**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: September 30, 2007**





**OR**





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





**For
      the transition period from _________________ to
      ________________**





**Commission
      file number:  000-16299**


________________




**ANTS
      SOFTWARE INC.**


**(Exact
      name of registrant as specified in its charter)**





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





**(650)
      931-0500**


**(Registrant’s
      Telephone Number, including area code)**








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





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





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





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





57,398,445
      shares of common stock as of November 5, 2007











**TABLE
        OF CONTENTS**










PART
      I.  Financial Information




Item
                  1.
              Condensed
                  Financial StatementsCondensed
                  Balance Sheets as of September 30, 2007 and December 31,
                  2006
              3Condensed
                  Statements of Operations for the Three & Nine Months ended September
                  30, 2007 & 2006
              4Condensed
                  Statements of Cash Flows for the Three & Nine Months ended September
                  30, 2007 & 2006
              5Notes
                  to Condensed Financial Statements
              6-18Item
                  2.
              Management’sDiscussion
                  and Analysis of Financial Condition and Results of
                  Operations
              19-32Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              32Item
                  4.
              Controls
                  and Procedures
              32






PART
      II.  Other Information




Item
                  1.
              Legal
                  Proceedings
              33Item
                  1A.
              Risk
                  Factors
              33-37Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              37Item
                  3.
              Defaults
                  Upon Senior Securities
              37Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              37Item
                  5.
              Other
                  Information
              37Item
                  6.
              Exhibits
              37Signatures
              38





2




**PART
      I.  FINANCIAL INFORMATION**





**ITEM
      1.  CONDENSED FINANCIAL STATEMENTS**

















**ANTS
                  SOFTWARE INC.****CONDENSED
                  BALANCE SHEETS**September
                  30,
              
              
              December
                  31,ASSETS
              
              2007
              
              
              2006(Unaudited)
              
              
              (Audited)Current
                  assets:Cash
                  and cash equivalents
              
              $
              4,238,945
              
              
              $
              4,698,949Accounts
                  receivable
              
              
              78,330
              
              
              
              68,145Prepaid
                  insurance and other expenses
              
              
              216,251
              
              
              
              118,654Total
                  current assets
              
              
              4,533,526
              
              
              
              4,885,748Restricted
                  cash
              
              
              192,574
              
              
              
              190,958Prepaid
                  expense from warrant issued to customer
              
              
              72,092
              
              
              
              115,347Prepaid
                  debt issuance cost
              
              
              591,074
              
              
              
              33,645Property
                  and equipment, net
              
              
              609,544
              
              
              
              736,053Other
                  assets
              
              
              34,420
              
              
              
              34,420Total
                  assets
              
              $
              6,033,230
              
              
              $
              5,996,171LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable and other accrued expenses
              
              $
              695,181
              
              
              $
              626,011Accrued
                  bonuses, commissions and severance payable
              
              
              26,250
              
              
              
              179,127Accrued
                  vacation payable
              
              
              224,043
              
              
              
              175,237Deferred
                  revenues
              
              
              82,762
              
              
              
              56,819Total
                  current liabilities
              
              
              1,028,236
              
              
              
              1,037,194Long-term
                  liabilities:Accrued
                  rent
              
              
              -
              
              
              
              15,087Notes
                  Payable, includes debt premium of $541,579 and $120,880,
                  netin
                  2007 and 2006, respectively
              
              
              7,041,579
              
              
              
              1,120,880Total
                  liabilities
              
              
              8,069,815
              
              
              
              2,173,161Commitment
                  and contingenciesStockholders’
                  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,57,126,545
                  and 53,188,485 shares issued and outstanding, respectively
              
              
              5,713
              
              
              
              5,319Common
                  stock subscribed, not issued
              
              
              -
              
              
              
              1Additional
                  paid-in capital
              
              
              68,867,235
              
              
              
              62,469,426Accumulated
                  deficit
              
              
              (70,909,533
              )
              
              
              (58,651,736
              )Total
                  stockholders’ (deficit) equity
              
              
              (2,036,585
              )
              
              
              3,823,010Total
                  liabilities and stockholders' (deficit) equity
              
              $
              6,033,230
              
              
              $
              5,996,171See
                  Notes to Condensed Financial Statements






3






**ANTS
                  SOFTWARE INC.****CONDENSED
                  STATEMENTS OF OPERATIONS****(Unaudited)**For
                  the Three Months Ended
              
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Revenues:Licenses
                  and royalties
              
              $
              200,000
              
              
              $
              11,364
              
              
              $
              250,625
              
              
              $
              103,426Maintenance
              
              
              26,964
              
              
              
              25,484
              
              
              
              66,933
              
              
              
              85,069Professional
                  services
              
              
              -
              
              
              
              11,364
              
              
              
              -
              
              
              
              11,364Total
                  revenues
              
              
              226,964
              
              
              
              48,212
              
              
              
              317,558
              
              
              
              199,859Cost
                  of Revenues:Licenses
                  and support services
              
              
              2,401
              
              
              
              2,000
              
              
              
              11,877
              
              
              
              17,096Gross
                  profit
              
              
              224,563
              
              
              
              46,212
              
              
              
              305,681
              
              
              
              182,763Operating  Expenses:Sales
                  and marketing
              
              
              547,455
              
              
              
              1,378,552
              
              
              
              2,396,756
              
              
              
              4,010,123Research
                  and development
              
              
              2,637,841
              
              
              
              2,058,145
              
              
              
              6,908,858
              
              
              
              4,767,956General
                  and administrative
              
              
              935,618
              
              
              
              1,091,430
              
              
              
              3,364,623
              
              
              
              2,596,034Total
                  operating expenses
              
              
              4,120,914
              
              
              
              4,528,127
              
              
              
              12,670,237
              
              
              
              11,374,113Loss
                  from operations
              
              
              (3,896,351
              )
              
              
              (4,481,915
              )
              
              
              (12,364,556
              )
              
              
              (11,191,350
              )Other
                  income (expense):Interest
                  income
              
              
              70,803
              
              
              
              89,422
              
              
              
              270,864
              
              
              
              153,463Gain
                  on legal settlement
              
              
              1,599
              
              
              
              (163
              )
              
              
              3,599
              
              
              
              2,837Interest
                  expense
              
              
              (64,090
              )
              
              
              -
              
              
              
              (167,704
              )
              
              
              (3,766
              )Other
                  income, net
              
              
              8,312
              
              
              
              89,259
              
              
              
              106,759
              
              
              
              152,534Net
                  loss
              
              $
              (3,888,039
              )
              
              $
              (4,392,656
              )
              
              $
              (12,257,797
              )
              
              $
              (11,038,816
              )Basic
                  and diluted net loss per common share
              
              $
              (0.07
              )
              
              $
              (0.08
              )
              
              $
              (0.22
              )
              
              $
              (0.22
              )Shares
                  used in computing basic and dilutednet
                  loss per share
              
              
              56,622,605
              
              
              
              52,053,558
              
              
              
              56,361,987
              
              
              
              49,695,060See
                  Notes to Condensed Financial Statements






4






**ANTS
                  SOFTWARE, INC.****CONDENSED
                  STATEMENTS OF CASH FLOWS****(Unaudited)**For
                  the Nine MonthsEnded
                  September 30,2007
              
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (12,257,797
              )
              
              $
              (11,038,816
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              322,562
              
              
              
              254,151Amortization
                  of accrued rent, net of cash payments
              
              
              (22,265
              )
              
              
              (1,825
              )Amortization
                  of warrant issued to customer
              
              
              43,255
              
              
              
              43,255Accretion
                  of premium on note payable
              
              
              (265,041
              )
              
              
              -Amortization
                  of debt issuance cost
              
              
              278,186
              
              
              
              -Bad
                  debt expense, net of write-offs of uncollectible accounts
              
              
              -
              
              
              
              33,738Compensation
                  expense on modification of stock options
              
              
              54,060
              
              
              
              264,750Compensation
                  expense recognized on vesting of non-employee stock
                  options
              
              
              36,831
              
              
              
              25,657Compensation
                  expense recognized on vesting of employee stock options
              
              
              1,006,175
              
              
              
              640,761Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (10,184
              )
              
              
              (23,505
              )Prepaid
                  insurance and other expenses
              
              
              (97,597
              )
              
              
              (158,215
              )Accounts
                  payable and other accrued expenses
              
              
              110,758
              
              
              
              (217,866
              )Accrued
                  bonuses, commissions and severance payable
              
              
              (152,877
              )
              
              
              (175,000
              )Accrued
                  vacation
              
              
              48,806
              
              
              
              22,804Deferred
                  revenue
              
              
              25,943
              
              
              
              62,919Net
                  cash used in operating activities
              
              
              (10,879,185
              )
              
              
              (10,267,192
              )Cash
                  flows used in investing activities:Investment
                  in restricted asset
              
              
              (1,616
              )
              
              
              (80,559
              )Purchases
                  of office furniture, fixtures and equipment and security
                  deposits
              
              
              (196,053
              )
              
              
              (490,505
              )Net
                  cash used in investing activities
              
              
              (197,669
              )
              
              
              (571,064
              )Cash
                  flows from financing activities:Proceeds
                  from private placements - equity, net of commissions
              
              
              5,018,574
              
              
              
              9,072,253Proceeds
                  from private placements - convertible promissory note, net of
                  commissions
              
              
              4,881,426
              
              
              
              -Proceeds
                  from exercise of options
              
              
              60,600
              
              
              
              593,954Proceeds
                  from exercise of warrants, net of commissions
              
              
              656,250
              
              
              
              125,873Proceeds
                  from common stock subscribed for private placement units
              
              
              -
              
              
              
              -Net
                  cash provided by financing activities
              
              
              10,616,850
              
              
              
              9,792,080Net
                  decrease in cash and cash equivalents
              
              
              (460,004
              )
              
              
              (1,046,176
              )Cash
                  and cash equivalents at beginning of period
              
              
              4,698,949
              
              
              
              6,381,932Cash
                  and cash equivalents at end of period
              
              $
              4,238,945
              
              
              $
              5,335,756Supplemental
                  disclosure of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              432,746
              
              
              $
              -Non-cash
                  investing and financing activities:Common
                  stock issued for subscribed shares at December 31, 2005
              
              $
              -
              
              
              $
              243,608Allocation
                  of stockholders' equity to premium on convertible note
              
              $
              685,740
              
              
              $
              -Allocation
                  of a portion of placement agent commissions to debt issuance
                  costs
              
              $
              835,616
              
              
              $
              -Adjustment
                  for stock options exercised
              
              $
              34,410
              
              
              $
              -See
                  Notes to Condensed 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 September
      30, 2007 as compared to the significant accounting policies described in our
      Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
      Effective January 1, 2007, we implemented the reporting requirements of
      Financial Accounting Standards Interpretation, FIN No. 48, “*Accounting for
      Uncertainty in Income Taxes – an interpretation of FASB Statement
      No. 109.”*





The
      information furnished reflects all adjustments (all of which were of a normal
      recurring nature), which, in the opinion of management, are necessary to make
      the financial statements not misleading and to fairly present the financial
      position, results of operations, and cash flows on a consistent basis. Operating
      results for the three and nine months ended September 30, 2007 and 2006 are
      not
      necessarily indicative of the results that may be expected in the
      future.





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





Management
      has evaluated our current financial position and anticipates that cash on hand
      will be sufficient to fund operations and investments in capital equipment
      into
      the second fiscal quarter of 2008 at current levels of revenue and
      expenditures.





**2.    Summary
      of Significant Accounting Policies**





***Revenue
      Recognition***





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




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






6





·
            Persuasive
                evidence of an arrangement exists.


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


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


·
            Collection
                is probable.





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





***Research
      and Development Expenses***





We
      account
      for research and development (“R&D”) costs in accordance with Statement of
      Financial Accounting Standards No. 86,*“Accounting for the Costs of Computer
      Software to be Sold, Leased, or Otherwise Marketed.”*





Our
      research and development expenses consist primarily of personnel-related
      expenses, lab supplies and operational costs, and depreciation on
      equipment.  To date, we have expensed all of our R&D costs in the
      periods in which they were incurred, as our process for developing our products
      has been essentially completed concurrent with the establishment of
      technological feasibility.





***Stock-Based
      Compensation Expense***




We
      have a
      stock-based employee and director compensation plan (the ANTs software inc.
      2000
      Stock Option Plan or the “Plan”).  Since January 1, 2006, we have been
      using the provisions of Statement of Financial Accounting Standards (“SFAS”)
      123(R), *“Share-Based Payment”*(the “Statement” or “SFAS 123(R)”), to
      account for stock-based award compensation expense. Our stock-based compensation
      expense for the three and nine months ended September 30, 2007 and 2006 includes
      compensation expense for all stock-based compensation awards granted prior
      to,
      but not fully vested, as of January 1, 2006, based on the grant date fair
      value estimated in accordance with the original provisions of SFAS 123,
*“Accounting for Stock Compensation”*(“SFAS
      123”).  Stock-based compensation expense for all stock-based
      compensation awards granted subsequent to January 1, 2006 is based on the grant
      date fair value estimated in accordance with the provisions of SFAS 123(R).
      We
      recognize compensation expense for stock option awards on a straight-line basis
      over the requisite service period of the award, generally three
      years.





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





***Income
      Taxes***





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





Our
      judgment, assumptions and estimates used for the current tax provision take
      into
      account the potential impact of the interpretation of FIN No. 48 (“FIN 48”)
“*Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS
      No.
      109,”* issued by the Financial Accounting Standards Board, and its
      interpretation of current tax laws and possible future audits conducted by
      the
      U.S. tax authorities.  FIN 48 required that we examine the effects of
      our tax position, based on the use of our judgments, assumptions, and estimates
      when it is more likely than not, based on technical merits, that our tax
      position will be sustained if an examination is performed.





We
      adopted
      the provisions of FIN 48 on January 1, 2007.






7




***Recent
      Accounting Pronouncements***




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 September 30, 2007 as compared to the recent accounting pronouncements
      described in our Annual Report on Form 10-K for the fiscal year ended December
      31, 2006.





In
      February 2007, the Financial
      Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting
      Standards No. 159, *“The Fair Value Option for Financial Assets and Financial
      Liabilities”* (“SFAS 159”). SFAS 159 permits companies to choose to measure
      certain financial instruments and certain other items at fair value. The
      standard requires that unrealized gains and losses on items for which the fair
      value option has been elected be reported in earnings. SFAS 159 is effective
      for
      companies beginning in the first quarter of 2008, although earlier adoption
      is
      permitted. We are currently evaluating the impact SFAS 159 will have on our
      financial statements.





***Reclassifications***




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





**3.    Basic
      and Diluted Net Loss Per Share**





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





The
      following table presents the calculation of basic and diluted net loss per
      share:




For
                    the Three Months
                
                
                For
                    the Nine MonthsEnded
                    September 30,
                
                
                Ended
                    September 30,2007
                
                
                2006
                
                
                2007
                
                
                2006Net
                    Loss
                
                $
                (3,888,039
                )
                
                $
                (4,392,656
                )
                
                $
                (12,257,797
                )
                
                $
                (11,038,816
                )Weighted
                    average shares of common stockoutstanding
                    - basic and dilutive
                
                
                56,622,605
                
                
                
                52,053,558
                
                
                
                56,361,987
                
                
                
                49,695,060Basic
                    and diluted net loss per share
                
                $
                (0.07
                )
                
                $
                (0.08
                )
                
                $
                (0.22
                )
                
                $
                (0.22
                )







As
      of September 30, 2007, we had $6.5
      million in promissory notes outstanding, which are convertible into 3,250,000
      shares of common stock at a price of $2.00 per share and if all notes are
      converted, we will issue 183,980 shares of common stock to a placement agent
      in
      consideration for services, at a price of $2.20 per share. As of September
      30,
      2006, we had no convertible promissory notes.  As of September 30,
      2007 we had outstanding stock options for the purchase of up to 8,831,349 shares
      of common stock at prices ranging from $0.52 to $3.20 per share and as of
      September 30, 2006, we had outstanding stock options for the purchase of up
      to
      7,806,562 shares of common stock at prices ranging from $0.52 to
      $6.38.  As of September 30, 2007 we had outstanding warrants for the
      purchase of up to 7,475,411 shares of common stock at prices ranging from $1.99
      to $6.38 per share and as of September 30, 2006 we had outstanding warrants
      for
      the purchase of up to 8,212,911 shares of common stock at prices ranging from
      $1.99 to $7.25 per share.  At September 30, 2007 and 2006, outstanding
      stock options, warrants and potential debt conversion shares, which were
      anti-dilutive and therefore not included in the computation of diluted net
      loss
      per share, totaled 19,740,740 and 16,019,473, respectively.







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




Prepaid
      expense from warrant issued to
      customer, net, consists of an original charge of $173,021 related to the
      issuance of a warrant to a customer in 2005 to purchase 100,000 shares of 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 over 36 months into
      general and administrative expenses on a straight-line basis and commenced
      January 2006.  Amortized expense for the three and nine months ended
      September 30, 2007 was $14,418 and $43,254, respectively. Amortized expense
      for
      the three and nine months ended September 30, 2006 was $14,418 and $43,255,
      respectively. The unamortized balance of this prepaid expense from warrant
      issued to customer totaled  $72,092 as of September 30,
      2007.






8




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





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





As
      of September 30, 2007, prepaid debt
      issuance costs are $591,074. The debt issuance costs are being amortized into
      general and administrative expense using the interest method over the life
      of
      the associated debt, 24 months. Amortization of these costs commenced on January
      1, 2007 and totaled $108,658 and $278,186, respectively, for the three and
      nine
      months ended September 30, 2007. There were no such costs for the three and
      nine
      months ended September 30, 2006. The prepaid debt issuance costs are discussed
      in greater detail in Note 8 to these financial statements.





**6.   
      Deferred Revenues**





Deferred
      revenue is comprised of
      license fees and annual maintenance and support fees. License fees are
      recognized upon customer acceptance of the product. Annual maintenance and
      support fees are being amortized ratably into revenue on the statement of
      operations over the life of the contract, which is generally a 12-month period
      beginning with customer acceptance of the product. The amount of deferred
      revenue on the balance sheet at September 30, 2007 is $82,762, all of which
      is
      maintenance and support fees. During the three and nine months ended September
      30, 2007, we recognized $26,964 and $66,933, respectively, in deferred revenue
      in the statement of operations. During the three and nine months ended September
      30, 2006, we recognized $25,484 and $85,069, respectively, in deferred revenue
      in the statement of operations.





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




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




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





Upon
      adoption of FIN 48, our policy to include interest and penalties related to
      unrecognized tax benefits within our Provision for (benefit from) Income Taxes
      did not change. As of September 30, 2007, we had no amount accrued for payment
      of interest and penalties related to unrecognized tax benefits (and no amounts
      as of the adoption date of FIN 48).  For the three and nine months
      ended September 30, 2007, we recognized no amounts of interest and penalties
      related to unrecognized tax benefits in our provision for income
      taxes.





The
      cumulative effect of adopting FIN 48 on January 1, 2007 is recognized as a
      change in accounting principle, recorded as an adjustment to the opening balance
      of retained earnings on the adoption date.  As a result of the
      implementation of FIN 48, we recognized no change in the liability for
      unrecognized tax benefits related to tax positions taken in prior periods,
      and
      no corresponding change in retained earnings. At December 31, 2006 we recorded
      a
      valuation allowance for the total deferred tax assets as a result of
      uncertainties regarding the realization of the asset based upon the lack of
      profitability and the uncertainty of future profitability. This valuation
      allowance offsets any changes to the liability. Additionally, FIN 48 specifies
      that tax positions for which the timing of the ultimate resolution is uncertain
      should be recognized as long-term liabilities. We made no reclassifications
      between current taxes payable and long-term taxes payable upon adoption of
      FIN
      48.  Our total amount of unrecognized tax benefits as of the January
      1, 2007 adoption date and for the three and nine months ended September 30,
      2007
      was $685,000 and $685,000, respectively. Also, we had no amounts of unrecognized
      tax benefits that, if recognized, would affect our effective tax rate for
      January 1, 2007 and September 30, 2007.





9




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





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





**8.   
      Convertible Promissory Notes**





In
      December 2006 our Board of Directors
      approved the terms of a private offering to raise additional working capital.
      The private offering consisted of units (the “J Units”) sold at a per unit price
      of $50,000 with each J Unit comprised of (i) 14,285 shares of our common stock
      (issued at a per share price of $1.75) and (ii) a convertible promissory note
      (the “Note”) with an initial face value of $25,000.   The Notes
      bear interest at the rate of 10% per annum (simple interest) due and payable
      at
      the end of each fiscal quarter. Each Note matures 24 months from its issuance
      date, and is convertible into shares of our common stock, at the election of
      the
      holder, at a per share price of $2.00.  The Notes are prepayable
      without penalty upon 30 days notice.  The Notes are convertible at our
      election in the event the closing price of our common stock equals or exceeds
      $4.00 per share, and if converted at our election, we have agreed to register
      the shares of stock issuable upon conversion. The sales of these securities
      were
      made in reliance upon Rule 506 and Section 4(2) of the Securities Act of
      1933.




In
      December 2006, we sold 40 J Units to
      accredited investors, raising $2 million and issued 571,400 shares of common
      stock and Notes with an aggregate face value of $1 million.  In
      January 2007, we sold 180 J Units to accredited investors, raising $9 million,
      and issued 2,571,300 shares of common stock and Notes with an aggregate face
      value of $4.5 million.  In March 2007, we sold 40 J Units to
      accredited investors, raising $2 million, and issued 571,400 shares of common
      stock and Notes with an aggregate face value of $1 million.




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 2007 and March 2007 Notes. The premium
      is
      included in Notes Payable on the balance sheet at September 30, 2007. The
      premium is amortized as a reduction to Interest Expense on a straight-line
      basis
      over the life of each Note. The premium amortization relating to these notes
      as
      well as those outstanding as of December 31, 2006 totaled $100,828 and $265,042
      for the three and nine months ended September 30, 2007,
      respectively.





As
      a commission for the sale of the
      January 2007 and March 2007 J Unit sales and placement of the Notes, we paid
      $1,100,000 in cash commissions and issued 199,980 shares of common stock to
      a
      placement agent. The shares are contractually valued at $1.93 per share or
      $385,961. The total commission value of $1,485,961 was allocated between debt
      issuance costs and additional paid-in capital as a cost of raising the funds,
      in
      the same proportion that was used to allocate the gross proceeds of the offering
      between notes payable and stockholders’ equity.  This resulted in (i)
      an increase to debt issuance costs of $835,616, amortizable over the life of
      each Note and (ii) and increase to additional paid-in capital of
      $650,345.  Unamortized debt issuance costs related to these issuances
      as well as those outstanding at December 31, 2006 totaled $591,074 as of
      September 30, 2007. The debt issuance cost is being expensed on a straight-line
      basis over the life of each Note. For the three and nine months ended September
      30, 2007 the amount expensed totaled $108,658 and $278,186, respectively. The
      shares issued to the placement agent in the second quarter of 2007 for all
      J
      Unit sales beginning in December 2006 total 210,360 and are shown on the balance
      sheet in common stock at their par value of $21.





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




***Lease
      Commitment***





As
      of September 30, 2007, we leased
      office facilities under a non-cancelable operating lease.  Future
      minimum lease payments required under the non-cancelable leases are as
      follows:









10






Payments
                  Due by Period
              
              Operating
                  LeasesLess
                  than 1 Year
              
              $
              314,080More
                  than 1 Year
              
              
              239,400Total
                  minimum lease payments
              
              $
              553,480


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 and is subject to our right to extend the term of the lease for a total
      of
      six additional years. The base rent under this lease is $16,060 per month for
      the first year, $17,520 per month for the second year and $20,440 per month
      for
      the third year. We received abated rent for the period from May 1, 2005 to
      July
      30, 2005. In July 2007 we extended this lease for the period May 1, 2008 through
      April 30, 2009 at the rate of $34,200 per month.





We
      are recognizing rent expense for
      this lease in accordance with Financial Technical Bulletin 85-3 (“FTB 85-3”),
“*Accounting for Operating Leases with Scheduled Rent
      Increases.*”  The base rent, the effects of the scheduled rent
      increases, and the effects of the rent abatement are being recognized on a
      straight-line basis over the lease term.  This results in monthly
      rental expense of $16,668 through April 30, 2007. For the three and nine months
      ended September 30, 2007 and three and nine months ended September 30, 2006,
      we
      recognized $50,004 and $150,012, respectively, in rental expense for this
      lease.





11





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





A
      summary of transactions occurring in
      stockholders’ equity for the nine months ending September 30, 2007 and 2006 is
      presented in the table below:






Changes
                  in Stockholders' EquityFor
                  the Nine Months Ended September 30,2007
              
              
              2006Total
                  stockholders' equity, beginning of period
              
              $
              3,823,010
              
              
              $
              6,412,586Cash
                  transactions:Proceeds
                  from private placements:Sales
                  of "H" units at $1.60 per unit
              
              
              -
              
              
              
              204,000Cash
                  commissions on sales of "H" units
              
              
              -
              
              
              
              (20,000
              )Sales
                  of restricted shares of common stock at $1.50 per share
              
              
              -
              
              
              
              9,597,503Cash
                  commissions on sales of restricted shares of common stock
              
              
              -
              
              
              
              (709,250
              )Sales
                  of 220 "J" units at $25,000 per unit (equity portion of
                  units)
              
              
              5,500,000
              
              
              
              -Total
                  cash commissions on sales of "J" units (equity)
              
              
              (481,426
              )
              
              
              -Net
                  proceeds from private placements
              
              
              5,018,574
              
              
              
              9,072,253Proceeds
                  from warrant exercises:Warrants
                  with exercise price of $2.00-$3.50 per share discounted to$1.25
                  per share
              
              
              656,250
              
              
              
              -Warrants
                  with exercise price of $2.00 per share discounted to$1.50
                  and $1.40 per share
              
              
              -
              
              
              
              109,998Warrants
                  with exercise price of $2.00 exercised at $2.00 per share
              
              
              -
              
              
              
              55,000Cash
                  commissions on exercise of warrants
              
              
              -
              
              
              
              (39,125
              )Net
                  proceeds from warrant exercises
              
              
              656,250
              
              
              
              125,873Cash
                  proceeds from exercise of stock options
              
              
              60,600
              
              
              
              593,954Total
                  cash transactions
              
              $
              5,735,424
              
              
              $
              9,792,080Non-cash
                  transactions:Premium
                  on note payable
              
              
              (685,740
              )
              
              
              -Common
                  stock issued to placement agent on sales of 220 "J' units,
                  net
              
              
              217,042
              
              
              
              -Employee
                  compensation expense - vesting of stock options
              
              
              1,006,175
              
              
              
              640,761Compensation
                  expense due to modification of stock options
              
              
              54,060
              
              
              
              264,750Total
                  employee compensation expense
              
              
              591,537
              
              
              
              905,511Non-employee
                  compensation expense:Restricted
                  stock/stock options issued to vendors
              
              
              -
              
              
              
              16,000Vesting
                  of stock options and warrants issued to consultants
              
              
              36,831
              
              
              
              9,657Extension
                  of stock option grant
              
              
              34,410
              
              
              
              -Total
                  non-employee compensation expense
              
              
              71,241
              
              
              
              25,657Total
                  non-cash transactions
              
              $
              662,778
              
              
              $
              931,168Net
                  loss for fiscal period
              
              $
              (12,257,797
              )
              
              $
              (11,038,816
              )Total
                  stockholders' equity, end of period
              
              $
              (2,036,585
              )
              
              $
              6,097,018


Following
      is a summary of equity transactions by quarter for the nine months ending
      September 2007 and 2006. Sales of equity securities (with the exception of
      stock
      option exercises) or equity-linked securities were made in reliance upon Rule
      506 and Section 4(2) of the Securities Act of 1933.





**Transactions
      for the three months ended September 30, 2007 and Subsequent
      Event:**





·
            From
                August 20, 2007 through September 30, 2007, we offered warrant holders
                the
                right to exercise their warrants at a discounted price of $1.25 per
                share.
                A total of 525,000 warrants were exercised, resulting in gross proceeds
                to
                the Company of $656,250.  In October 2007 an additional 271,900
                warrants were exercised totaling $339,875 in proceeds; see “Subsequent
                Events” in Note 13.






12




**·**
            We
                recognized $392,484 in compensation expense related to the vesting
                of
                employee stock options and $21,334 in professional fees related to
                the
                vesting of non-employee stock options. $3,548 of the employee compensation
                expense is attributable to the modification of grants made to a terminated
                employee whereby the exercise period was extended from three months
                to six
                months.





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





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





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





·
            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. Each Note matures 24 months from the issuance
                date,
                and is convertible into shares of our common stock, at the election
                of the
                holder, at a per share price of $2.00.  The Notes are prepayable
                without penalty upon 30 days notice. The Notes are convertible at
                our
                election, in the event the closing price of our common stock equals
                or
                exceeds $4.00 per share, and if converted at our election, we have
                agreed
                to register the shares of stock issuable upon
                conversion.




·
            We
                paid $1,100,000 in cash commissions and recorded an obligation to
                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
                were
                issued in the second quarter ending June 30, 2007.  The shares
                were 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 and the remaining $650,345 was allocated to additional paid-in
                capital.




·
            We
                received $60,600 in proceeds from the exercise of stock options resulting
                in the issuance of 60,000 shares of common stock.  The stock
                options had an average exercise price of $1.01, resulting in gross
                proceeds of $60,600.




·
            We
                recognized $292,187 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 September 30, 2006:**





·
            We
                recognized $603,112 in compensation expense related to vesting of
                employee
                stock options and $2,467 in professional fees related to the vesting
                of
                non-employee stock options.  Employee stock option expense
                included $264,750 related to the extension of the exercise period
                for
                stock options for the former Chief Executive Officer and former Vice
                President of Engineering.




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





·
            We
                sold 6,398,335 restricted shares of common stock at $1.50 per share
                to
                accredited investors through a private offering and received $9,597,503
                in
                gross proceeds. We paid $709,250 in cash commissions on these sales
                to a
                placement agent.  Commissions paid in common stock to the
                placement agent totaled $496,475.






13




·
            We
                received $446,000 in proceeds from the exercise of stock options
                resulting
                in the issuance of 225,000 shares of common
                stock.




·
            We
                recognized $214,211 in compensation expense related to vesting of
                employee
                stock options, and $3,338 in professional fees related to the vesting
                of
                non-employee stock options.




·
            We
                incurred $16,000 in legal fees to be paid in the form of 10,666 restricted
                shares of the Company’s Common Stock at $1.50 per
                share.




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





·
            We
                sold to accredited investors, through a private offering, 127,500
                H Units
                at a price of $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 $3.25,
                exercisable until April 14, 2008.  We received $204,000 in gross
                proceeds from the offering.  No commissions were incurred for
                these sales.





·
            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.





·
            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.





·
            We
                recognized $88,188 in compensation expense related to 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 and the Compensation Committee of the Board of
      Directors.





Options
      granted under the Plan generally vest within three years after the date of
      grant, and expire 10 years after grant.  Stock option vesting is
      generally time-based, but stock options sometimes vest as a result of
      achievement of milestones. Options granted to new hires generally vest 16.7%
      beginning six months after the employee’s date of hire, then at 2.78% each month
      thereafter such that the option is fully vested three years from date of hire.
      Options granted to existing employees generally start vesting monthly following
      their grant. 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.






14




The
      following table sets forth the total stock-based compensation expense for
      employees, outside directors and consultants for the three and nine months
      ending September 30, 2007 and 2006.




For
                  the Three Months Ended
                September
                  30,
              
              
              
              For
                  the Nine Months Ended
                September
                  30,2007
              
              
              
              2006
              
              
              
              2007
              
              
              
              2006Sales
                  and marketing ("S&M")
              
              $
              50,969
              
              
              $
              58,615
              
              
              $
              158,982
              
              
              $
              131,527Research
                  and development ("R&D")
              
              
              165,418
              
              
              
              176,288
              
              
              
              471,089
              
              
              
              306,330General
                  and administrative ("G&A")
              
              
              197,431
              
              
              
              370,676
              
              
              
              466,995
              
              
              
              477,311Stock-based
                  compensation before income taxes
              
              
              413,818
              
              
              
              605,579
              
              
              
              1,097,066
              
              
              
              915,168Income
                  tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
                  stock-based compensation expense after income taxes
              
              $
              413,818
              
              
              $
              605,579
              
              
              $
              1,097,066
              
              
              $
              915,168Stock-based
                  compensation expense charged to:Employee
                  compensation expense (includesoutside
                  directors)
              
              $
              392,484
              
              
              $
              603,112
              
              
              $
              1,060,235
              
              
              $
              905,511Professional
                  fees - S&M consultants
              
              
              14,190
              
              
              
              -
              
              
              
              26,788
              
              
              
              -Professional
                  fees - R&D consultants
              
              
              5,081
              
              
              
              2,467
              
              
              
              7,980
              
              
              
              9,657Professional
                  fees - G&A consultants
              
              
              2,063
              
              
              
              -
              
              
              
              2,063
              
              
              
              -Stock-based
                  compensation before income taxes
              
              
              413,818
              
              
              
              605,579
              
              
              
              1,097,066
              
              
              
              915,168Income
                  tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
                  stock-based compensation expense after income taxes
              
              $
              413,818
              
              
              $
              605,579
              
              
              $
              1,097,066
              
              
              $
              915,168





Total
      stock-based compensation expense for the three and nine months ending September
      30, 2007 was $413,818 and $1,097,066 respectively and increased basic and
      diluted net loss per share by $0.01 and $0.02, respectively. For the three
      and
      nine month period ending September 30, 2006 stock-based compensation was
      $605,579 and $915,168, respectively, and increased reported basic and diluted
      net loss per share by $0.01 and $0.02, respectively.  Stock-based
      compensation expense had no impact on cash flows used in operations or cash
      flows from financing activities for the three and nine months ended September
      30, 2007 and 2006.





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






Three
                  MonthsEnded
                  September 30,2007
              2006Expected
                  life in years
              3
              3Volatility
              65.75%
              82.00%Risk-free
                  Rate
              4.41%
              4.87%Dividend
                  Yield
              -
              -







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





As
      of
      September 30, 2007 there was approximately $2.1 million of total unrecognized
      compensation expense, adjusted for forfeitures, related to unvested stock-based
      payments granted to employees and contractors, which we expect to recognize
      over
      a weighted-average period of approximately 1.9 years. Total unrecognized
      compensation cost will be adjusted for future changes in estimated
      forfeitures.






15




**12.
         Stock Options and Warrants**





As
      of
      September 30, 2007, we had outstanding options to purchase up to 8,831,349
      shares of common stock of which 6,444,109 were exercisable and 7,475,411
      warrants outstanding to purchase common stock of which 7,331,305 were
      exercisable.







Stock
                  Option Shares
              
              
              
              
              
              Total
                  OptionsAvailable
              
              
              
              
              
              Warrants
              
              
              and
                  Warrantsfor
                  Grant
              
              
              Outstanding
              
              
              Outstanding
              
              
              OutstandingBalance,
                  December 31, 2006
              
              
              1,310,270
              
              
              
              8,091,569
              
              
              
              8,262,911
              
              
              
              16,354,480Granted
              
              
              (1,649,167
              )
              
              
              1,649,167
              
              
              
              -
              
              
              
              1,649,167Exercised
              
              
              -
              
              
              
              (60,000
              )
              
              
              (525,000
              )
              
              
              (585,000
              )Retired/forfeited
              
              
              849,387
              
              
              
              (849,387
              )
              
              
              (262,500
              )
              
              
              (1,111,887
              )Balance,
                  September 30, 2007
              
              
              510,490
              
              
              
              8,831,349
              
              
              
              7,475,411
              
              
              
              16,306,760Exercisable
                  at September 30, 2007
              
              
              
              6,444,109
              
              
              
              7,331,305
              
              
              
              13,775,414





Net
      cash
      proceeds from the exercise of stock options were $60,600 and $60,600 for the
      three and nine months ended September 30, 2007 and $36,950 and $593,954 for
      the
      three and nine months ended September 30, 2006, respectively. No income tax
      benefit was realized from stock option exercises during these periods due to
      our
      net loss from operations for both periods.  In accordance with SFAS
      123(R), we present excess tax benefits from the exercise of stock options,
      if
      any, as financing cash flows rather than operating cash flows.





Average
      exercise prices and aggregate intrinsic values of stock option activity for
      the
      nine months ended September 30, 2007, is as follows:




Shares
              
              
              
              
              
              Average
              
              
              AggregateAvailable
              
              
              Outstanding
              
              
              Exercise
              
              
              IntrinsicFor
                  Grant
              
              
              Stock
                  Options
              
              
              Price
              
              
              ValueOutstanding
                  at January 1, 2007
              
              
              1,310,270
              
              
              
              8,091,569
              
              
              $
              2.14
              
              
              N/AGranted
              
              
              (1,649,167
              )
              
              
              1,649,167
              
              
              $
              1.82
              
              
              N/AExercised
                  through cash consideration
              
              
              -
              
              
              
              (60,000
              )
              
              $
              1.01
              
              
              $
              32,400Retired
                  or forfeited
              
              
              849,387
              
              
              
              (849,387
              )
              
              
              
              
              
              N/AOutstanding
                  at September 30, 2007
              
              
              510,490
              
              
              
              8,831,349
              
              
              $
              2.07
              
              
              $
              (4,592,301
              )Exercisable
                  at September 30, 2007
              
              
              
              6,444,109
              
              
              $
              2.12
              
              
              $
              (3,673,142
              )






The
      aggregate intrinsic value of total stock options outstanding and exercisable
      and
      of total stock options exercised during the three months ended September 30,
      2007 in the table above represent the total pretax intrinsic value (i.e., the
      difference between our closing stock price on September 30, 2007 and the
      weighted average exercise price, times the number of shares) that would have
      been received by the option holders had all option holders exercised their
      options on September 30, 2007. Aggregate intrinsic value changes as the fair
      market value of our stock changes.  The closing market price of the
      stock on September 30, 2007 was $1.55.






16




The
      range
      of exercise prices for options outstanding and exercisable, weighted-average
      exercise price per share, and remaining weighted-average contractual life is
      as
      follows:




Weighted
              
              
              WeightedAverage
                  Exercise
              
              
              Average
                  RemainingOptions
              
              
              Price
                  per Share
              
              
              Contractual
                  LifeRange
                  of exercise prices:$0.52
                  - $0.99
              
              
              
              407,500
              
              
              $
              0.70
              
              
              
              5.48$1.00
                  - $1.99
              
              
              
              3,414,328
              
              
              $
              1.68
              
              
              
              6.97$2.00
                  - $2.99
              
              
              
              4,284,080
              
              
              $
              2.35
              
              
              
              6.64$3.00
                  - $3.99
              
              
              
              725,441
              
              
              $
              3.05
              
              
              
              5.68Total
                  stock options outstandingat
                  September 30, 2007
              
              
              
              8,831,349
              
              
              $
              2.07
              
              
              
              6.63
  Weighted
              
              
              WeightedAverage
                  Exercise
              
              
              Average
                  RemainingOptions
              
              
              Price
                  per Share
              
              
              Contractual
                  LifeRange
                  of exercise prices:$0.52
                  - $0.99
              
              
              
              407,500
              
              
              $
              0.70
              
              
              
              5.48$1.00
                  - $1.99
              
              
              
              2,002,859
              
              
              $
              1.60
              
              
              
              5.03$2.00
                  - $2.99
              
              
              
              3,308,309
              
              
              $
              2.40
              
              
              
              5.98$3.00
                  - $3.99
              
              
              
              725,441
              
              
              $
              3.05
              
              
              
              5.68Total
                  stock options exercisableat
                  September 30, 2007
              
              
              
              6,444,109
              
              
              $
              2.12
              
              
              
              5.71







The
      weighted average grant-date fair value of stock options granted during the
      three
      months ended September 30, 2007 was $1.12.






17




Warrants
      outstanding as of September 30, 2007 are summarized in the table
      below:




Exercise
              
              
              WeightedPrices
              
              
              Average
              
              Year
                  ofWarrants
              
              
              per
                  Share
              
              
              Exercise
                  Price
              
              ExpirationWarrants
                  purchased in privateplacements:1,468,181
              
              
              $
              2.00
              
              
              
              
              20073,347,230
              
              
              $
              3.25
              
              
              
              
              20081,000,000
              
              
              $
              3.25
              
              
              
              
              2009Subtotal
              
              
              5,815,411
              
              
              
              
              
              
              $
              2.93Warrant
                  issued to customer for potentialfuture
                  services and consultant forcurrent
                  services:100,000
              
              
              $
              3.50
              
              
              
              
              
              200850,000
              
              
              $
              1.99
              
              
              
              
              
              2009Subtotal
              
              
              150,000
              
              
              
              
              
              
              $
              3.00Warrants
                  issued to outside directorsand
                  former employee:50,000
              
              
              $
              6.38
              
              
              
              
              
              2010850,000
              
              
              $
              2.31
                  - 2.75
              
              
              
              
              
              2011260,000
              
              
              $
              2.35
                  - 2.60
              
              
              
              
              
              2015350,000
              
              
              $
              2.85
              
              
              
              
              
              2016Subtotal
              
              
              1,510,000
              
              
              
              
              
              
              $
              2.63Total
                  warrants outstanding atSeptember
                  30, 2007
              
              
              7,475,411
              
              
              
              
              
              
              $
              2.87




**13.
         Subsequent Events**





Under
      a
      program authorized by the Board of Directors in the third quarter of 2007,
      warrant holders were authorized to exercise their warrants with exercise prices
      from $2.00 to $3.50 per share at a discounted price of $1.25 per
      share.  Certain of these exercises were made in October 2007 resulting
      in an issuance of 271,900 shares of common stock and proceeds of $339,875.
      The
      sales of these securities were made in reliance upon Rule 506 and Section 4(2)
      of the Securities Act of 1933.





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






18




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





The
      following information should be read in conjunction with the financial
      statements and notes thereto in Part 1 Item 1, Financial Statements for this
      Quarterly Report on Form 10-Q and with Item 7, Management’s Discussion and
      Analysis of Financial Condition and Results of Operations, in our Annual Report
      on Form 10-K for the year ended December 31, 2006.





*Certain
      statements contained in this Form 10-Q constitute forward-looking statements
      within the meaning of Section 27A of the Securities Act of 1933, as amended
      and
      Section 21E of the Securities Exchange Act of 1934, as amended.  Such
      forward-looking statements herein are based on current expectations that involve
      a number of risks and uncertainties. Such forward-looking statements are based
      on assumptions that we will have adequate financial resources to fund the
      development and operation of our business, that there will be no material
      adverse change in our operations or business, that we will meet success in
      marketing and selling our products, and that we will be able to continue to
      attract and retain skilled employees necessary for our business, among other
      things. The foregoing assumptions are based on judgments with respect to, among
      other things, information available to our future economic, competitive and
      market conditions and future business decisions. All of these assumptions are
      difficult or impossible to predict accurately and many are beyond our control.
      Accordingly, although we believe that the assumptions underlying the
      forward-looking statements are reasonable, any such assumption could prove
      to be
      inaccurate and therefore there can be no assurance that the results contemplated
      in the forward-looking statements will be realized. There are a number of risks
      presented by our business and operations, which could cause our financial
      performance to vary markedly from prior results, or results contemplated by
      the
      forward-looking statements. Such risks include failure of the our technology
      or
      products to work as anticipated, failure to develop commercially viable products
      or services from our technology, delays or failure in financing efforts, delays
      in or lack of market acceptance, failure to recruit adequate personnel, and
      problems with protection of intellectual property, among others. The words
      “believe,” “estimate,” “expect,” “intend,” “anticipate” “should”, “could”,
“may”, “plan” and similar expressions and variations thereof identify some of
      these forward-looking statements. Management decisions, including budgeting,
      are
      subjective in many respects and periodic revisions must be made to reflect
      actual conditions and business developments, the impact of which may cause
      us to
      alter our capital investment and other expenditures, which may also adversely
      affect our results of operations. In light of significant uncertainties inherent
      in forward-looking information included in this Quarterly Report on Form 10-Q,
      the inclusion of such information should not be regarded as a representation
      by
      us that our objectives or plans will be achieved. We undertake no obligation
      to
      revise or publicly release the results of any revision to these forward-looking
      statements.*





**The
      Company**





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





**Corporate
      History**





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





19




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





**Technology
      and Intellectual Property**





**Overview**





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





**The
      ANTs Concurrency Engine**





Applications
      that 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 thirteen patents on the concepts, which underlie
      ACE, six of which have been granted by the United States Patent and Trademark
      Office.





ACE
      consists of two key components:





·
            A
                highly efficient data processing
                engine


·
            Lock-free
                data structures, enabling
                concurrency





**The
      Data Processing Engine**





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





**Lock-Free
      Data Structures**





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





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


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





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





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





**Patents**





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





20




**Products**





**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. It incorporates the ANTs
      Concurrency Engine, which provides unique performance and cost-saving advantages
      that make ADS an attractive alternative to other RDBMS’s. End-users of RDBMS’s,
      independent software vendors who bundle an RDBMS with their products and other
      RDBMS vendors, can use ADS or its technologies to lower costs and gain
      competitive advantage.





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





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


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


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


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


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


●
            Automatic
                failover and recovery are built in





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





**The
      ANTs Compatibility Server**





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





We
      are developing the underlying
      technologies related to ACS. We have begun limited pilot testing and will
      continue product refinement during the remainder of 2007.





**Sales
      and Marketing**





**The
      Market**





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





**Strategy**





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






21




·
            Developing
                middleware (ACS) that helps customers migrate applications among
                RDBMS’s.


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


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


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


·
            Selling
                the ANTs Data Server through two sales
                channels:




·
                Through
                    independent software vendors who will incorporate the ANTs Data
                    Server
                    with their own product which they will sell to their customers,
                    and
 **·**
                Through
                    selling partners such as
                    value added resellers and system integrators – companies which generally
                    have deep expertise in certain vertical or geographical markets
                    and that
                    integrate the best products to develop complete solutions for
                    their
                    customers.


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





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





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





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


·
            Telecom
                – messaging applications


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





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





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





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





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





We
      intend
      to generate revenue through licensing, maintenance, and
      integration/customization fees. We intend to license ACS to partners whom we
      expect will rebrand, sell and support it. ACS is in pilot testing and
      development; we do not expect to generate revenues from ACS until fiscal 2008.
      We intend to license ADS to independent software vendors whom we expect will
      customize it for use with their applications. We also intend to license ADS
      through re-sellers and system integrators.  We began selling the first
      commercial version of ADS in 2005 and have generated approximately $1.1 million
      in revenues through September 30, 2007.





22





**Competition**





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





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




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





We
      have not identified any direct
      competitor for ACS. Oracle, IBM and Microsoft encourage migration from
      competitive products through use of their migration tools. These tools often
      require substantial investment to rewrite applications, retrain developers
      and
      purchase additional database licenses. Customers with whom we have spoken are
      not receptive to migrating applications under such conditions with these tools.
      ACS on the other hand intends to allow low-cost migration with minimal
      modification to the application.




**Current
      Operations**





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





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






23




**Results
      of Operations**





Results
      of operations for the three and
      nine months ended September 30, 2007 and 2006 are summarized below (in
      000’s):








For
                  the Three Months ending
              
              
              
              
              
              For
                  the Nine Months endingSeptember
                  30,
              
              
              
              
              
              September
                  30,2007
              
              
              2006
              
              
              %
                  Change
              
              
              2007
              
              
              2006
              
              
              %
                  ChangeRevenues
              
              $
              227
              
              
              $
              48
              
              
              
              373%
              
              
              $
              318
              
              
              $
              200
              
              
              
              59%Cost
                  of revenues
              
              
              2
              
              
              
              2
              
              
              
              -
              
              
              
              12
              
              
              
              17
              
              
              
              -29%Gross
                  profit
              
              $
              225
              
              
              $
              46
              
              
              
              389%
              
              
              $
              306
              
              
              $
              183
              
              
              
              67%Operating
                  expenses
              
              
              4,121
              
              
              
              4,528
              
              
              
              -9%
              
              
              
              12,670
              
              
              
              11,374
              
              
              
              11%Loss
                  from operations
              
              
              (3,896
              )
              
              
              (4,482
              )
              
              
              -13%
              
              
              
              (12,364
              )
              
              
              (11,191
              )
              
              
              10%Other
                  income (expense), net
              
              
              8
              
              
              
              89
              
              
              
              -91%
              
              
              
              106
              
              
              
              152
              
              
              
              -30%Net
                  loss
              
              
              (3,888
              )
              
              
              (4,393
              )
              
              
              -11%
              
              
              
              (12,258
              )
              
              
              (11,039
              )
              
              
              11%Net
                  loss per share -basic
                  and diluted
              
              $
              (0.07
              )
              
              $
              (0.08
              )
              
              
              -13%
              
              
              $
              (0.22
              )
              
              $
              (0.22
              )
              
              
              -Shares
                  used in computing basic anddiluted
                  net loss per share (in 000's)
              
              
              56,602
              
              
              
              52,054
              
              
              
              9%
              
              
              
              56,355
              
              
              
              49,695
              
              
              
              13%






**Revenues**





Revenues
      consist of license fees earned on the ANTs Data Server, amortization of prepaid
      deferred maintenance and support, royalties from third parties who resell ADS
      under their own label, and professional fees for consulting. During 2007, we
      modified our go-to-market strategy, eliminating direct sales of ADS and selling
      solely through partners.  This is reflected in the revenue results in
      that sales through partners now account for most of our revenues.





During
      the
      three and nine months ended September 30, 2007, we recognized $227 thousand
      and
      $318 thousand, respectively, in revenue, in accordance with our revenue
      recognition policy, of which:





·
            $200
                thousand and $251 thousand, respectively, were licenses and royalties,
                and;


·
            $27
                thousand and $67 thousand, respectively, were maintenance and support
                fees
                from the current and prior
                quarters.





For
      the
      three months ended September 30, 2007, license and royalty fees were comprised
      of a royalty payment of $200 thousand from one of our partners (representing
      88%
      of revenue for quarter) and the maintenance and support fees were comprised
      of
      maintenance and support contracts with six customers or partners.





For
      the
      nine months ended September 30, 2007, license and royalty fees included a
      royalty payment of $200 thousand from one of our partners and $51 thousand
      in
      license fees from another partner for a total of $251 thousand, which represents
      79% of revenue for the period.  Maintenance and support fees were
      comprised of maintenance and support contracts with eight customers and
      partners.





We
      deferred $51 thousand and $83 thousand, respectively of maintenance and support
      fees invoiced during the three and nine months ending September 30,
      2007.  These deferred fees are reflected on the balance sheets as
      deferred revenue.





During
      the
      three and nine months ending September 30, 2006, we recognized $48 thousand
      and
      $200 thousand, respectively, in revenue, in accordance with our revenue
      recognition policy, of which:






24




·
            $11
                thousand and $104 thousand, respectively, was license fees and royalties,
                and;


·
            $26
                thousand and $85 thousand were maintenance and support fees from
                the
                current and prior quarters, and;


·
            $11
                thousand and $11 thousand, respectively, was professional service
                revenue.





We
      deferred $14 thousand and $51 thousand of the maintenance and support fees
      invoiced during the three and nine months ending September 30, 2006. These
      deferred fees were reflected on the balance sheets as deferred
      revenue.





**Cost
      of Revenues**





Cost
      of
      revenues during the three and nine months ending September 30, 2007 was $2
      thousand and $12 thousand, respectively. Cost of revenues during the three
      and
      nine months ending September 30, 2006 was $2 thousand and $17 thousand,
      respectively. Costs of revenues consist of 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
      third quarter of 2007 we accelerated the change in strategic direction begun
      during the last quarter of fiscal 2006 by significantly ramping up development
      of the ANTs Compatibility Server and by eliminating direct sales of the ANTs
      Data Server while focusing on marketing and selling ADS through partners. We
      shifted technical sales personnel and added off-shore resources to the ACS
      development effort and reduced direct sales personnel and marketing programs.
      As
      a result, research and development expenses increased significantly, while
      sales
      and marketing expenses decreased significantly when comparing the quarters
      ending September 30, 2006 and 2007.





General
      and administrative expense during the third quarter of 2007 decreased moderately
      compared to the third quarter of 2006 as there was minimal expense in 2007
      related to Sarbanes-Oxley compliance and a reduction in personnel. General
      and administrative expense for the nine-months ended September 2007 increased
      substantially over the same period in 2006 primarily due to: (i) one-time events
      - separation agreements for our chairman and two former employees during the
      second quarter of 2007; (ii) higher staffing levels during the first two
      quarters of 2007 vs. 2006 in order to meet the extensive process and reporting
      requirements related to our first-time compliance with Section 404 of the
      Sarbanes-Oxley Act of 2002 and; (iii) a revised salary and bonus agreement
      for
      our president and CEO, implemented in the second quarter of 2007.





The
      number
      and distribution of full time employees as of September 30, 2007 and 2006 were
      as follows:




Change
                  fromSeptember
                  30,
              
              
              September
                  30,
              
              
              2006
                  to 20072007
              
              
              %
              
              
              2006
              
              
              %
              
              
              No.
              
              
              %Sales
                  and Marketing
              
              
              3
              
              
              
              7%
              
              
              
              12
              
              
              
              25%
              
              
              
              (9
              )
              
              
              -75%Research
                  and Development
              
              
              33
              
              
              
              81%
              
              
              
              29
              
              
              
              60%
              
              
              
              4
              
              
              
              14%General
                  and Administrative
              
              
              5
              
              
              
              12%
              
              
              
              7
              
              
              
              15%
              
              
              
              (2
              )
              
              
              -29%Totals
              
              
              41
              
              
              
              100%
              
              
              
              48
              
              
              
              100%
              
              
              
              (7
              )
              
              
              -15%






25






Operating
      expenses by department for the three and nine months ending September 30, 2007
      and 2006 were as follows (dollars in 000’s):








Three
                  Months ended September 30,2007
              
              
              
              
              
              2006$
              
              
              
              %
              
              
              %
                    Change vs.
                Prior
                  Period
              
              
              $
              
              
              
              %Sales
                  and marketing
              
              $
              547
              
              
              
              13%
              
              
              
              -60%
              
              
              $
              1,379
              
              
              
              30%Research
                  and development
              
              
              2,638
              
              
              
              64%
              
              
              
              28%
              
              
              
              2,058
              
              
              
              46%General
                  and administrative
              
              
              936
              
              
              
              23%
              
              
              
              -14%
              
              
              
              1,091
              
              
              
              24%Total
                  operating expenses
              
              $
              4,121
              
              
              
              100%
              
              
              
              -9%
              
              
              $
              4,528
              
              
              
              100%
  Nine
                  Months ended September 30,2007
              
              
              2006$
              
              
              
              %
              
              
              %
                    Change vs.
                Prior
                  Period
              
              
              $
              
              
              
              %Sales
                  and marketing
              
              $
              2,397
              
              
              
              19%
              
              
              
              -40%
              
              
              $
              4,010
              
              
              
              35%Research
                  and development
              
              
              6,909
              
              
              
              54%
              
              
              
              45%
              
              
              
              4,768
              
              
              
              42%General
                  and administrative
              
              
              3,364
              
              
              
              27%
              
              
              
              30%
              
              
              
              2,596
              
              
              
              23%Total
                  operating expenses
              
              $
              12,670
              
              
              
              100%
              
              
              
              11%
              
              
              $
              11,374
              
              
              
              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 Note 2 “Summary of
      Significant Accounting Policies” of the Notes to Condensed Financial
      Statements.





The
      total
      stock-based employee compensation expense recognized in the three months ending
      September 30, 2007 and 2006 was $392 thousand and $603 thousand, respectively.
      The large decrease is primarily due to the extension of the exercise period
      for
      stock options for the former Chief Executive Officer and the former Vice
      President of Engineering totaling $265 thousand in the quarter ended September
      30, 2006; no similar charge was incurred during the same period in
      2007.





The
      total
      stock-based employee compensation expense recognized in the nine months ending
      September 30, 2007 and 2006 was $1,060 thousand and $906 thousand,
      respectively.  The increase is due to the acceleration of the vesting
      of all options outstanding as of December 31, 2005 on that date, and recording
      a
      one-time charge in that year.  We implemented SFAS 123R on January 1,
      2006. Therefore, by the end of the third quarter of 2007 we were recording
      the
      cumulative effect of all stock options granted and vesting over seven quarters
      compared to options that had vested for just three quarters at the end of the
      third quarter 2006.  This increase was offset by both the decrease in
      stock-based compensation for exercise extensions noted above, and lower vesting
      expense as a result of forfeited stock options by terminated employees,
      primarily in sales and marketing.





As
      in
      prior years, we recognize stock-based compensation expense related to option
      awards to outside consultants in the department for which those consultants
      provided services.  For the three months ended September 30, 2007 and
      2006 we recorded $21 thousand, and $3 thousand, respectively in stock-based
      compensation to outside consultants.  For the nine months ended
      September 30, 2007 and 2006, we recorded $37 thousand and $10 thousand,
      respectively.





**Sales
      and Marketing Expenses**





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






26




Selected
      sales and marketing expenses for the three and nine months ended September
      30,
      2007 and 2006 follows (dollars in 000's):






Three
                  Months
              
              
              Percent
              
              
              Nine
                  Months
              
              
              Percent2007
              
              
              2006
              
              
              Change
              
              
              2007
              
              
              2006
              
              
              ChangeEmployee
                  compensation and benefits
              
              
              207
              
              
              
              757
              
              
              
              -73%
              
              
              
              1,010
              
              
              
              1,983
              
              
              
              -49%Marketing
                  and pre-sales support
              
              
              191
              
              
              
              425
              
              
              
              -55%
              
              
              
              736
              
              
              
              1,401
              
              
              
              -47%Travel
                  and entertainment
              
              
              62
              
              
              
              114
              
              
              
              -46%
              
              
              
              239
              
              
              
              422
              
              
              
              -43%Stock-based
                  compensation
              
              
              51
              
              
              
              59
              
              
              
              -14%
              
              
              
              159
              
              
              
              132
              
              
              
              20%






Total
      sales and marketing expenses decreased by $832 thousand in the third quarter
      of
      2007 compared to the same period in 2006 as a result of our change in
      go-to-market strategy by selling through partners, rather than selling directly
      to end-users, and shifting pre-sales technical staff to research and
      development. Employee-related expenses decreased due to personnel reductions
      and
      the reclassification of pre-sales technical staff previously included in sales
      and marketing to research and development.  In connection with the
      reduction in headcount, we incurred severance costs of $4 thousand in
      stock-based compensation expense due to the extension of the stock option
      exercise period for one former employee.





Full
      time
      employees totaled twelve at third quarter end 2006 compared to three at third
      quarter end 2007. Expenses related to direct marketing activities such as trade
      shows, advertising, other marketing events and travel and entertainment
      decreased as we participated in fewer outbound marketing and sales events and
      focused our efforts on marketing and selling to a smaller number of larger
      partners.





Total
      sales and marketing expenses decreased by $1,613 million in the first nine
      months of 2007 compared to the same period in 2006 for the reasons discussed
      above. Employee stock-based compensation expense increased year-over-year as
      we
      were recording the cumulative effect of all stock options granted and vesting
      over seven quarters compared to just three quarters in the first nine months
      of
      2006.





For
      the remainder of fiscal 2007, we
      expect sales and marketing****expenses will stabilize or
      decline marginally due to decreased personnel-related expenses and as we focus
      on selling and marketing ADS and ACS through partners.





**Research
      and Development Expenses**





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





Selected
      research and development expenses for the three and nine months ended September
      30, 2007 and 2006 follows (dollars in 000's):




Three
                  Months
              
              
              Percent
              
              
              Nine
                  Months
              
              
              Percent2007
              
              
              2006
              
              
              Change
              
              
              2007
              
              
              2006
              
              
              ChangeEmployee
                  compensation and benefits
              
              $
              1,502
              
              
              $
              1,235
              
              
              
              22%
              
              
              $
              4,441
              
              
              $
              3,117
              
              
              
              42%Contractors
              
              
              844
              
              
              
              507
              
              
              
              66%
              
              
              
              1,658
              
              
              
              995
              
              
              
              67%Stock-based
                  compensation
              
              
              165
              
              
              
              174
              
              
              
              -5%
              
              
              
              471
              
              
              
              297
              
              
              
              59%Equipment
                  and computer supplies
              
              
              17
              
              
              
              37
              
              
              
              -54%
              
              
              
              34
              
              
              
              127
              
              
              
              -73%





27






Total
      research and development expenses increased by $580 thousand in the three months
      ended September 30, 2007 compared to the same period in 2006 due to an increase
      in full time employees from 29 in 2006 to 33 in 2007 and an increase in our
      contract research and development teams.





Total
      research and development expenses increased by $2,141 thousand in the first
      nine
      months of 2007 compared to the same period in 2006, due primarily to the
      following: i) employee-related expenses rose as research and development
      staffing increased from 29 full time employees in 2006 to 33 as of September
      30,
      2007; ii) an increase in our contract research and development teams and iii)
      employee stock-based compensation expense increased as we were recording the
      cumulative effect of all stock options granted and vesting over seven quarters
      compared to just three quarters in the first nine months of
      2006.  This increase was offset by a nonrecurring $60 thousand charge
      taken in the nine months ended September 30, 2006 relating to routine physical
      inventories of equipment and computer supplies.





For
      the
      remainder of fiscal 2007, we expect research and development expenses will
      increase moderately as we intensify efforts to bring ACS to market.





**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.





Selected
      general and administrative expenses for the three and nine months ended
      September 30, 2007 and 2006 follows (in 000's):




Three
                  Months
              
              
              Percent
              
              
              Nine
                  Months
              
              
              Percent2007
              
              
              2006
              
              
              Change
              
              
              2007
              
              
              2006
              
              
              ChangeEmployee
                  compensation and benefits
              
              $
              202
              
              
              $
              315
              
              
              
              -36%
              
              
              $
              1,450
              
              
              $
              938
              
              
              
              55%Stock-based
                  compensation
              
              
              197
              
              
              
              371
              
              
              
              -47%
              
              
              
              467
              
              
              
              477
              
              
              
              -2%Professional
                  fees
              
              
              251
              
              
              
              331
              
              
              
              -24%
              
              
              
              771
              
              
              
              875
              
              
              
              -12%Debt
                  issuance Costs
              
              
              109
              
              
              
              -
              
              
              N/A
              
              
              
              278
              
              
              
              -
              
              
              N/ADirector
                  compensation
              
              
              48
              
              
              
              -
              
              
              N/A
              
              
              
              175
              
              
              
              -
              
              
              N/A






Total
      general and administrative expenses decreased by $155 thousand in the third
      quarter of 2007 compared to the same period in 2006, due primarily to the
      following: 1) employee-related expense decreased by $113 thousand due to staff
      reductions, including the transition of our chairman from employee to
      non-employee (executive to non-executive) status and the reduction of two
      general and administrative positions; 2) employee stock-based compensation
      expense also decreased due to stock-based compensation expense related to
      warrants issued to directors during the third quarter of 2006; most of those
      warrants have fully vested and no further expense is being recorded for them;
      3)
      professional fees decreased as our Sarbanes Oxley compliance activities switched
      from first-time compliance in 2007 to maintenance in 2007, and; 4) amortization
      of debt issuance costs related to the closing of the J Unit financing in January
      2007.





Total
      general and administrative expenses increased by $768 thousand in the first
      nine
      months of 2007 compared to the same period in 2006, due primarily to the
      following: 1) employee-related compensation expense increased by $512 thousand
      related to a severance agreement between us and our chairman, who on June 26,
      2007 terminated as an employee and executive chairman while remaining
      non-executive chairman and also increased by $62 thousand due to a bonus paid
      to
      our Chief Executive Officer pursuant to his employment agreement all of which
      was partially offset by staff reductions; 2) employee stock-based compensation
      expense also decreased compared to the prior year primarily due to stock-based
      compensation expense related to warrants issued to directors during the third
      quarter of 2006; most of those warrants have fully vested and no further expense
      is being recorded for them; the expense related to the director warrants was
      offset somewhat by a) the cumulative effect of all stock options granted and
      vesting over seven quarters compared to just three quarters in the first nine
      months of 2006 and, b) pursuant to separation agreements with two former
      employees, we recognized approximately $50 thousand in stock compensation
      expense related to the extension of their option exercise period; 3)
      professional fees decreased as our Sarbanes Oxley compliance activities switched
      from first-time compliance in 2007 to maintenance in 2007, and; 4) amortization
      of debt issuance costs related to the closing of the J Unit financing in January
      2007.





28




Beginning
      in 2007, outside directors are paid cash compensation in consideration for
      their
      service on the Board of Directors.  We recognized director
      compensation expense totaling $48 thousand and $175 thousand for the three
      and
      nine months ended September 30, 2007, which included, in the first quarter
      of
      2007, a one-time payment of $50 thousand cash payment to a former director
      in
      recognition of six years of service on the board.  Included in
      stock-based compensation is $127 thousand and $238 thousand related to outside
      director stock options and warrants for the three and nine months ended
      September 30, 2007.  We did not incur outside director cash
      compensation for the three or nine months ending September 30,
      2006.





For
      the
      remainder of fiscal 2007, we expect general and administrative expense will
      decrease moderately as the full effect of personnel reductions and other cost
      reductions are realized.





**Other
      Income, Net**





The
      components of other income and expense, and for the three and nine months ended
      September 30, 2007 and 2006, are as follows (dollars in 000’s):









For
                  the Three Months Ended
                September
                  30,
              
              
              For
                  the Nine Months Ended
                September
                  30,2007
              
              
              2006
              
              
              %
                  Change
              
              
              2007
              
              
              2006
              
              
              %
                  ChangeOther
                  income (expense):Interest
                  expense, Convertible Notes Payable
              
              $
              (166
              )
              
              $
              -
              
              
              N/A
              
              
              $
              (430
              )
              
              $
              -
              
              
              N/AAmortization
                  of premium, ConvertibleNotes
                  Payable
              
              
              101
              
              
              
              -
              
              
              N/A
              
              
              
              265
              
              
              
              -
              
              
              N/AInterest
                  income
              
              
              71
              
              
              
              89
              
              
              
              -20%
              
              
              
              271
              
              
              
              153
              
              
              
              77%Other
                  interest expense
              
              
              1
              
              
              
              1
              
              
              
              -
              
              
              
              (3
              )
              
              
              (4
              )
              
              
              -25%Gain
                  on legal settlement and other
              
              
              1
              
              
              
              -
              
              
              N/A
              
              
              
              3
              
              
              
              3
              
              
              
              -Other
                  income, net
              
              $
              8
              
              
              $
              90
              
              
              
              -91%
              
              
              $
              106
              
              
              $
              152
              
              
              
              -30%





During
      the
      three months ended September 30, 2007 and 2006, other income, net totaled $8
      thousand and $89 thousand, respectively.  The decrease in net interest
      income primarily resulted from the issuance of Convertible Notes in December
      2006, and January and March 2007 and associated interest expense, plus lower
      interest earned on invested cash, due to an approximate $1.7 million decrease
      in
      average invested cash balances during the third quarter of 2007 versus the
      same
      quarter in 2006. In 2006, interest expense consisted entirely of interest
      incurred on Company credit cards.  Quarterly interest payments on the
      convertible promissory notes was offset somewhat by the amortization of the
      premium on these Notes.





During
      the
      nine months ended September 30, 2007 and 2006, other income, net totaled $107
      thousand and $152 thousand, respectively. Interest income increased 77% in
      the
      nine months ended September 30, 2007 with an average rate of return on invested
      cash of 4.7% versus 3.0% for the same period in 2006 as well as a $780 thousand
      higher average invested cash balance in 2007 versus 2006.  Interest
      expense increased due to the issuance of Convertible Notes as noted
      above.






29




**Liquidity
      and Capital Resources**





From
      inception, we have reported negative cash flow from
      operations.  During fiscal years 2000 through 2004, we focused
      primarily on research and development of ADS 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
      two potential funding sources, raising funds through private offerings and
      revenue generated from the licensing of the ANTs Data Server and in the future,
      the ANTs Compatibility Server (which is still in development). Revenue to date
      has been minimal. There can be no assurance that any of these sources will
      provide sufficient funds to support our operations beyond the second fiscal
      quarter of 2008. We have no commitments to acquire assets that would have a
      material impact on the balance sheet or statement of cash flows.  We
      intend to monitor expenses carefully and to reduce expenses when
      possible.





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 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
      tendered three types of private offerings to accredited investors during 2006
      and 2007:





·
            Equity-only
                units – comprised of shares of our restricted common stock at a discount
                to the then-current market price, and a warrant to purchase the same
                number of restricted shares of our 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.


·
            Equity
                and Convertible Note units – comprised of shares of our restricted common
                stock at a discount to the then-current market prices and a convertible
                promissory note.


·
            Convertible
                Note and Warrant units – comprised of a convertible promissory note and a
                warrant to purchase restricted shares of our 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.





During
      the
      three months ending 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.





In
      September 2007, investors exercised warrants to purchase 525,000 shares of
      common stock at $1.25 per share for $656,250.  Subsequent to quarter
      end additional warrants were exercised.  In October 2007 investors
      exercised warrants to purchase 271,900 shares of common stock at $1.25 per
      share
      for $339,875.  See Note 13 “Subsequent Events” in the accompanying
      Notes to Condensed Financial Statements.





Our
      continued ability to fund operations is dependent on our ability to generate
      financing. In October 2007, we sold to an accredited investor a convertible
      promissory note in the amount of $2,000,000. Pursuant to the sale, we issued
      a
      warrant to the investor covering 1,333,333 shares of our common stock with
      a per
      share exercise price of $3.25. The warrant expires 36 months from issuance.
      The
      Note bears interest at the rate of 10% per annum (simple interest) due and
      payable at the end of each fiscal quarter. The Note matures 36 months from
      issuance and is convertible into shares of our common stock, at the election
      of
      the holder, at a per share price of $1.50.  The Note is prepayable
      without penalty if (i) the bid price of our common stock equals or exceeds
      $4.00
      per share for ten consecutive trading days and (ii) we provide the investor
      with
      20 trading days’ notice of our intent to prepay. See Note 13 “Subsequent Events”
in the Accompanying Notes to Financial Statements.






30




For
      the
      nine months ended September 30, 2007, cash outflows totaled $11.1 million,
      consisting of $10.9 million used in operations and $198 thousand used in
      investing activities.  Operating cash outflows primarily consisted of
      salaries and benefits, primarily in research and development, and general
      overhead expenses.  Investing activities primarily consisted of the
      purchase of equipment related to research and development.





As
      of
      September 30, 2007, we had approximately $4.2 million in cash on hand and as
      of
      October 25, 2007 we had approximately $6.2 million cash on hand to fund
      operations.  We anticipate that, at our current levels of revenues and
      expenditures, this $6.2 million will fund operations into the second fiscal
      quarter of 2008. Should we need to secure additional financing, we believe
      that
      due to an uncertain investment climate, securing additional financing will
      be
      difficult.





**Off-Balance
      Sheet Arrangements**





As
      of
      September 30, 2007, we had certain off-balance sheet arrangements as described
      below.





On
      April
      27, 2005, we entered into a lease with Bayside Plaza, a partnership, for
      approximately 15,000 square feet of general commercial offices located at 700
      Airport Boulevard, Suite 300, Burlingame, California (the “Premises”). We moved
      our principal offices to these Premises on May 2, 2005. The Premises are used
      for the purposes of general office use and for software development. The lease
      has an initial term of three years, subject to our right to extend the term
      of
      the lease for a total of six additional years. The base rent under this lease
      is
      $16,060 per month for the first year, $17,520 per month for the second year
      and
      $20,440 per month for the third year. We received abated rent for the period
      from May 1, 2005 to July 30, 2005. In July 2007 we extended this lease for
      the
      period May 1, 2008 through April 30, 2009 at the rate of $34,200 per
      month.





We
      are
      recognizing rent expense for this lease in accordance with Financial Technical
      Bulletin 85-3 (“FTB 85-3”), “Accounting for Operating Leases with Scheduled Rent
      Increases.”  The base rent, the effects of the scheduled rent
      increases, and the effects of the rent abatement are being recognized on a
      straight-line basis over the lease term.  This results in monthly
      rental expense of $16,668 through April 30, 2007. For the three and nine months
      ended September 30, 2007 and three and nine months ended September 30, 2006,
      we
      recognized $50,004 and $150,012, respectively, in rental expense for this
      lease.





As
      of
      September 30, 2007, the total remaining unamortized deferred rent is $26,402.
      This amount represents the difference between the total amount of rent expensed
      on a straight-line basis and the actual rent payments to be made over the
      remaining lease term. The $26,402 is included as a current liability in accounts
      payable and other accrued expenses on the balance sheet.  As of
      September 30, 2007 the total remaining off-balance sheet lease obligation is
      $553,480.





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





Payments
                Due by PeriodLess
                than
            1-3
            3-5
            More
                thanContractual
                Obligations
            Total
            1
                Year
            Years
            Years
            5
                YearsOperating
                lease obligations
            $553,480
            $314,080
            $239,400
            -
            -








**Critical
      Accounting Estimates**





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






31




There
      have been no significant changes
      in our critical accounting estimates during the three months ended September
      30,
      2007 as compared to the critical estimates disclosed in Management’s Discussion
      and Analysis of Financial Condition and Results of Operations included in our
      Annual Report on Form 10-K for the year ended December 31, 2006. Effective
      January 1, 2007, we implemented the reporting requirements of Financial
      Accounting Standards Interpretation, FIN No. 48, “*Accounting for Uncertainty
      in Income Taxes – an interpretation of FASB Statement
      No. 109.”*





**ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





**Foreign
        Currency Exchange Risk**





The
        majority of our revenue is realized in United States dollars. While some
        portion
        of our revenue is generated from international customers, payments are made
        in
        United States dollars, mitigating foreign exchange exposure.  As a
        result, our financial results would not be materially affected by factors
        such
        as changes in foreign currency exchange rates or weak economic conditions
        in
        foreign markets.  We do not enter into foreign currency hedging
        transactions to mitigate our exposure to foreign currency exchange
        risks.





**Interest
        Rates**





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





**ITEM
      4. CONTROLS AND PROCEDURES**





The
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
      Exchange Act of 1934, as amended) was evaluated under the supervision and with
      the participation of our management, including the Chief Executive Officer
      and
      Chief Financial Officer, as of the end of the period covered by this quarterly
      report. Based on that evaluation, our Chief Executive Officer and Chief
      Financial Officer have concluded that our disclosure controls and procedures
      are
      effective in providing reasonable assurance that the information required to
      be
      disclosed in this quarterly report is recorded, processed, summarized and
      reported within the time period required for the filing of this quarterly
      report.





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





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





32





**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.





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





***Market
      acceptance of our products and services is not
      guaranteed***.





We
      are at an early stage of development
      and our revenue will depend upon market acceptance and utilization of our
      products and services. Our products are under constant development and are
      still
      maturing. Some customers may be reluctant to purchase products from a company
      with unproven products, uncertain finances, or less-experienced support
      department. Also, due to economic conditions some potential customers may have
      tightened budgets for evaluating new products and technologies and the
      evaluation cycles may be much longer than in the recent past. There can be
      no
      assurance that our product and technology development or support efforts will
      result in new products and services, or that they will be successfully
      introduced.





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





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





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





We
      anticipate that current cash
      resources will be sufficient for us to execute our business plan into the second
      fiscal quarter of 2008. 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***.






33





For
        the
        three months ended September 30, 2007 one of our largest customers accounted
        for
        approximately 88% of our revenue. A decrease in revenue from any of our largest
        customers for any reason, including a decrease in pricing or activity, or
        a
        decision to either utilize another vendor or to no longer use some or all
        of the
        products and services we provide, could have a material adverse effect on
        our
        revenue.





***We
      compete with large companies***.





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





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





We
      believe that our market will be
      characterized by increasing technical sophistication.  We also believe
      that our eventual success will depend on our ability to continue to provide
      increased and specialized technical expertise.  There is no assurance
      that we will not fall technologically behind competitors with greater
      resources.  Although we believe that we enjoy a lead in our product
      development, and believe 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 thirteen patent applications
      with the United States Patent and Trademark Office and intend to file
      more.  Six patents have been granted; however, we do not know if the
      remaining seven applications will be granted or whether we will be successful
      in
      prosecuting any future patents.  In addition, the laws of some foreign
      countries do not protect proprietary rights to the same extent, as do the laws
      of the United States.  Our means of protecting our proprietary rights
      may not be adequate and third parties may infringe or misappropriate our
      patents, copyrights, trademarks and similar proprietary rights.  If we
      fail to protect our intellectual property and proprietary rights, our business,
      financial condition and results of operations would suffer.  We
      believe that we do not infringe upon the proprietary rights of any third party,
      and no third party has asserted an infringement claim against us.  It
      is possible, however, that such a claim might be asserted successfully against
      us in the future.  We may be forced to suspend our operations to pay
      significant amounts to defend our rights, and a substantial amount of the
      attention of our management may be diverted from our ongoing business, all
      of
      which would materially adversely affect our business.





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






34




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





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





***We
      face rapid technological change***.





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





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





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





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





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





***Future
      profitability is not guaranteed***.





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





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





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





35





***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 develop a low-cost, easy-to-use migration
                product;


·
            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***.






36





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





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





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





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





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





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





During
      the
      three months ended September 30, 2007, warrant holders exercised 525,000
      warrants with original exercise prices of $2.00 to $3.50 per share at a
      discounted price of $1.25 per share, resulting in gross proceeds to the Company
      of $656,250.  The sales of these securities were made in reliance upon
      Rule 506 of Regulation D and Section 4(2) of the Securities Act of
      1933.





The
      proceeds from these sales of unregistered securities will be used for product
      development and general working capital purposes.





**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 three-months ended September 30, 2007.





**ITEM
      5.  OTHER INFORMATION**





None





**ITEM
      6.  EXHIBITS**





(a)
      Exhibits




3.1
              
              Amended
                    and Restated Certificate of Incorporation of our, filed as Exhibit
                    3.1 to
                    our 10-QSB filed on August 14, 2003, is hereby incorporated by
                    reference.3.2
              
              Amended
                    and Restated Bylaws of our, filed as Exhibit 3.2 to our 10-KSB filed on
                    March 22, 2001, are hereby incorporated by
                    reference.10.1
              
              Employment
                  Agreement with Chairman of the Board, Francis K.
                  Ruotolo.10.2
              
              Employment
                  Agreement with Chief Executive Officer and President, Joseph
                  Kozak.10.3
              
              Employment
                Agreement with Chief Financial Officer and Secretary, Kenneth
                Ruotolo10.4
              
              Retirement
                and Board Service Agreement with Chairman of the Board, Francis K.
                Ruotolo10.5
              
              First
                Amendment to Lease





37




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


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


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


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





b)
      Reports
      on Form 8-K





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





1)
            On
                July 2, 2007, we announced that effective June 26, 2007 we entered
                into a
                consulting agreement with Mr. Ari Kaplan, a member of our Board of
                Directors;


2)
            On
                September 27, 2007 we announced that effective September 30, 2007,
                Mr.
                Francis Ruotolo would resign as Chairman of our Board of Directors,
                while
                remaining a director and that on October 1, 2007, Mr. Joseph Kozak,
                our
                President and Chief Executive Officer would become Chairman of our
                Board
                of Directors.








**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:   November
      8,
      2007                                                           By:              /s/
      Joe
      Kozak


Joe
      Kozak,
      Chief Executive Officer and President











Date:  November
      8,
      2007                                                           By:             /s/
      Kenneth
      Ruotolo


Kenneth
      Ruotolo, Chief Financial Officer and Secretary








38