**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: March 31, 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:





56,391,185
      shares of common stock as of April 30, 2007











**TABLE
      OF CONTENTS**












PART
                I. Financial InformationItem
              1.
            Condensed
              Financial StatementsCondensed
                Balance Sheets as of March 31, 2007 and
                December 31, 2006
            3Condensed
                Statements of Operations for the
                Three Months ended March 31, 2007 & 2006
            4Condensed
                Statements of Cash Flows for the
                Three Months ended March 31, 2007 & 2006
            5Notes
                to Condensed Financial
                Statements
            6-16Item
              2.
            Management’s Discussion
              and Analysis of Financial
              Condition and Results of Operations
            16-26Item
              3.
            Quantitative
              and Qualitative
              Disclosures About Market Risk
            27Item
              4.
            Controls
              and Procedures
            27PART
                II. Other InformationItem
              1.
            Legal
              Proceedings
            27Item
              1A.
            Risk
              Factors
            27-32Item
              2.
            Unregistered
              Sales of Equity Securities and Use of
              Proceeds
            32Item
              3.
            Defaults
              Upon Senior Securities
            32Item
              4.
            Submission
              of Matters to a Vote of Security
              Holders
            32Item
              5.
            Other
              Information
            32Item
              6.
            Exhibits
              and Reports on Form 8-K
            32-33Signatures
            33








2


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. CONDENSED FINANCIAL STATEMENTS**




**ANTS
                  SOFTWARE INC.****CONDENSED
                  BALANCE
                  SHEETS**March
                  31,
              
              
              December
                  31,ASSETS
              
              
              2007
              
              
              2006Unaudited
              
              
              AuditedCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              11,197,763
              
              $
              4,698,949Accounts
                  receivable, net of allowance for doubtful accounts of $0 and
                  $0in
                  2007 and 2006, respectively
              
              
              178,091
              
              
              68,145Prepaid
                  insurance and other expenses
              
              
              106,123
              
              
              118,654Total
                  current assets
              
              
              11,481,977
              
              
              4,885,748Restricted
                  cash
              
              
              190,958
              
              
              190,958Prepaid
                  expense from warrant issued to customer, net
              
              
              100,929
              
              
              115,347Prepaid
                  debt issuance cost, net
              
              
              808,389
              
              
              33,645Property
                  and equipment, net
              
              
              766,780
              
              
              736,053Other
                  assets
              
              
              34,420
              
              
              34,420Total
                  assets
              
              $
              13,383,453
              
              $
              5,996,171LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable and other accrued expenses
              
              $
              683,001
              
              $
              626,011Accrued
                  bonuses and commissions payable
              
              
              58,501
              
              
              179,127Accrued
                  vacation payable
              
              
              189,149
              
              
              175,237Deferred
                  revenues
              
              
              102,257
              
              
              56,819Total
                  current liabilities
              
              
              1,032,908
              
              
              1,037,194Long-term
                  liabilities:Accrued
                  rent
              
              
              3,772
              
              
              15,087Convertible
                  promissory notes, includes debt premium of $743,234 and $120,880,net
                  in 2007 and 2006, respectively
              
              
              7,243,234
              
              
              1,120,880Total
                  liabilities
              
              
              8,279,914
              
              
              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;56,391,185
                  and 53,188,485 shares issued and outstanding, respectively
              
              
              5,640
              
              
              5,319Common
                  stock subscribed, not issued
              
              
              21
              
              
              1Additional
                  paid-in capital
              
              
              67,420,233
              
              
              62,469,426Accumulated
                  deficit
              
              
              (62,322,355
              )
              
              (58,651,736
              )Total
                  stockholders’ equity
              
              
              5,103,539
              
              
              3,823,010Total
                  liabilities and stockholders' equity
              
              $
              13,383,453
              
              $
              5,996,171


3




**ANTS
                  SOFTWARE INC.****CONDENSED
                  STATEMENT OF
                  OPERATIONS****(Unaudited)**For
                  the Three Months Ended March 31,2007
              
              
              2006Revenues:Licenses
                  and royalties
              
              $
              50,625
              
              $
              42,000Maintenance
              
              
              18,502
              
              
              26,389Total
                  revenues
              
              
              69,127
              
              
              68,389Cost
                  of revenues:Licenses
              
              
              2,712
              
              
              -Gross
                  profit
              
              
              66,415
              
              
              68,389Operating
                  expenses:Sales
                  and marketing
              
              
              1,099,671
              
              
              1,072,024Research
                  and development
              
              
              1,875,163
              
              
              1,230,255General
                  and administrative
              
              
              808,298
              
              
              526,331Total
                  operating expenses
              
              
              3,783,132
              
              
              2,828,610Loss
                  from operations
              
              
              (3,716,717
              )
              
              (2,760,221
              )Other
                  income (expense):Interest
                  income
              
              
              85,886
              
              
              9,712Gain
                  on legal settlement and other, net
              
              
              1,500
              
              
              1,000Interest
                  expense
              
              
              (41,288
              )
              
              (1,470
              )Other
                  income, net
              
              
              46,098
              
              
              9,242Net
                  loss
              
              $
              (3,670,619
              )
              $
              (2,750,979
              )Basic
                  and diluted net loss per common share
              
              $
              (0.07
              )
              $
              (0.06
              )Shares
                  used in computing basic and dilutednet
                  loss per share
              
              
              55,995,934
              
              
              45,180,279See
                  Accompanying Notes to Financial
                  Statements




4




**ANTS
                  SOFTWARE INC.****CONDENSED
                  STATEMENT OF CASH
                  FLOWS****(Unaudited)**For
                  the Three Months Ended March 31,2007
              
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (3,670,619
              )
              $
              (2,750,979
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              106,808
              
              
              71,979Amortization
                  of accrued rent, net of cash payments
              
              
              (2,555
              )
              
              1,825Amortization
                  of warrant issued to customer
              
              
              14,418
              
              
              14,418Accretion
                  of premium on note payable
              
              
              (63,386
              )
              
              -Amortization
                  of debt issuance cost
              
              
              60,871
              
              
              -Bad
                  debt expense, net of write-offs of uncollectible accounts
              
              
              -
              
              
              33,738Compensation
                  expense on restricted stock issued to a non-employee for
                  services
              
              
              -
              
              
              11,000Compensation
                  expense recognized on vesting of non- employee stock
                  options
              
              
              14,076
              
              
              3,851Compensation
                  expense recognized on vesting of employee stock options
              
              
              292,186
              
              
              88,188Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (109,946
              )
              
              (86,400
              )Prepaid
                  insurance, other expenses
              
              
              12,531
              
              
              (57,949
              )Accounts
                  payable and other accrued expenses
              
              
              82,642
              
              
              (333,796
              )Accrued
                  bonuses and commissions payable
              
              
              (120,626
              )
              
              (183,750
              )Accrued
                  vacation
              
              
              13,912
              
              
              22,667Deferred
                  revenue
              
              
              45,438
              
              
              25,511Net
                  cash used in operating activities
              
              
              (3,324,250
              )
              
              (3,139,697
              )Cash
                  flows used in investing activities:Purchases
                  of office furniture, fixtures and equipment and security
                  deposits
              
              
              (137,536
              )
              
              (124,273
              )Net
                  cash used in investing activities
              
              
              (137,536
              )
              
              (124,273
              )Cash
                  flows from financing activities:Proceeds
                  from private placements - equity, net of commissions
              
              
              5,018,574
              
              
              184,000Proceeds
                  from private placement - convertible promissory notes, net of
                  commissions
              
              
              4,881,426
              
              
              -Proceeds
                  from exercise of options
              
              
              60,600
              
              
              111,005Proceeds
                  from exercise of warrants, net of commissions
              
              
              -
              
              
              70,873Net
                  cash provided by financing activities
              
              
              9,960,600
              
              
              365,878Net
                  increase (decrease) in cash and cash equivalents
              
              
              6,498,814
              
              
              (2,898,092
              )Cash
                  and cash equivalents at beginning of period
              
              
              4,698,949
              
              
              6,381,932Cash
                  and cash equivalents at end of period
              
              $
              11,197,763
              
              $
              3,483,840Supplemental
                  disclosure of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              104,674
              
              $
              -Non-cash
                  investing and financing activities:Common
                  stock issued for subscribed shares
              
              
              -
              
              
              243,608Allocation
                  of stockholders' equity to premium on convertible note
              
              
              685,740
              
              
              -Allocation
                  of a portion of placement agent commissions to debt issuance
                  costs
              
              
              217,042
              
              
              -Extension
                  on stock options
              
              
              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 March 31, 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 months ended March 31, 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-month periods ended
      March 31, 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 March 31, 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 MonthsEnded
                  March 31,2007
              
              
              2006Net
                  Loss
              
              $
              (3,670,619
              )
              $
              (2,750,979
              )Weighted
                  average shares of common stockoutstanding
                  - basic and dilutive
              
              
              55,995,034
              
              
              45,180,276Basic
                  and diluted net loss per share
              
              $
              (0.07
              )
              $
              (0.06
              )


As
      of
      March 31, 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 March 31, 2006, we had no convertible promissory notes. As of March 31,
      2007 and 2006, we had outstanding stock options for the purchase of up to
      8,151,569 and 8,173,062 shares of common stock at prices ranging from $0.52
      to
      $6.38 and $0.52 to $6.38, respectively. As of March 31, 2007 and 2006, we had
      outstanding warrants for the purchase of up to 8,262,911 and 13,288,504 shares
      of common stock at prices ranging from $1.99 to $6.38 and $1.99 to $7.25,
      respectively. At March 31, 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 19,848,460 at prices ranging from $0.52 to $6.38 per share,
      and 21,461,566 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 months ended March 31, 2007 and 2006 was $14,418 and $14,418,
      respectively, leaving a net balance in the prepaid asset account of $100,929
      on
      March 31, 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
      March 31, 2007, prepaid debt issuance costs are $808,389. 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 $60,871 for the quarter ended March 31, 2007. 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
      statements 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 March 31, 2007 is $102,257, which
      is
      comprised of $26,087 in license fees and $76,170 in maintenance and support
      fees. During the quarter ended March 31, 2007, we recognized $18,502 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 March 31, 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 months ended March 31, 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 March
      31,
      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 March 31, 2007.





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.


9


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 March 31, 2007. The premium
      is
      being accreted as a reduction to interest expense ratably over the remaining
      life of the notes. For the quarter ended March 31, 2007 the amount accreted
      was
      $63,386.





As
      of
      March 31, 2007, we paid $1,100,000 in cash commissions and will issue 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 March 31, 2007. The remaining $650,345 was
      allocated to additional paid-in capital. The shares due to the placement agent
      for all J Unit sales beginning in December 2006, total 210,360 and are shown
      on
      the balance sheet in common stock subscribed at their par value of $21 and
      will
      be issued in the second quarter of 2007.




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




***Lease
      Commitments***





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




Payments
                  Due by Period
              
              
              Operating
                  LeasesLess
                  than 1 Year
              
              $
              242,360More
                  than 1 less than 2 Years
              
              
              20,440Total
                  minimum lease payments
              
              $
              262,800




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.


10


We
      are recognizing rent expense for this lease i n
      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 quarters ended
      March 31, 2007 and 2006 we recognized a total of $50,004 and $50,004
      respectively, in rental expense for this lease.





***Contingencies***




As
        part of
        a customer License Agreement (“Agreement”) dated August 1, 2005 we have agreed
        to issue a warrant to purchase 50,000 shares of our restricted stock to the
        customer thirty (30) days after the Software Acceptance Date, subject to
        approval from our board of directors, compliance with applicable securities
        laws
        and regulations and Licensee representing that it is an accredited investor.
        The
        warrant has an exercise price of $3.50 per share and is exercisable for a
        period
        of three years from the Effective Date of the warrant. If the warrant is
        not
        granted within thirty days after the Software Acceptance Date without fault
        of
        Licensee, then Licensee will have the right to terminate the Agreement on
        notice
        to us, and we will immediately refund to Licensee all monies paid to us under
        this Agreement. It is our opinion this customer does not intend to accept
        our
        product, that no warrant will be issued and therefore there is no contingency
        associated with the warrant. We intend to cancel the warrant during the 2nd
        quarter of 2007.




**10. 
        Stockholders’ Equity Transactions**




A
      comprehensive summary of transactions occurring in stockholders’ equity for the
      three-month periods ending March 31, 2007 and 2006 is presented in the table
      below.




Changes
                  in Stockholders' EquityFor
                  the Three Months Ended March 31,2007
              
              
              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 "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
              
              
              184,000Proceeds
                  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
              
              
              -
              
              
              70,873Proceeds
                  from cash exercise of stock options
              
              
              60,600
              
              
              111,005Total
                  cash transactions
              
              $
              5,079,174
              
              $
              365,878Non-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
              
              
              292,186
              
              
              88,188Non-employee
                  compensation expense:Restricted
                  stock/stock options issued to vendors
              
              
              -
              
              
              11,000Vesting
                  of stock options/warrants issued to consultants
              
              
              14,076
              
              
              3,851Extension
                  of stock option grant
              
              
              34,410
              
              
              -Total
                  non-employee compensation expense
              
              
              48,486
              
              
              14,851Total
                  non-cash transactions
              
              
              (128,026
              )
              
              103,039Net
                  loss for fiscal period
              
              
              (3,670,619
              )
              
              (2,750,979
              )Total
                  stockholders' equity, end of period
              
              $
              5,103,539
              
              $
              4,130,524


11


**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.




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 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.




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.





**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.


12


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-month periods ending
      March 31, 2007 and 2006.


Three
                  Months Ended March 31,2007
              
              
              2006Sales
                  and marketing ("S&M")
              
              $
              80,953
              
              $
              24,439Research
                  and development ("R&D")
              
              
              127,454
              
              
              59,803General
                  and administrative ("G&A")
              
              
              97,855
              
              
              7,797Stock-based
                  compensation before income taxes
              
              
              306,262
              
              
              92,039Income
                  tax benefit
              
              
              -
              
              
              -Total
                  stock-based compensation expense after income taxes
              
              $
              306,262
              
              $
              92,039Stock-based
                  compensation expense charged to:Employee
                  compensation expense (includesoutside
                  directors)
              
              $
              292,186
              
              $
              88,188Professional
                  fees - S&M consultants
              
              
              12,598
              
              
              3,851Professional
                  fees - R&D consultants
              
              
              1,478
              
              
              -Stock-based
                  compensation before income taxes
              
              
              306,262
              
              
              92,039Income
                  tax benefit
              
              
              -
              
              
              -Total
                  stock-based compensation expense after income taxes
              
              $
              306,262
              
              $
              92,039





Total
      stock-based compensation expense for the three months ending March 31, 2007
      and
      2006 of $306,262 and $92,039, respectively, increased our net loss for those
      periods by the same amount, and increased
      reported basic and diluted net loss per share by $.01 for the period ended
      March
      31, 2007.Basic
      and
      diluted net loss per share did not change for the period ended March 31, 2006.Stock-based compensation expense had no impact on cash flows used in
      operations or cash flows from financing activities for the three months ended
      March 31, 2007 and 2006.




Net
      cash
      proceeds from the exercise of stock options were $60,600 and $111,005 for the
      three months ended March 31, 2007 and 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 March 31, 2007 and 2006, was
      estimated using the Black-Scholes valuation model with the following
      weighted-average assumptions:


13




Three
                  Months endedMarch
                  31,2007
              
              
              2006Employees:Expected
                  life in years
              
              
              3.00
              
              
              3.00Volatility
              
              
              67%
                  - 156%
              
              
              91%
                  - 156%Interest
                  Rate
              
              
              4.68%
                  - 4.32%
              
              
              4.57%
                  - 4.32%Yield
                  Rate
              
              
              0.00%
              
              
              0.00%Non-Employees:Expected
                  life in years
              
              
              4.00
              
              
              4.00Volatility
              
              
              91%
                  - 92%
              
              
              91%
                  - 92%Interest
                  Rate
              
              
              4.55%
                  - 4.65%
              
              
              4.55%
                  - 4.65%Yield
                  Rate
              
              
              0.00%
              
              
              0.00%




The
      computation of expected volatility for the three months ending March 31, 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.





Stock
      option activity (including both employee and non-employee grants) for the three
      months ended March 31, 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
              
              
              (120,000
              )
              
              120,000
              
              $
              2.06
              
              
              N/AExercised
                  through cash consideration
              
              
              -
              
              
              (60,000
              )
              $
              1.01
              
              $
              59,400Retired
                  or forfeited
              
              
              -
              
              
              -
              
              
              
              
              
              N/AOutstanding
                  at March 31, 2007
              
              
              1,190,270
              
              
              8,151,569
              
              $
              2.15
              
              $
              (1,222,735
              )Exercisable
                  at March 31, 2007
              
              
              
              
              
              6,075,769
              
              $
              2.12
              
              $
              (729,092
              )




The
      aggregate intrinsic value of total stock options outstanding and exercisable,
      and of total stock options exercised during the three months ended March 31,
      2007 in the table above represent the total pretax intrinsic value (i.e., the
      difference between our closing stock price on March 31, 2006 and the weighted
      average exercise price, times the number of shares) that would have been
      received by the option holders had all option holders exercised their options
      on
      March 31, 2007. Aggregate intrinsic value changes as the fair market value of
      our stock changes. The closing market price of the stock on March 31, 2007
      was
      $2.00.





As
      of
      March 31, 2007 there was approximately $2.9 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.


14


Stock
      options outstanding and exercisable at March 31, 2007 are summarized in the
      table below.


Total
                  Options Outstanding as of March 31, 2007Weighted
              
              
              WeightedAverage
                  Exercise
              
              
              Average
                  RemainingOptions
              
              
              Price
                  per Share
              
              
              Contractual
                  LifeRange
                  of exercise prices:$0.52
                  - $0.99
              
              
              407,500
              
              $
              0.70
              
              
              6.22$1.00
                  - $1.99
              
              
              1,965,161
              
              $
              1.60
              
              
              5.30$2.00
                  - $2.99
              
              
              5,053,467
              
              $
              2.35
              
              
              7.55$3.00
                  - $3.99
              
              
              725,441
              
              $
              3.05
              
              
              6.18Total
                  stock options outstandingat
                  March 31, 2007
              
              
              8,151,569
              
              $
              2.15
              
              
              6.82Options
                  Exercisable at March 31, 2007Weighted
              
              
              WeightedAverage
                  Exercise
              
              
              Average
                  RemainingOptions
              
              
              Price
                  per Share
              
              
              Contractual
                  LifeRange
                  of exercise prices:$0.52
                  - $0.99
              
              
              407,500
              
              $
              0.70
              
              
              6.22$1.00
                  - $1.99
              
              
              1,909,343
              
              $
              1.59
              
              
              5.30$2.00
                  - $2.99
              
              
              3,033,485
              
              $
              2.42
              
              
              7.53$3.00
                  - $3.99
              
              
              725,441
              
              $
              3.05
              
              
              6.18Total
                    stock options exercisableat
                  March 31, 2007
              
              
              6,075,769
              
              $
              2.12
              
              
              6.48


**12.
      Warrants and Stock Options**





As
      of
      March 31, 2007, we had outstanding options to purchase up to 8,151,569 shares
      of
      common stock, and warrants to purchase up to 8,262,911 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 OutstandingWeighted
              
              
              
              
              
              Total
                  Stock OptionsShares
                  Available
              
              
              Number
                  of
              
              
              Average
              
              
              Warrants
              
              
              and
                  Warrantsfor
                  Grant
              
              
              Shares
              
              
              Exercise
                  Price
              
              
              Outstanding
              
              
              OutstandingBalance,
                  December 31, 2006
              
              
              1,310,270
              
              
              8,091,569
              
              $
              2.14
              
              
              8,262,911
              
              
              16,354,480Granted
              
              
              (120,000
              )
              
              120,000
              
              $
              2.06
              
              
              -
              
              
              120,000Exercised
              
              
              -
              
              
              (60,000
              )
              $
              1.01
              
              
              -
              
              
              (60,000
              )Retired/forfeited
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -Balance
                  March 31, 2007
              
              
              1,190,270
              
              
              8,151,569
              
              $
              2.15
              
              
              8,262,911
              
              
              16,414,480Exercisable
                  at March 31, 2007
              
              
              
              
              
              6,075,769
              
              
              
              
              
              7,955,501
              
              
              14,031,270Weighted
                  average exercise price
              
              
              
              
              
              
              
              $
              2.12
              
              $
              2.88
              
              $
              2.55Weighted
                  average remainingcontractual
                  life - years
              
              
              
              
              
              
              
              
              6.82
              
              
              2.28
              
              
              4.25




The
      weighted average grant-date fair value of stock options granted during the
      three
      months ended March 31, 2007 was $0.98.





As
      of
      March 31, 2007, there were 1,190,270 options available in the option reserve
      for
      future grants.


15


The
      warrants outstanding as of March 31, 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
              
              
              6,340,411Warrants
                  issued to customer andvendors
                  for future services:100,000
              
              $
              3.50
              
              
              200850,000
              
              $
              1.99
              
              
              2009Subtotal
              
              
              150,000Warrants
                  issued to outside directorsand
                  former employee:50,000
              
              $
              6.38
              
              
              2010925,000
              
              $
              2.31
                  - $2.75
              
              
              2011327,500
              
              $
              2.35
                  - $2.60
              
              
              2015470,000
              
              $
              2.85
              
              
              2016Subtotal
              
              
              1,772,500Total
                  warrants outstanding atMarch
                  31, 2007
              
              
              8,262,911


**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.*


16
 *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”), a
      relational database management system that can dramatically reduce costs and
      can
      improve performance in a wide range of applications. Two proprietary
      technologies - the ANTs Concurrency Engine and compatibility with the
      proprietary extensions from other database vendors - together provide unique
      performance and consolidation/cost-saving advantages that make the ANTs Data
      Server an attractive alternative to other relational database management systems
      (“RDBMS’s”). End-users of RDBMS’s, independent software vendors who bundle an
      RDBMS with their products and other RDBMS vendors can use the ANTs Data Server
      or its technologies 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.





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.





**Technology
      and Intellectual Property**





**Overview**





The
      ANTs
      Data Server is based on technologies that provide an advantage over other relational
      database management systems: Compatibility and the ANTs Concurrency Engine
      (“ACE”).





**Compatibility**





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 have
      developed technology that allows the ANTs Data Server to natively process these
      proprietary extensions. This technology, which is tightly integrated into the
      ANTs Data Server, allows customers to migrate applications to the ANTs Data
      Server more easily and at less cost.





**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.


17


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. ANTs 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.





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 proprietary technologies, all of which we believe must be
      present to achieve results comparable to the ANTs Data Server. We 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. Two proprietary technologies-the
      ANTs Concurrency Engine and compatibility with the proprietary extensions from
      other database vendors-together provide unique performance and
      consolidation/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 compatibility and performance technologies,
      ADS incorporates features that make it suitable for a wide range of applications,
      including:




·
              It
                  can be deployed on off-the-shelf hardware
 ·
              It
                  can be deployed on the Linux, Windows, and Solaris operating
                  systems
 ·
              It
                  supports the SQL-92 language and popular features from
                  SQL-99
 ·
              Its
                  micro-threaded execution engine maximizes performance of multi-core
                  CPUs
                  and multi-processor servers
 ·
              Transactions
                  are durably recorded to disk logs for backup, failover and
                  recovery
 ·
              Automatic
                  failover and recovery are built
                  in




18


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.





**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 ANTs
      has
      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.





**Strategy**





Our
      go-to-market strategy adapts with changes in the competitive structure of the
      RDBMS market. The refinement of ANTs’ 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:




·
              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 three sales
                  channels;
 o
              Direct
                  sales to end-users.
 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.




Our
      compatibility technology provides a solution to the problem of RDBMS lock-in
      and
      cost escalation for major enterprises by enabling them to migrate applications
      from high-cost, proprietary vendors to the compatible, cost-effective ANTs
      Data
      Server. Just as corporations have lowered total cost of ownership by migrating
      from custom applications to packaged applications, from proprietary to
“open-standards” hardware, and from Unix to Linux, corporations can now
      consolidate their high-cost RDBMS’s to the ANTs Data Server.





Our
      high-performance technology makes the ANTs Data Server 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 ANTs is 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:


19


IBM
      - through
      a multinational solutions engagement agreement, announced January 2007, the
      ANTs
      Data Server (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 as Genero db).
      First success: Genero db selected by a Fortune 100 retailer in mid-2006 for
      in-store applications.





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 to sell ADS through re-sellers and system integrators and to a
      lesser-extent, to end-users. We began selling the first commercial version
      of
      ADS in 2005, and have generated approximately $823,000 in revenues through
      March
      31, 2007.





**Competition**





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





We
      have
      identified one competitor in the “compatibility” segment. Enterprise DB, an
      open-source RDBMS, claims compatibility with applications written for Oracle
      and
      Sybase. The three major 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.





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.





**Current
      Operations**





Our
      operations currently comprise marketing the ANTs Data Server, a relational
      database management system that can dramatically reduce costs and can improve
      performance in a wide range of applications, supporting customers and research
      and development. Our headquarters are located in Burlingame, California with
      sales staff in other states. We have a long-standing relationship with a
      contract development organization 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 continued marketing of ADS,
      supporting customers, and research and development.


20


**Results
      of Operations**





Results
      of
      operations for the three months ended March 31, 2007 and 2006 are summarized
      below.


Summary
                  of Statements of Operations(in
                  000's except per share data)For
                  the Three Months ending March 31,2007
              
              
              2006
              
              
              %
                  ChangeRevenues
              
              $
              69
              
              $
              68
              
              
              1%Cost
                  of goods sold
              
              
              3
              
              
              -
              
              
              N/AGross
                  profit
              
              $
              66
              
              $
              68
              
              
              -3%Operating
                  expenses
              
              
              3,783
              
              
              2,828
              
              
              34%Loss
                  from operations
              
              
              (3,717
              )
              
              (2,760
              )
              
              35%Other
                  income (expense), net
              
              
              46
              
              
              9
              
              
              411%Net
                  loss
              
              
              (3,671
              )
              
              (2,751
              )
              
              33%Net
                  loss per share -basic
                  and diluted
              
              $
              (0.07
              )
              $
              (0.06
              )
              
              17%Shares
                  used in computing basic anddiluted
                  net loss per share (in 000's)
              
              
              55,996
              
              
              45,180
              
              
              24%





**Revenues**




Revenues
      consist of license fees earned on the ANTs Data Server (“ADS”), 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-month period ending March 31, 2007, we recognized $69 thousand in revenue,
      in accordance with our revenue recognition policy, of which:





$51
      thousand was license fees


$18
      thousand were maintenance and support fees from the current and prior
      periods





We
      deferred $64 thousand of the maintenance and support fees invoiced during the
      first three months of 2007. These deferred fees are reflected on the balance
      sheets as deferred revenue.





During
      the
      first three months of 2006, we recognized $68 thousand in revenue, in accordance
      with our revenue recognition policy, of which:





$42
      thousand was license fees


$26
      thousand were maintenance and support fees from the current and prior
      periods





We
      deferred $52 thousand of the maintenance and support fees invoiced during the
      first three months of 2006. These deferred fees were reflected on the balance
      sheets as deferred revenue.


21


**Cost
      of Goods Sold**





Cost
      of
      goods sold during the three months ending March 31, 2007 was $3 thousand. There
      was no cost of goods sold for the same period of 2006. 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.





**Overview
      of Operating Expenses**





During
      the
      first quarter of 2007 we modified the strategic direction begun during fiscal
      2005 and expanded in fiscal 2006. In 2005 and 2006, we focused on selling the
      ANTs Data Server directly to end-users and to a lesser extent through partners.
      In 2007, we are focused on selling primarily through partners. This requires
      fewer sales staff and less marketing expense. We are also investing more
      technical resources in building out our compatibility technology while
      maintaining focus on our high-performance technology. Toward these ends, in
      2006, we accelerated development efforts related to compatibility features
      and
      implemented an aggressive recruiting campaign to attract engineering resources.
      As a result, research and development expenses increased significantly, while
      sales and marketing expenses remained level when comparing the quarters ending
      March 31, 2006 and 2007.





General
      and administrative expense, increased substantially over 2006 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.





All
      areas
      of the company expanded in 2006 as we added personnel. The growth in average
      full-time equivalent employees (“FTE”) from the first quarter of 2006 to the
      first 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
              
              
              11
              
              
              22%
              
              
              14
              
              
              33%
              
              
              (3)
              
              
              
              -21%Research
                  and Development
              
              
              32
              
              
              63%
              
              
              22
              
              
              52%
              
              
              10
              
              
              
              45%General
                  and Administrative
              
              
              8
              
              
              16%
              
              
              6
              
              
              14%
              
              
              2
              
              
              
              33%Totals
              
              
              51
              
              
              100%
              
              
              42
              
              
              100%
              
              
              9
              
              
              
              21%






Operating
      expenses by department for the three months ending March 31, 2007 and 2006
      were
      as follows (rounded in thousands):


Operating
                  Expenses - Three Months ended March 31,2007
              
              
              2006%
                  Change vs.$
                  in
                  000's
              
              
              %
                  of
                  Total
              
              
              Prior
                  Period
              
              $
              in
                  000's
              
              
              %
                  of
                  TotalSales
                  and marketing
              
              $
              1,100
              
              
              29
              %
              
              3
              %
              $
              1,072
              
              
              38
              %Research
                  and development
              
              
              1,875
              
              
              50
              %
              
              52
              %
              
              1,230
              
              
              43
              %General
                  and administrative
              
              
              808
              
              
              21
              %
              
              54
              %
              
              526
              
              
              19
              %Total
                  operating expenses
              
              $
              3,783
              
              
              100
              %
              
              34
              %
              $
              2,828
              
              
              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.





The
      total
      stock-based employee compensation expense recognized in the three months ending
      March 31, 2007 and 2006 was $292 thousand and $92 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 quarter of 2006 and through the first quarter
      of
      2007 began generating vesting expense under SFAS 123R. By the end of the first
      quarter of 2007 we were recording the cumulative effect of all stock options
      granted and vesting over five quarters compared to just one quarter in the
      first
      quarter of 2006.


22


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 March 31, 2007, R&D professional fees included $1.5
      thousand of this expense, compared to $0 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 consist 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 from 2006 to 2007 (in
                  000's):**2007**
              
              
              **2006**
              
              
              **%
                  Change**Employee
                  compensation and benefits
              
              
              552
              
              
              503
              
              
              10%Marketing
                  & presales support
              
              
              449
              
              
              522
              
              
              -14%Stock-based
                  compensation
              
              
              68
              
              
              24
              
              
              183%


Total
      S&M expenses increased by $28 thousand in the first quarter of 2007 compared
      to the same period in 2006, due primarily to the following: 1) employee-related
      expenses increased due to salary increases and merit-based bonus payments that
      more than offset headcount reductions; 2) expenses related to direct marketing
      activities such as trade shows, advertising, and other marketing events
      decreased, also a result of ongoing strategic changes; offset by increases
      in
      outside sales support for lead generation, development of partner alliances
      and
      customer presales support; and 3) recognition of employee stock-based
      compensation expense as required by SFAS 123R which was implemented at the
      beginning of fiscal 2006.





**Research
      and Development Expenses**





Research
      and development expenses consist primarily of employee salaries and benefits
      (including stock-based compensation), fees to consultants, depreciation on
      equipment and software, and allocation of corporate overhead. In 2005 R&D
      focused primarily on supporting sales activities by adding new features, and
      testing and refining ADS as a high-performance product. Significant increases
      in
      R&D expenses during fiscal 2006 were driven by changes in our overall
      strategic direction to include compatibility features in ADS. The strategic
      change required the addition of significant new engineering resources, in the
      form of employees and additional offshore consultants to support R&D
      operations. The first quarter of 2007 saw the continued impact of these
      strategic changes.




Changes
                  to key research and development expenses from 2006 to 2007 (in
                  000's):**2007**
              
              
              **2006**
              
              
              **%
                  Change**Employee
                  compensation and benefits
              
              
              1,372
              
              
              959
              
              
              43%On-
                  and off-shore contractors
              
              
              274
              
              
              208
              
              
              32%Stock-based
                  compensation
              
              
              126
              
              
              56
              
              
              125%Equipment
                  and computer supplies
              
              
              92
              
              
              71
              
              
              30%






Total
      R&D expenses increased by $611 thousand in the first 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 from an average of
      22 in 2006 to 32 in 2007; 2) greater use of on and off-shore consultants, and;
      3) recognition of employee stock-based compensation expense as required by
      the
      implementation of SFAS 123R which was implemented at the beginning of fiscal
      2006 and; 4) increased depreciation expense, a result of increased equipment
      purchases in the prior fiscal year.


23


**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 from 2006 to 2007(in
                  000's):**2007**
              
              
              **2006**
              
              
              **%
                  Change**Employee
                  compensation and benefits
              
              
              315
              
              
              277
              
              
              14%Stock-based
                  compensation
              
              
              98
              
              
              8
              
              
              1125%Professional
                  fees
              
              
              236
              
              
              141
              
              
              67%Debt
                  Issuance Costs
              
              
              61
              
              
              -
              
              
              N/A%




Total
      G&A expenses increased by $282 thousand in the first quarter of 2007
      compared to the same period in 2006, due primarily to the following: 1)
      employee-related expense increased due to an increase of two headcount to
      provide support for section 404 Sarbanes-Oxley compliance and SEC reporting
      requirements; 2) recognition of employee stock-based compensation expense as
      required by the implementation of SFAS 123R which was implemented at the
      beginning of fiscal 2006; 3) growth in professional fees, is mainly due to
      compliance with section 404 of the Sarbanes-Oxley Act of 2002, of which
      implementation began during the second quarter of 2006; and 4) amortization
      of
      debt issuance cost related to financing the J units.





Beginning
      in 2007 outside directors were paid cash compensation in consideration for
      their service on the board of directors. During the quarter, directors received
      aggregate cash compensation of $68 thousand, which 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
      $47 thousand of stock based compensation expense related to vesting of outside
      director warrants during the quarter. Total outside director compensation
      expense for the first quarter of 2007 was $115 thousand. There was no outside
      director compensation expense for the same period in 2006.





**Other
      Income (Expense), Net**





The
      components of other income (expense), net, and the changes therein from 2007
      to
      2006, are as follows (in 000’s):




For
                  the Three Months Ended March 31,2007
              
              
              2006
              
              
              %
                  ChangeOther
                  income (expense):Interest
                  income
              
              $
              86
              
              $
              10
              
              
              760%Gain
                  on legal settlement and other
              
              
              2
              
              
              1
              
              
              100%Interest
                  expense - Cash
              
              
              (105
              )
              
              (2
              )
              
              5150%Interest
                  expense - Convertible Note Payable
              
              
              63
              
              
              -
              
              
              N/AOther
                  income (expense), net
              
              $
              46
              
              $
              9
              
              
              411%






During
      the
      three months ended March 31, 2007 and 2006, Other Income (Expense), net was
      $46
      thousand and $9.2 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: 1) 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 quarter
      of 2007 was 3.8% compared with .8% during the same period in 2006 and 2) our
      average cash balance was approximately $4.3 million higher during the
      quarter-ended March 31, 2007 as compared to the same quarter in
      2006.


24


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.





**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 will pursue strategic investments from those partners; and 3)
      revenue generated from the licensing of the ANTs Data Server (“ADS”). 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
      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.





For
      the
      three months ended March 31, 2007, operations used approximately $3.3 million,
      in cash. Investing activities utilized another $138 thousand. Thus, total cash
      outflow for the three months ended March 31, 2007, was approximately $3.5
      million.





As
      of
      March 31, 2007, we had approximately $11.2 million in cash on hand to fund
      operations and equipment purchases. We anticipate that, at our current levels
      of
      revenues and expenditures, the $11.2 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.


25


**Off-Balance
      Sheet Arrangements**





As
      of
      March 31, 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 months
      ended
      March 31, 2007, we recognized a total of $50,004 in rental expense for this
      lease. During the same period in 2006, we recognized $50,004 in rental
      expense.





As
      of
      March 31, 2007, the total remaining unamortized deferred rent is $46,112. 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. $42,340 is included as a current liability in accounts
      payable and other accrued expenses, and $3,772 is in long-term liabilities
      on
      the balance sheet. As of March 31, 2007, the total remaining off-balance sheet
      lease obligation is $262,800.




The
      table
      below presents our total long-term contractual obligations as of March 31,
      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
            
            $
            262,800
            
            $
            242,360
            
            $
            20,440
            
            
            -
            
            
            -





**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.





There
      have
      been no significant changes in our critical accounting estimates during the
      three months ended March 31, 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."*


26


**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 does 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.





**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.


27


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 product and services. Our product is under constant
      development and is still maturing. Some customers may be reluctant to purchase
      products from a company with an unproven product, 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 March 31, 2007 one of our largest customers accounted for
      73%
      of the 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.





***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.


28


***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.





***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.


29


***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.


30


***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.





***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.


31


***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**





**** 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, as amended (the “Act”). Such securities have not been
      registered and will not be registered under the act and may not be offered
      or
      sold in the United States absent registration or an applicable exemption from
      registration requirements.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





None





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





No
      matter
      was submitted to a vote of security holders during the period covered by this
      report.





**ITEM
      5. OTHER INFORMATION**





None





**ITEM
      6. EXHIBITS** **AND
      REPORTS ON FORM 8-K.**





(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 Ruotolo31.1
              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.




32


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
                  January 11, 2007, we announced the resignation of Homer G. Dunn,
                  a
                  director, from our Board of Directors;2)
              On
                  January 31, 2007, we announced that we had received an aggregate
                  of $7
                  million in connection with the financing described in the current
                  report
                  on Form 8-K filed on December 20, 2006, and that we had commitments
                  from
                  investors for an additional $4 million, expected to be received
                  shortly
                  after January 31, 2007. Of the total $11 million, $5.5 million
                  was in the
                  form of Convertible Promissory Notes and $5.5 million was raised
                  from the
                  issuance of 3,142,700 shares of our Common Stock;3)
              On
                  March 15, 2007, our Chief Executive Officer, Joseph Kozak summarized
                  in a
                  letter to shareholders: (i) 2006 accomplishments; (ii) the status
                  of our
                  partner relationships; (iii) recent accomplishments in product
                  development, and; (iv) recent technology developments and a modified
                  partner strategy.4)
              On
                  March 23, 2007, we announced that we had entered into Employment
                  Agreements with our Chairman, Francis K. Ruotolo, our Chief Executive
                  Officer and President, Joseph Kozak, and our Chief Financial Officer
                  and
                  Secretary, Kenneth 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:
              May 10, 2007
            By:
            /s/ Joe KozakJoe
              Kozak, Chief Executive Officer and PresidentDate:
              May 10, 2007
            By:
            /s/ Kenneth RuotoloKenneth
              Ruotolo, Chief Financial Officer and Secretary












33