
      expenses decreased as we participated in fewer outbound marketing and sales
      events and instead focused our efforts on marketing and selling to a smaller
      number of larger partners. Employee stock-based compensation expense increased
      year-over-year as we were recording the cumulative effect of all stock options
      granted and vesting over six quarters compared to just two quarters in the
      first
      half of 2006.





For
      the remainder of fiscal 2007, we
      expect S&M expenses will continue to decline as average FTE’s decline and we
      focus on selling and marketing ADS and ACS through partners.






25




**Research
      and Development Expenses**





Research
      and development expenses consist primarily of employee salaries and benefits
      (including stock-based compensation), fees to off-shore contract development
      organizations, depreciation on equipment and software, and allocation of
      corporate overhead. In 2006 R&D focused primarily on supporting sales
      activities by adding new features, and testing and refining ADS. Significant
      increases in R&D expenses during fiscal 2006 were driven by changes in our
      strategy to include compatibility features in ADS. During the last half of
      fiscal 2006 we significantly increased personnel in R&D and during the first
      half of fiscal 2007 we began developing ACS and added significantly to our
      overseas contract R&D teams.






Changes
                  to key research and development expenses for the three and six
                  months
                  ended June 30, from 2006 to 2007 (in 000's):Three
                  Months
              
              Percent
              
              Six
                  Months
              
              Percent2007
              
              2006
              
              Change
              
              2007
              
              2006
              
              ChangeEmployee
                  compensation and benefits
              
              $
                  1,568
              
              $
                  991
              
              58%
              
              $
                  2,939
              
              $
                  1,883
              
              56%On-
                  and off-shore contractors
              
              542
              
              279
              
              94%
              
              814
              
              488
              
              67%Stock-based
                  compensation
              
              177
              
              67
              
              164%
              
              303
              
              123
              
              146%Equipment
                  and computer supplies
              
              10
              
              76
              
              -87%
              
              17
              
              90
              
              -81%


Total
      R&D expenses increased by $917 thousand in the second quarter of 2007
      compared to the same period in 2006, due primarily to the following: 1)
      employee-related expenses rose as R&D staffing increased (average FTE of 22 in 2006 to
      32 in
      2007); 2) greater use of on and off-shore consultants; 3) employee
      stock-based compensation expense increased as we were recording the cumulative
      effect of all stock options granted and vesting over six quarters compared
      to
      just two quarters in the first half of 2006 and; 4) approximately $60 thousand
      of the expense related to equipment and computer supplies for 2006 is a result
      of an accounting adjustment based on an internal audit in which we determined
      that we should have expensed rather than capitalized certain equipment based
      on
      our fixed asset policy.




Total
      R&D expenses increased by $1.6 million in the first half of 2007 compared to
      the same period in 2006, due primarily to the following: 1) employee-related
      expenses rose as R&D staffing increased (average FTE of 22 in 2006 to 32 in
      2007); 2) greater use of on and off-shore consultants; 3) employee stock-based
      compensation expense increased as we were recording the cumulative effect of
      all
      stock options granted and vesting over six quarters compared to just two
      quarters in the first half of 2006 and; 4) approximately $60 thousand of the
      expense related to equipment and computer supplies for 2006 is a result of
      an
      accounting adjustment based on an internal audit in which we determined that
      we
      should have expensed rather than capitalized certain equipment based on our
      fixed asset policy.





For
      the
      remainder of fiscal 2007, we expect R&D expenses will increase moderately as
      we intensify efforts to bring ACS to market by the end of the year.





**General
      and Administrative**





General
      and administrative expenses comprise primarily employee salaries and benefits
      (including stock-based compensation), professional fees (legal, accounting,
      investor relations, and recruiting), facilities expenses and
      insurance.




Changes
                  to key general and administrative expenses for the three and six
                  months
                  ended June 30,  from 2006 to 2007 (in 000's):Three
                  Months
              
              Percent
              
              Six
                  Months
              
              
              Percent2007
              
              2006
              
              Change
              
              2007
              
              2006
              
              ChangeEmployee
                  compensation and benefits
              
              $
                  932
              
              $
                  361
              
              158%
              
              $
                  1,246
              
              $
                  623
              
              100%Stock-based
                  compensation
              
              172
              
              99
              
              74%
              
              222
              
              107
              
              107%Professional
                  fees
              
              342
              
              403
              
              -15%
              
              689
              
              544
              
              27%Debt
                  Issuance Costs
              
              109
              
              —
              
              N/A
              
              170
              
              —
              
              N/A




Total
      G&A expenses increased by $643 thousand in the second quarter of 2007
      compared to the same period in 2006, due primarily to the following: 1)
      employee-related expense increased by $507 thousand related to a one-time
      severance agreement between us and Mr. Francis Ruotolo, our chairman, who on
      June 26, 2007 terminated as an employee and executive chairman while remaining
      non-executive chairman and by $62 thousand due to a bonus paid to our CEO
      pursuant to his employment agreement; 2) employee stock-based compensation
      expense increased: a) as we were recording the cumulative effect of all stock
      options granted and vesting over six quarters compared to just two quarters
      in
      the first half of 2006 and, b) pursuant to separation agreements with two former
      employees, we recognized approximately $50 thousand in expense related to the
      extension of their option exercise period, 3) an increase in professional fees
      related to director compensation, offset by the fact that fees have not yet
      been
      incurred in our second year of Sarbanes Oxley compliance, and; 4) amortization
      of debt issuance costs related to the closing of the J Unit financing in January
      2007.






26


Total
      G&A expenses increased by $924 thousand in the first half of 2007 compared
      to the same period in 2006, due primarily to the following: 1) employee-related
      expense increased by $507 thousand related to a severance agreement between
      us
      and Mr. Francis Ruotolo, our chairman, who on June 26, 2007 terminated as an
      employee and executive chairman while remaining non-executive chairman and
      also
      increased by $62 thousand due to a bonus paid to our CEO pursuant to his
      employment agreement; 2) employee stock-based compensation expense increased:
      a)
      as we were recording the cumulative effect of all stock options granted and
      vesting over six quarters compared to just two quarters in the first half of
      2006 and, b) pursuant to separation agreements with two former employees, we
      recognized approximately $50 thousand in stock compensation expense related
      to
      the extension of their option exercise period, 3) an increase in professional
      fees related to director compensation, offset by the fact that fees have not
      yet
      been incurred in our second year of Sarbanes Oxley compliance, and; 4)
      amortization of debt issuance costs related to the closing of the J Unit
      financing in January 2007.





Beginning
      in 2007, outside directors are paid cash compensation in consideration for
      their
      service on the board of directors. During the second quarter of 2007 directors
      earned cash compensation of $49 thousand for board services during the
      quarter.  During the first six months directors earned aggregate cash
      compensation of $127 thousand that includes a one-time payment of $50 thousand
      to Mr. Homer Dunn in recognition of six years of service on the board. Mr.
      Dunn
      resigned as director in January 2007. In addition, we recognized stock based
      compensation expense related to vesting of outside director stock options and
      warrants of $30 thousand and $33 thousand, respectively, during the second
      quarter 2007. We recognized $30 thousand and $81 thousand, respectively, of
      stock based compensation expense related to vesting of outside director stock
      options and warrants during the first six months of 2007. Total outside director
      compensation expense for the second quarter of 2007 was $59 thousand. There
      was
      no outside director cash compensation for the same period in 2006





For
      the
      remainder of fiscal 2007, we expect G&A expenses will decrease moderately as
      the full effect of personnel reductions and other cost reductions are
      realized.





**Other
      Income (Expense), Net**





The
      components of other income (expense), net, and the changes therein for the
      three
      and six months ended June 30, from 2007 to 2006, are as follows (in
      000’s):




For
                the Three Months Ended June 30,
            
            
            For
                the Six Months Ended June 30,2007
            
            
            2006
            
            
            %
                Change
            
            
            2007
            
            
            2006
            
            
            %
                ChangeOther
                income (expense):Interest
                income
            
            $
            114
            
            
            $
            54
            
            
            
            111%
            
            
            $
            200
            
            
            $
            64
            
            
            
            213%Gain
                on legal settlement and other
            
            
            1
            
            
            
            2
            
            
            
            -50%
            
            
            
            2
            
            
            
            3
            
            
            
            -33%Interest
                expense - Cash
            
            
            (163
            )
            
            
            (2
            )
            
            
            8050%
            
            
            
            (268
            )
            
            
            (4
            )
            
            
            6600%Interest
                expense - Convertible Note Payable
            
            
            100
            
            
            
            —
            
            
            N/A
            
            
            
            164
            
            
            
            —
            
            
            N/AOther
                income (expense), net
            
            $
            52
            
            
            $
            54
            
            
            
            -4%
            
            
            $
            98
            
            
            $
            63
            
            
            
            56%




During
      the
      three months ended June 30, 2007 and 2006, Other Income (Expense), net was
      $52
      thousand and $54 thousand, respectively. The change in activity resulted from
      two main factors: interest income grew significantly and interest expense,
      (both
      cash and non-cash) increased.





The
      increase in interest income was driven by two factors: First, we invested in
      higher-yielding money market funds in 2007 compared to a minimum-yield bank
      investment product in 2006.  The average rate of return during the
      second quarter of 2007 was 3.8% compared with .6% during the same period in
      2006. Second, our average cash balance was approximately $500 thousand higher
      during the quarter-ended June 30, 2007 as compared to the same quarter in
      2006.





27


Interest
      expense increased due to our issuance of convertible promissory notes valued
      at
      $6,500,000 through the first quarter of 2007. There were no such interest-paying
      instruments issued in the first quarter of 2006. Quarterly interest expense
      on
      the convertible promissory notes was offset somewhat by the accretion of the
      premium on the convertible promissory notes.





During
      the
      six months ended June 30, 2007 and 2006, Other Income (Expense), net was $98
      thousand and $63 thousand, respectively. The change in activity resulted from
      two main factors: interest income grew significantly and interest expense,
      (both
      cash and non-cash) increased.





The
      increase in interest income was driven by two factors. First, we invested in
      higher-yielding money market funds in 2007 compared to a minimum-yield bank
      investment product in 2006.  The average rate of return during the
      first half of 2007 was 4.5% compared with .9% during the same period in 2006.
      Second our average cash balance was approximately $1.8 million higher during
      the
      six months ended June 30, 2007 as compared to the same quarter in
      2006.





**Liquidity
      and Capital Resources**





From
      inception, we have reported negative cash flow from
      operations.  During the periods from fiscal 2000 through fiscal 2004,
      we focused primarily on research and development with first sales occurring
      in
      the first quarter of 2005. Throughout our history, 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 most
      recently with the issuance of convertible promissory notes.




We
      have
      three potential funding sources:  1) raising funds through private
      placements of our stock and warrants; 2) as we develop close relationships
      with
      large partners, we plan to pursue strategic investments from those partners;
      and
      3) revenue generated from the licensing of the ANTs Data Server and the ANTs
      Compatibility Server (which is still in development). Revenue to date has been
      minimal. There can be no assurance that any or all of these sources will provide
      sufficient funds to support our operations beyond fiscal year
      2007.  We intend to continue our acquisition of computer-related
      equipment to expand and update our computer laboratory; however, we presently
      have no commitments to acquire assets that would have a material impact on
      the
      balance sheet or statement of cash flows.  We plan to fund all such
      equipment acquisitions with cash provided by operations and/or cash received
      from financing activities.





Sales
      of
      our securities in private offerings have been our primary source of operating
      capital.  We have also raised funds as investor’s exercise warrants
      related to prior offerings, and as stock options are exercised. Our investing
      activities have been focused almost entirely on the acquisition of computer
      equipment, and expansion of facility capacity in our development and testing
      laboratory.  The funds used for investing have been significantly less
      than the funds provided by financing activities; the remainder of the capital
      raised has been used to support operations and increase cash balances on
      hand.





We
      have
      tendered several private offerings each year.  The offerings typically
      consist of units, which give the investor shares of restricted common stock
      at a
      discount to the then-current market price, and a warrant to purchase the same
      number of restricted shares of common stock at a fixed price set at a premium
      to
      the then-current market price.  The warrants generally have a life of
      three years.  Beginning in the fourth quarter of 2006 we began to
      offer units that consisted of a convertible promissory note along with
      restricted common stock.





For
      the
      six months ended June 30, 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.





28
 
  For
          the
          six months ended June 30, 2007, operations used approximately $7.2 million,
          in
          cash.  Investing activities utilized another $192
          thousand.  Thus, total cash outflow for the six months ended June 30,
          2007, was approximately $7.4 million.


As
      of June
      30, 2007, we had approximately $7.2 million in cash on hand to fund operations
      and equipment purchases.  We anticipate that, at our current levels of
      revenues and expenditures, the $7.2 million cash balance will fund operations
      through the fiscal year 2007. Should we need to secure additional financing,
      we
      believe that due to an uncertain investment climate, securing additional
      financing will be difficult.





**Off-Balance
      Sheet Arrangements**





As
      of June 30, 2007, 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 15,600 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 the event that the Lease is not extended,
      the total obligations related to the lease amount to $600,060.





We
      recognize rent expense for this lease in accordance with Financial Technical
      Bulletin 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.  This results in monthly
      rental expense of $16,668.  During the three and six months ended June
      30, 2007, we recognized a total of $50,004 and $100,008 respectively in rental
      expense for this lease.  During the same period in 2006, we recognized
      $50,004 and $100,008 respectively in rental expense.





As
      of June
      30, 2007, the total remaining unamortized deferred rent is $37,717. This amount
      represents the difference between the total amount of rent recognized (expensed)
      on a straight-line basis and the actual rent payments to be made over the
      remaining lease term. The $37,717 is included as a current liability in accounts
      payable and other accrued expenses on the balance sheet.  As of June
      30, 2007 the total remaining off-balance sheet lease obligation is
      $204,400.





The
      table
      below presents our total long-term contractual obligations as of June 30, 2007,
      for both on and off-balance sheet categories.





Payments
                Due by PeriodLess
                than
            1-3
            3-5
            More
                thanContractual
                Obligations
            Total
            1
                Year
            Years
            Years
            5
                YearsOperating
                lease obligations
            $204,400
            $204,400
            —
            —
            —





**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 bases its 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.





29


There
      have been no significant changes
      in our critical accounting estimates during the three months ended June 30,
      2007
      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, 2006. 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**





The
        majority of our revenue is realized in United States dollars. While some
        portion
        of our revenue is generated from international customers, payments are made
        in
        United States dollars, mitigating foreign exchange exposure.  As a
        result, our financial results would not 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 our 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 it can 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 our invested principal by limiting
      default risk, market risk, and reinvestment 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.





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 its 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 and, to the best of our knowledge, no such action
      against us has been threatened, nor do we anticipate any such
      action.






30




**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 it operates in a highly changing and complex
      business environment that involves numerous risks, some of which are beyond
      our
      control. The following discussion highlights a few of these risk factors, any
      one of which may have a significant adverse impact on our business, operating
      results and financial condition.  As a result of the risk factors set
      forth below and elsewhere in this 10-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***.





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. Some customers may be reluctant to purchase products from a company
      with unproven products, uncertain finances, or less-experienced support
      department. Also, due to economic conditions some potential customers may have
      tightened budgets for evaluating new products and technologies and the
      evaluation cycles may be much longer than in the recent past. There can be
      no
      assurance that our product and technology development or support efforts will
      result in new products and services, or that they will be successfully
      introduced.





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





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





***A
      failure to obtain financing could prevent us from executing our business
      plan***.





We
      anticipate that current cash
      resources will be sufficient for us to execute our business plan through fiscal
      year 2007. 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 June 30, 2007 one of our largest customers accounted for
        approximately 40% 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 effect on
        our
        revenue.





31





***We
      compete with 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 that will be otherwise
      unavailable for some time, we face very large competitors with greater resources
      who may adopt various strategies to block or slow our market penetration,
      thereby straining our more limited resources.  We are aware of efforts
      by competitors to introduce doubt about our financial stability as we compete
      to
      make sales and win customers and business.  Large competitors may also
      seek to hinder our operations through attempts to recruit key staff with
      exceptionally attractive terms of employment, including signing bonuses, or
      by
      offer of highly competitive terms to potential or newly acquired
      customers.





***We
      will need to continue our product development
      efforts***.





We
      believe that our market 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 are hopeful that our patents provide some protection, we will
      likely need significant additional capital in order to continue to enjoy such
      a
      technological lead over competitors with more resources.





**We*****rely upon Independent Software Vendors for product
      sales***.





A
      significant portion of our sales has
      been made through independent software vendors (“ISVs”). As a result, our
      success may depend on the continued sales efforts of these ISVs, and identifying
      and entering into agreements with additional ISVs.  The use of these
      ISVs 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 ISVs may harm our
      results.  There can be no assurance that we will identify or engage
      qualified ISVs 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.  Despite our precaution, 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 eleven 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 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 and the
      marketing of our first product***.





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 no commercial benefit or potential.  In addition,
      from our inception to the present, we have not recognized any substantial
      operating revenues.





32




***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 enhance our existing
      products and to develop, manufacture and market new products and services.
      As a
      result, we expect to continue to make a significant investment in engineering,
      research and development.  There can be no assurance that we will be
      able to develop and introduce new products and services or enhance our initial
      products in a timely manner to satisfy customer needs, achieve market acceptance
      or address technological changes in our target markets. Failure to develop
      products and services and introduce them successfully and in a timely manner
      could adversely affect our competitive position, financial condition and results
      of operations.





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





We
      may experience substantial growth in
      the size of our staff and the scope of our operations, resulting in increased
      responsibilities for management.  To manage this possible growth
      effectively, we will need to continue to improve our operational, financial
      and
      management information systems will possibly need to create entire 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
      product may be used to manage data
      from critical business applications. We may become the subject of litigation
      alleging that our product was 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 that it is
      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 SEC and various other bodies formed to interpret
      and create appropriate accounting principles.  A change in those
      principles can have a significant effect on our reported results


and
      may
      affect our reporting of transactions completed before a change is
      announced.  Changes to those rules or the questioning of current
      practices may adversely affect our reported financial results or the way we
      conducts business.  For example, accounting principles affecting many
      aspects of our business, including rules relating to equity-related
      compensation, have recently been revised.  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 change could make the use of equity-related compensation less
      attractive and therefore make it more difficult to attract and retain
      employees.





33




***There
      is a limited market for our common stock***.





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





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


·
            economic
                conditions within the database
                industry;


·
            our
                failure to meet performance estimates or the performance estimates
                of
                securities analysts;


·
            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 develop or 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 attesting to and reporting on these assessments.  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 our assessment of the
      effectiveness of our internal control 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.








34




***We
      have indemnified our officers and directors***.





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





***Limitation
      on ability for control through proxy contest***.





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





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





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





**ITEM
      2.  UNREGISTERED SALES OF EQUITY SECURITIES**





None





**ITEM
      3.  DEFAULTS UPON SENIOR SECURITIES**





None





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





The
      annual meeting of the shareholders
      of the Company was held on May 11, 2007.  Of the 56,230,135 shares
      entitled to vote at the meeting, 38,961,261 shares were voted.  The
      results were as follows:





Proposal
      number 1 – Election of Two Class 1 Directors:




**FOR**
            
            **WITHHELD**Thomas
                Holt
            
            37,460,651
            
            1,500,610Joseph
                Kozak
            
            38,459,329
            
            501,932






Proposal
      number 2 – Ratification of the selection of Burr, Pilger & Mayer, LLP, as
      independent accountants for the Company for the calendar year ending December
      31, 2007:




**FOR**
            
            
            
            **AGAINST**
            
            
            
            **ABSTENTION**38,629,049
            
            
            
            96,859
            
            
            
            235,353








35





**ITEM
      5.  OTHER INFORMATION**





None





**ITEM
      6.  EXHIBITS**




(a)
      Exhibits





3.1
            Amended
                and Restated Certificate of Incorporation of our, filed as Exhibit
                3.1 to
                our 10-QSB filed on August 14, 2003, is hereby incorporated by
                reference.


3.2
            Amended
                and Restated Bylaws of our, filed as Exhibit 3.2 to our 10-KSB filed
                on
                March 22, 2001, are hereby incorporated by
                reference.


10.1
            Employment
                Agreement with Chairman of the Board, Francis K.
                Ruotolo.


10.2
            Employment
                Agreement with Chief Executive Officer and President, Joseph
                Kozak.


10.3
            Employment
                Agreement with Chief Financial Officer and Secretary, Kenneth
                Ruotolo


10.4
            Retirement
                and Board Service Agreement with Chairman of the Board, Francis K.
                Ruotolo


31.1
            Certification
                of the Chief Executive Officer required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of
                2002.


31.2
            Certification
                of the Chief Financial Officer required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of
                2002.


32.1
            Certification
                of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.


32.2
            Certification
                of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





b)
      Reports
      on Form 8-K





During
      the
      fiscal quarter covered by this report, we filed the following reports on Form
      8-K:





1)
            On
                April 16, 2007, we announced the appointment of Ari Kaplan to the
                Board of
                Directors;


2)
            On
                April 19, 2007, we clarified and corrected information contained
                in a
                summary of a conversation that had taken place between company employees
                and an attendee at the International Oracle User’s Group conference on
                April 17, 2007. The summary of the conversation had been posted on
                an
                independent investor web site.


3)
            On
                May 4, 2007, we announced we have amended the employment agreement
                with
                Chief Executive Officer, Joseph Kozak to increase his compensation.
                We
                also cancelled a stock option and granted a stock option to Mr.
                Kozak.


4)
            On
                May 17, 2007, we announced the appointments of Craig L. Campbell
                and
                Robert T. Jett were appointed to the Board of Directors as a Class
                2 and
                Class 3 directors, respectively.


5)
            On
                June 28, 2007, we announced the Company entered into a Retirement
                and
                Board Service Agreement with Mr. Francis
                Ruotolo.








**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:   August
                  9, 2007
            By:
            /s/
                Joe KozakJoe
                Kozak, Chief Executive Officer and President







Date:   August
                  9, 2007
            By:
            /s/
                Kenneth RuotoloKenneth
                Ruotolo, Chief Financial Officer and Secretary








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