**UNITED
      STATES**





**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




_____________________




**FORM
      10-Q**


**(Mark
      One)**





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





**For
      the quarterly period ended: June 30, 2006**





**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 issuer (1) has filed all reports required to be filed
      by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
      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 [
      ]    Non-accelerated filer [ X ]





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:


51,926,357
      shares of common stock as of July 31, 2006

















**TABLE
      OF CONTENTS**











PART
                I. Financial InformationItem
              1.
            Condensed
              Financial Statements
              (Unaudited)
            3-15Balance
              Sheets as of June 30, 2006 and December 31, 2005Statements
              of Operations for the Three and Six Months ended June 30, 2006 and
              2005Statements
              of Cash Flows for the Three and Six Months ended June 30, 2006 and
              2005Notes
              to Condensed Financial StatementsItem
              2.
            Management’s Discussion
              and Analysis of Financial
              Condition and Results of Operations
            15-24Item
              3.
            Quantitative
              and Qualitative Disclosures About Market
              Risk
            24Item
              4.
            Controls
              and Procedures
            24PART
                II. Other InformationItem
              1.
            Legal
              Proceedings
            24Item
              1A.
            Risk
              Factors
            24-28Item
              2.
            Unregistered
              Sales of Equity Securities and Use of
              Proceeds
            28Item
              3.
            Defaults
              Upon Senior Securities
            28Item
              4.
            Submission
              of Matters to a Vote of Security
              Holders
            28-29Item
              5.
            Other
              Information
            29Item
              6.
            Exhibits
              and Reports on Form 8-K
            29Signatures
            30






2




**PART
      I.  FINANCIAL INFORMATION**





**ITEM
      1.  FINANCIAL STATEMENTS**




**ANTS
      SOFTWARE INC.**


**CONDENSED
      BALANCE SHEETS**


**(Unaudited** **)**





June
                30,
            
            December
                31,ASSETS
            
            2006
            
            2005Current
                assets:Cash
                and cash equivalents
            
            $
            9,035,653
            
            $
            6,381,932Accounts
                  receivable, net of allowance for doubtful accounts of $49,738 and
                  $16,000in
                  2006 and 2005, respectively
            
            
            83,378
            
            
            45,228Prepaid
                insurance and other expenses
            
            
            158,265
            
            
            73,560Total
                current assets
            
            
            9,227,296
            
            
            6,500,720Restricted
                cash
            
            
            185,958
            
            
            105,399Prepaid
                expense from warrant issued to customer, net
            
            
            144,184
            
            
            173,021Property
                and equipment, net
            
            
            755,740
            
            
            622,515Other
                assets
            
            
            34,702
            
            
            34,702Total
                assets
            
            $
            10,397,880
            
            $
            7,436,357LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable and other accrued expenses
            
            $
            242,462
            
            $
            548,178Accrued
                bonuses and commissions payable
            
            
            21,250
            
            
            218,750Accrued
                vacation payable
            
            
            211,582
            
            
            149,573Deferred
                revenues
            
            
            92,724
            
            
            58,603Total
                current liabilities
            
            
            568,018
            
            
            975,104Long-term
                liabilities:Accrued
                rent
            
            
            37,717
            
            
            48,667Total
                liabilities
            
            
            605,735
            
            
            1,023,771Commitment
                and contingencies (Note 8)
            
            
            -
            
            
            -Stockholders’
                equity:Preferred
                  stock, $0.0001 par value; 50,000,000 shares authorized,no
                  shares issued and outstanding, respectively
            
            
            -
            
            
            -Common
                stock, $0.0001 par value; 100,000,000 shares authorized; 51,913,857
                and
                44,862,058 shares issuedand
                      outstanding, respectively
            
            
            5,192
            
            
            4,487Common
                stock subscribed, not issued
            
            
            519,230
            
            
            243,608Additional
                paid-in capital
            
            
            59,439,716
            
            
            49,690,324Accumulated
                deficit
            
            
            (50,171,993
            )
            
            (43,525,833
            )Total
                stockholders’ equity
            
            
            9,792,145
            
            
            6,412,586Total
                liabilities and stockholders' equity
            
            $
            10,397,880
            
            $
            7,436,357







The
      accompanying notes are an integral part of these condensed financial
      statements.






3


**ANTS
      SOFTWARE INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**





For
                the Three Months
            
            For
                the Six Monthsended
                June 30,
            
            ended
                June 30,2006
            
            2005
            
            2006
            
            2005Revenues:Licenses
                and royalties
            
            $
            50,062
            
            $
            108,000
            
            $
            92,062
            
            $
            194,100Maintenance
            
            
            33,196
            
            
            7,000
            
            
            59,585
            
            
            7,667Professional
                services
            
            
            -
            
            
            19,500
            
            
            -
            
            
            19,500Total
                revenues
            
            
            83,258
            
            
            134,500
            
            
            151,647
            
            
            221,267Cost
                of Goods Sold:Licenses
            
            
            15,096
            
            
            -
            
            
            15,096
            
            
            -Gross
                profit
            
            
            68,162
            
            
            134,500
            
            
            136,551
            
            
            221,267Operating
                Expenses:Sales
                and marketing
            
            
            1,559,546
            
            
            855,176
            
            
            2,631,571
            
            
            1,430,535Research
                and development
            
            
            1,479,556
            
            
            796,093
            
            
            2,709,811
            
            
            1,583,182General
                and administrative
            
            
            978,274
            
            
            460,489
            
            
            1,504,604
            
            
            986,092Total
                operating expenses
            
            
            4,017,376
            
            
            2,111,758
            
            
            6,845,986
            
            
            3,999,809Loss
                from operations
            
            
            (3,949,214
            )
            
            (1,977,258
            )
            
            (6,709,435
            )
            
            (3,778,542
            )Other
                income (expense):Interest
                income
            
            
            54,330
            
            
            6,033
            
            
            64,041
            
            
            8,561Gain
                on legal settlement
            
            
            2,000
            
            
            1,000
            
            
            3,000
            
            
            2,500Write-off
                of leasehold improvements
            
            
            -
            
            
            (45,012
            )
            
            -
            
            
            (45,012
            )Interest
                expense
            
            
            (2,297
            )
            
            (785
            )
            
            (3,766
            )
            
            (1,700
            )Other
                income, net
            
            
            54,033
            
            
            (38,764
            )
            
            63,275
            
            
            (35,651
            )Net
                loss
            
            $
            (3,895,181
            )
            $
            (2,016,022
            )
            $
            (6,646,160
            )
            $
            (3,814,193
            )Basic
                and diluted net loss per common share
            
            $
            (0.08
            )
            $
            (0.05
            )
            $
            (0.14
            )
            $
            (0.10
            )Shares
                  used in computing basic and dilutednet
                  loss per share
            
            
            51,775,813
            
            
            39,535,096
            
            
            48,496,266
            
            
            38,362,261







The
      accompanying notes are an integral part of these condensed financial
      statements.






4


**ANTS
      SOFTWARE INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




For
                the Six Months ended June 30,2006
            
            2005Cash
                flows from operating activities:Net
                loss
            
            $
            (6,646,160
            )
            $
            (3,814,193
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            150,934
            
            
            128,968Amortization
                of accrued rent, net of cash payments
            
            
            730
            
            
            33,336Amortization
                of warrant issued to customer for potential support
                services
            
            
            28,837
            
            
            -Bad
                debt expense
            
            
            33,738
            
            
            -Compensation
                expense recognized on options granted to non-employees
            
            
            7,189
            
            
            39,348Compensation
                expense recognized on restricted shares of common stock granted to
                non-employeeand
                subscribed as of June 30,2006
            
            
            16,000
            
            
            -Compensation
                expense recognized on vesting of employee stock options
            
            
            302,399
            
            
            -Write-off
                of leasehold improvements and security deposits, net
            
            
            -
            
            
            36,194Write-off
                of unrecoverable security deposits related to prior office
                facilities
            
            
            -
            
            
            8,818Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (71,888
            )
            
            (181,500
            )Prepaid
                insurance and expenses
            
            
            (84,705
            )
            
            (46,483
            )Other
                assets
            
            
            -
            
            
            (34,420
            )Accounts
                payable and other accrued expenses
            
            
            (317,396
            )
            
            76,116Accrued
                bonuses and commissions payable
            
            
            (197,500
            )
            
            -Accrued
                vacation
            
            
            62,009
            
            
            28,001Deferred
                revenue
            
            
            34,121
            
            
            58,333Net
                cash used in operating activities
            
            
            (6,681,692
            )
            
            (3,667,482
            )Cash
                flows used in investing activities:Transfer
                operating funds to restricted cash
            
            
            (80,559
            )
            
            -Purchases
                of office furniture, fixtures and equipment and security
                deposits
            
            
            (284,159
            )
            
            (312,109
            )Net
                cash used in investing activities
            
            
            (364,718
            )
            
            (312,109
            )Cash
                flows from financing activities:Proceeds
                from private placements, net of commissions
            
            
            9,072,253
            
            
            3,409,650Proceeds
                from common stock subscribed for cash exercise of stock
                options
            
            
            6,755
            
            
            -Proceeds
                from exercise of options
            
            
            550,250
            
            
            125,591Proceeds
                from exercise of warrants, net of commissions
            
            
            70,873
            
            
            3,741,996Payments
                on capital lease obligations
            
            
            -
            
            
            (1,762
            )Net
                cash provided by financing activities
            
            
            9,700,131
            
            
            7,275,475Net
                increase in cash and cash equivalents
            
            
            2,653,721
            
            
            3,295,884Cash
                and cash equivalents at beginning of period
            
            
            6,381,932
            
            
            1,448,724Cash
                and cash equivalents at end of period
            
            $
            9,035,653
            
            $
            4,744,608Non-cash
                investing and financing activities:Common
                stock issued for subscribed shares at December 31, 2005
            
            $
            243,608
            
            $
            30,000Common
                  stock subscribed at June 30, 2006 to be issued to private placementagent
                  for commissions
            
            $
            496,475
            
            $
            -




The
      accompanying notes are an integral part of these 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, 2005 balance
      sheet was derived from audited financial statements filed with the Company’s
      10-KSB as of December 31, 2005 and therefore may not include all disclosures
      required by accounting principles generally accepted in the United States of
      America. Reference should be made to the ANTs software inc. (the “Company”) Form
      10-KSB for the twelve months ended December 31, 2005, for additional
      disclosures, including a summary of the Company’s accounting policies, which
      have not significantly changed, except for accounting for stock-based
      compensation. Effective January 1, 2006, the Company implemented the
      provisions of Statement of Financial Accounting Standards (“SFAS”) 123(R), *“Share-Based
      Payment”* (the
      “Statement or “SFAS 123(R)”), requiring us to recognize expense related to the
      fair value of our stock-based compensation awards.





The
      information furnished reflects all adjustments (all of which were of a normal
      recurring nature), which, in the opinion of management, are necessary to make
      the financial statements not misleading and to fairly present the financial
      position, results of operations, and cash flows on a consistent basis. Operating
      results for the three and six months ended June 30, 2006 and 2005 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.




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.




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


Management
      has evaluated the
      Company’s current financial position and anticipates that cash on hand will be
      sufficient to fund operations and investments in capital equipment through
      January 2007 at its current levels of revenue and expenditures.





**2.** **BASIC
      AND DILUTED NET LOSS PER SHARE**





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





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





For
                the Three Months
            
            For
                the Six Monthsended
                June 30,
            
            ended
                June 30,2006
            
            2005
            
            2006
            
            2005Net
                loss
            
            $
            (3,895,181
            )
            $
            (2,016,022
            )
            $
            (6,646,160
            )
            $
            (3,814,193
            )Weighted
                average shares of common stock outstanding - basic and
                dilutive
            
            
            51,775,813
            
            
            39,535,096
            
            
            48,496,266
            
            
            38,362,261Basic
                and diluted net loss per share
            
            $
            (0.08
            )
            $
            (0.05
            )
            $
            (0.14
            )
            $
            (0.10
            )





6


As
      of June
      30, 2006 and 2005, outstanding options and warrants for the purchase of up
      to
      22,385,203 shares of common stock at prices ranging from $0.52 to $6.38 per
      share, and 18,302,202 shares of common stock at prices ranging from $0.52 to
      $10.50 per share, respectively, were anti-dilutive, and therefore, not included
      in the computation of diluted loss per share.





**SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




**Revenue
      Recognition**





** We
      recognize 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
      for
      the ANTs Data Server (”ADS”), maintenance and support (otherwise known as
      post-contract customer support or “PCS”), royalties from independent software
      vendors who bundle ADS with their product offerings, and professional
      services.





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 support
      fees, and royalties from independent software vendors (“ISVs”) are recognized
      when all of the following criteria are met:





·
            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.





*License
      and Royalty Revenue*





The
      Company recognizes revenue from
      license agreements when earned which generally occurs when agreed upon
      deliverables have been provided, or milestones have been confirmed by licensees,
      and relative fair values of multiple elements can be determined. Royalty revenue
      is recognized when confirmation is received from the ISV that there are no
      concessions or contingencies and collectibility of the royalty is reasonably
      assured.





*Maintenance
      and Technical Support Revenue (“PCS”)*





The
      Company recognizes revenue from maintenance agreements based on the fair value,
      determined using VSOE, of such agreements. Maintenance revenue is deferred
      and amortized into the statement of operations over the period in which such
      services are provided, generally 12 months.





*Professional
      Services Revenue*





These
      revenues comprise primarily consulting services, and are recognized as services
      are performed under an engineering services agreement, when all revenue criteria
      and all obligations have been met. We charge the customer fees based on agreed
      upon billing rates, and the customers also reimburse us for agreed upon
      expenses.






7
 
 
  **Stock-Based
          Compensation**


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 and directors, 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. Under the Plan, the Company may grant incentive stock options
      and
      non-qualified stock options to employees, directors or consultants, at not
      less
      than the fair market value on the date of grant for incentive stock options,
      and
      85% of fair market value for non-qualified options. Options are granted at
      the
      discretion of the Board of Directors.





Options
      granted under the Plan are generally vested within three years after the date
      of
      grant, and expire 10 years after issuance. Stock option vesting is generally
      time-based. Options granted to new hires vest 16.7% beginning six months after
      the employee’s date of hire, then at 2.78% each month thereafter such that the
      option is fully vested three years from date of hire. Options granted to
      existing employees generally start vesting monthly following their grant. These
      options vest evenly over 36 months, at which time they are fully vested.
      Following termination of employment or consulting status there is usually a
      grace period during which the option is still exercisable for the vested shares.
      This period is typically for three months, but may be shorter or longer
      depending on the terms of a given stock option agreement. Options granted to
      outside directors are generally issued with the same terms as those granted
      to
      employees, except that in May 2006, the Company granted to its four outside
      directors options with vesting periods that coincided with their service periods
      (one to three years), with a one-year lock-up provision following their date
      of
      termination, during which the shares cannot be exercised. Additionally, under
      these stock option agreements, following termination of a director’s service
      there is a three year grace period during which the option is still exercisable
      for the vested shares. .





As
      of June
      30, 2006, the Company had a total of 427,777 shares of common stock in the
      stock
      option reserve available for future grant awards.




On
      January
      1, 2006, we adopted the provisions of Statement of Financial Accounting
      Standards (“SFAS”) 123(R), *“Share-Based
      Payment”* (the
      “Statement or “SFAS 123(R)”), requiring us to recognize expense related to the
      fair value of our stock-based compensation awards. We elected to use the
      modified prospective transition method as permitted by SFAS 123(R) and therefore
      have not restated our financial results for prior periods. Under this transition
      method, stock-based compensation expense for the three and six months ended
      June
      30, 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, which is three years. Grants to new
      employees and directors do not vest for the first six months of
      service.




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 overarching 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. The Company is applying the principles of SAB 107 in conjunction with
      its
      adoption of SFAS 123(R).




The
      following table sets forth the total stock-based compensation expense for the
      three and six month periods ended June 30, 2006, resulting from both the vesting
      of unvested options for certain grants issued prior to January 1, 2006, and
      from
      options awarded during the three and six month periods ended June 30,
      2006.






8


Three
                Months
            
            Six
                MonthsEnded
            
            EndedJune
                30, 2006
            
            June
                30, 2006Sales
                and marketing (“S&M”)
            
            $
            48,472
            
            $
            72,911Research
                and development (“R&D”)
            
            
            70,240
            
            
            130,043General
                and administrative (“G&A”)
            
            
            98,838
            
            
            106,635Stock-based
                compensation before income taxes
            
            
            217,550
            
            
            309,589Income
                tax benefit
            
            
            -
            
            
            -Total
                stock-based compensation expense after income taxes
            
            $
            217,550
            
            $
            309,589





Employee
      stock-based compensation expense in the three and six month periods ended June
      30, 2006, of $217,550 and $309,589, respectively, increased the Company’s net
      loss for those periods by those same amounts, and increased basic and diluted
      net loss per share by $0.01 in both periods. There was no impact on cash flows
      used in operations, or cash flows from financing activities, for the three
      and
      six month periods ended June 30, 2006 related to employee stock-based
      compensation expense.





The
      total
      stock-based compensation expense, net of income taxes, for the three months
      ended June 30, 2006 comprised $214,212 attributable to the vesting of employee
      and outside director (collectively referred to as “employee”) stock options, and
      $3,338 charged to R&D professional fees attributable to vesting of options
      issued to non-employee R&D contractors. The total stock-based compensation
      expense, net of income taxes, for the six months ended June 30, 2006 comprised
      $302,400 attributable to the vesting of employee stock options, and $7,189
      charged to R&D professional fees attributable to vesting of options issued
      to non-employee R&D contractors. During the three and six month periods
      ended June 30, 2005, the Company recognized R&D professional fees of $10,498
      and $14,439, respectively, related to the vesting of non-employee stock
      options.




Net
      cash
      proceeds from the exercise of stock options were $446,000 and $557,005 for
      the
      three and six month periods ended June 30, 2006, respectively. No income tax
      benefit was realized from stock option exercises during the three and six month
      periods ended June 30, 2006, due to the Company’s net loss from operations for
      the period. 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.




Prior
      to
      the adoption of SFAS 123(R), we applied SFAS 123, *“Accounting
      for Stock-Based Compensation”* ,
      amended
      by SFAS 148, “ *Accounting
      for Stock-Based Compensation — Transition and Disclosure* ”
(“SFAS
      148”), which allowed companies to apply the existing accounting rules under
      Accounting Principles Board No. 25, “ *Accounting
      for Stock Issued to Employees* ,”
(“APB
      25”) and related Interpretations. In general, as the exercise price of options
      granted under these plans was equal to the market price of the underlying common
      stock on the grant date, no stock-based employee compensation cost was
      recognized in our statements of operations for periods prior to the adoption
      of
      SFAS 123(R). As required by SFAS 148 prior to the adoption of SFAS 123(R),
      we
      disclosed reported net loss which included stock-based compensation expense
      of
      $0, calculated in accordance with APB 25, and then pro forma net loss as if
      the
      fair-value-based compensation expense calculated in accordance with SFAS 123
      had
      been recorded in the financial statements. The following table illustrates
      the
      effect on net loss after tax, and net loss per common share, as if we had
      applied the fair value recognition provisions of SFAS 123 to employee
      stock-based compensation during the three and six months ended June 30, 2005:





Three
                Months
            
            Six
                MonthsEnded
            
            EndedJune
                30, 2005
            
            June
                30, 2005Net
                loss as reported
            
            $
            (2,016,022
            )
            $
            (3,814,193
            )Less:
                  total stock-based compensation expense for employeesdetermined
                  under the SFAS 123 fair-value method
            
            
            (568,097
            )
            
            (839,918
            )Net
                loss, pro forma
            
            $
            (2,584,119
            )
            $
            (4,654,111
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (0.05
            )
            $
            (0.10
            )Pro
                forma
            
            $
            (0.07
            )
            $
            (0.12
            )





The
      fair
      value of employee and non-employee stock-based awards was estimated using the
      Black-Scholes valuation model with the following weighted-average assumptions
      for the three months ended June 30, 2006 and 2005:


9


Three
                MonthsEnded
                June 30,2006
            2005Employee
                Stock Options:Expected
                Life in Years
            3.00
                - 6.00
            5.00Volatility
            86
                -
                96.00%
            127.53%Interest
                Rate
            4.98
                - 5.00%
            4.14%Yield
                Rate
            0.00%
            0.00%Non-Employee
                Stock Options:Expected
                Life in Years
            4.00
            5.00Volatility
            91.00%
            127.53%Interest
                Rate
            5.00%
            4.14%Yield
                Rate
            0.00%
            0.00%




Our
      computation of expected volatility for the three months ended June 30, 2006
      is
      based on a combination of historical and market-based implied volatility. Our
      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.




Prior
      to
      the adoption of SFAS 123(R), on December 29, 2005, the Company’s Board of
      Directors approved the acceleration of vesting for all unvested employee stock
      options granted under the ANTs software inc. 2000 Stock Option Plan (the
“Plan”), as amended, excluding those stock options held by non-employee
      directors whose options had an exercise price less than $2.10, and certain
      employees who did not consent to such acceleration. The closing sale price
      of
      ANTs’ common stock on December 29, 2005 was $2.10. This was the price used to
      determine which options were “in” or “out of the money”. The Company accelerated
      a total of 2,621,004 options, of which 687,866 were in the money, and 1,933,138
      were out of the money. The vesting of the stock options was accelerated to
      December 29, 2005 so that the Company would not incur approximately $4.7 million
      in compensation expense in the 2006-2008 fiscal years that otherwise would
      have
      been recorded under SFAS 123(R).




Stock
      option activity (including both employee and non-employee grants) for the six
      months ended June 30, 2006, is as follows:





WeightedShares
            
            
            
            Average
            
            AggregateAvailable
            
            Outstanding
            
            Exercise
            
            IntrinsicFor
                Grant
            
            Stock
                Options
            
            Price
            
            ValueOutstanding
                at January 1, 2006
            
            
            1,818,940
            
            
            8,060,801
            
            $
            2.17
            
            
            N/AGranted
            
            
            (1,605,000
            )
            
            1,605,000
            
            $
            2.52
            
            
            N/AExercised
                through cash consideration
            
            
            -
            
            
            (318,902
            )
            $
            1.75
            
            $
            159,451Retired
                or forfeited
            
            
            213,837
            
            
            (213,837
            )
            $
            2.37
            
            
            N/AOutstanding
                at June 30, 2006
            
            
            427,777
            
            
            9,133,062
            
            $
            2.24
            
            $
            (91,331
            )Exercisable
                at June 30, 2006
            
            
            
            
            
            7,323,411
            
            $
            2.18
            
            $
            (512,639
            )




The
      aggregate intrinsic value of total stock options outstanding and exercisable,
      and of total stock options exercised during the six months ended June 30, 2006
      in the table above, represents the total pretax intrinsic value (i.e., the
      difference between the Company’s closing stock price on June 30, 2006 and the
      exercise price, times the number of shares) that would have been received by
      the
      option holders had all option holders exercised their options on June 30, 2006.
      Aggregate intrinsic value changes as the fair market value of the Company’s
      stock changes. The closing market price of the stock on June 30, 2006 was
      $2.25.





10


As
      of June
      30, 2006, there was approximately $3 million of total unrecognized compensation
      cost, adjusted for forfeitures, related to non-vested stock-based payments
      granted to Company employees and contractors, which is expected to be recognized
      over a weighted-average period of approximately 3 years. Total unrecognized
      compensation cost will be adjusted for future changes in estimated
      forfeitures.





Stock
      options outstanding and exercisable at June 30, 2006 are summarized in the
      table
      below.




Stock
                Options Outstanding
            
            Stock
                Options ExercisableNumber
                of
            
            Weighted
                Average
            
            Number
                of
            
            Weighted
                AverageOptions
            
            Remaining
            
            Options
            
            Exercise
                PriceOutstanding
            
            Contractual
                Life
            
            Exercisable
            
            per
                ShareRange
                of exercise prices:$0.52
                - $0.99
            
            
            470,500
            
            
            6.98
            
            
            470,500
            
            $
            0.70$1.00
                - $1.99
            
            
            2,026,161
            
            
            7.72
            
            
            1,995,336
            
            $
            1.54$2.00
                - $2.99
            
            
            5,860,960
            
            
            8.07
            
            
            4,082,134
            
            $
            2.46$3.00
                - $3.99
            
            
            725,441
            
            
            6.93
            
            
            725,441
            
            $
            3.05$4.00
                - $6.38
            
            
            50,000
            
            
            4.36
            
            
            50,000
            
            $
            6.38Total
                stock options
            
            
            9,133,062
            
            
            7.82
            
            
            7,323,411
            
            $
            2.18






**Recent
      Accounting Pronouncements** **




In
      May
      2005, the FASB issued SFAS 154, “ *Accounting
      Changes and Error Corrections”.* SFAS
      No.
      154 establishes new standards on accounting for changes in accounting
      principles. Pursuant to the new rules, all such changes must be accounted for
      by
      retrospective application to the financial statements of prior periods unless
      it
      is impracticable to do so. SFAS No. 154 supersedes Accounting Principles
      Bulletin (APB) Opinion 2, “ *Accounting
      for Changes”* and
      SFAS
      No. 3 “ *Reporting
      Accounting Changes in Interim Financial Statements”,* though
      it
      carries forward the guidance of those pronouncements with respect to accounting
      for changes in estimates, changes in the reporting entity, and error
      corrections. This statement is effective for accounting changes and error
      corrections made in years beginning after December 15, 2005, with early adoption
      permitted for changes and corrections made in years beginning after May 2005.
      The Company does not expect adoption of SFAS No. 154 to have a material impact
      on the Company's financial statements.




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






**4.** **PREPAID
      EXPENSE FROM WARRANT ISSUED TO CUSTOMER, NET**




Prepaid
      expense from warrant issued to customer, net, consists of the original charge
      of
      $173,021 related to the issuance of a warrant to a customer in 2005 to purchase
      100,000 shares of the Company’s Common Stock, in exchange for a guarantee by
      that customer to provide maintenance and support services for the ANTs Data
      Server to the Company’s customers should the Company be unable to provide such
      services. The fair value of the warrant was calculated using the Black-Scholes
      valuation model. The warrant has an exercise price of $3.50 per share and may
      be
      exercised until July 2008. The prepaid expense is being amortized into the
      statements of operations on a straight-line basis, over 36 months, commencing
      January 2006. Amortized expense for the three and six months ended June 30,
      2006
      was $14,418 and $28,837, respectively, leaving a net balance in the prepaid
      asset account of $144,184 on June 30, 2006.




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.              
      EQUITY
      TRANSACTIONS**





11




A
      comprehensive summary of transactions occurring in stockholders’ equity for the
      six months ending June 30, 2006 and 2005 is presented in the table
      below.





Changes
                in Stockholders' EquityFor
                the Six Months ended June 30,2006
            
            
            2005Total
                stockholders' equity, beginning of period
            
            $
            6,412,586
            
            $
            1,529,181Cash
                transactions:Proceeds
                from private placements:Sales
                of "F" Units at $1.00 per unit
            
            
            -
            
            
            933,000Cash
                commissions on sales of "F" units
            
            
            -
            
            
            (90,350
            )Commissions
                paid by issuing 63,181 "F" units to placement agent
            
            
            -
            
            
            -Sales
                of "G" Units at $1.60 per unit
            
            
            -
            
            
            2,642,000Cash
                commissions on sales of "G" units
            
            
            -
            
            
            (75,000
            )Sales
                of "H" units at $1.60 per unit
            
            
            204,000
            
            
            -Cash
                commissions on sales of "H" units
            
            
            (20,000
            )
            
            -Sales
                of restricted shares of common stock at $1.50 per share
            
            
            9,597,503
            
            
            -Cash
                commissions on sales of restricted shares of common stock
            
            
            (709,250
            )
            
            -Net
                proceeds from private placements
            
            
            9,072,253
            
            
            3,409,650Proceeds
                from warrant exercises:Warrants
                  with exercise price of $2.00 per share discounted to$1.50
                  and $1.40 per share in 2006 and 2005, respectively
            
            
            109,998
            
            
            3,935,797Cash
                commissions on exercise of warrants
            
            
            (39,125
            )
            
            (193,800
            )Net
                proceeds from warrant exercises
            
            
            70,873
            
            
            3,741,997Cash
                received from exercise of stock options
            
            
            557,005
            
            
            125,591Total
                cash transactions
            
            
            9,700,131
            
            
            7,277,238Non-cash
                transactions:Employee
                compensation expense - vesting of stock options
            
            
            302,399
            
            
            -Non-employee
                compensation expense:Restricted
                stock issued to vendor
            
            
            16,000
            
            
            -Stock
                  options issued in 2004 to, and exercised in 2005 by, executiverecruiter
                  in payment for search for new president
            
            
            -
            
            
            3,526Expense
                  incurred from extending exercise period on non-employeestock
                  option grant
            
            
            -
            
            
            30,130Vesting
                of stock options issued to contractors
            
            
            7,189
            
            
            5,692Total
                non-employee compensation expense
            
            
            23,190
            
            
            39,348Total
                non-cash transactions
            
            
            325,588
            
            
            39,348Net
                loss for fiscal period
            
            
            (6,646,160
            )
            
            (3,814,193
            )Total
                stockholders' equity, end of period
            
            $
            9,792,145
            
            $
            5,031,574





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





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






12




For
      the
      three and six month periods ending June 30, 2006, the Company recognized
      $214,211 and $302,399 in compensation expense related to vesting of employee
      stock options, respectively, and $3,338 and $7,189 in professional fees related
      to the vesting of non-employee stock options, respectively, in accordance with
      the accounting guidelines set forth in SFAS 123(R).





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





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





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




During
      the
      three months ended March 31, 2006, the Company paid cash commissions totaling
      $20,000 in connection with the H Unit offering that occurred during the fourth
      quarter of 2005. As well, the Company paid $39,125 in cash commissions in
      connection with the warrant exercises that occurred during the fourth quarter
      of
      2005.




During
      the
      three months ended March 31, 2006, a total of 93,902 shares of common stock
      of
      the Company were purchased through the exercise of stock options, resulting
      in
      cash proceeds to the Company of ** $111,005.





For
      the
      fiscal period ending March 31, 2006, the Company 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.





From
      November 12, 2004 through January 12, 2005, the Company sold to accredited
      investors, through a private offering, 2,123,000 F Units at a price of one
      dollar ($1.00) per F Unit, with each F Unit consisting of (i) one (1) share
      of
      common stock of the Company, and (ii) a warrant to purchase up to one (1) share
      of common stock of the Company at a per share exercise price of two dollars
      ($2.00), exercisable until November 12, 2007. The gross proceeds from the
      offering were $2,123,000, of which $933,000 was received in January 2005. The
      Company issued 963,000 shares in January 2005, including 30,000 shares that
      had
      been recorded as common stock subscribed as of December 31, 2004. The Company
      paid cash commissions totaling $90,350 and issued 63,181 F Units to the
      placement agent in January 2005 in connection with this private offering. The
      sales of these securities were made in reliance upon Rule 506 and Section 4(2)
      of the Securities Act of 1933.





From
      February 1, 2005 through March 31, 2005, the Company offered all shareholders
      who owned warrants with an exercise price of $2.00 the right to exercise their
      warrants at a discounted price of $1.40 per share. A total of 2,140,283 warrants
      was exercised, resulting in gross proceeds to the Company of $2,996,396. The
      Company paid cash commissions of $104,550 in connection with these warrant
      exercises in March and April of 2005. The
      sales
      of these securities were made in reliance upon Rule 506 and Section 4(2) of
      the
      Securities Act of 1933.




On
      February 25, 2005, a prior
      consultant exercised an option for 12,886 shares. The Company received no cash.
      The option was previously granted in lieu of cash compensation. The Company
      recognized non-employee compensation expense of $3, 526 and $21,473 in the
      six
      month period ended June 30, 2005, and the fiscal year ended December 31, 2004,
      respectively.




From
      April
      14, 2005 through May 31, 2005, the Company offered certain shareholders who
      owned
      warrants with an exercise price of $2.00 the right to exercise their warrants
      at
      a discounted price of $1.40 per share. A total of 671,000 warrants were
      exercised, resulting in gross proceeds to the Company of $939,400. The Company
      paid cash commissions of $89,250 in connection with these warrant exercises
      in
      May 2005. The
      sales
      of these securities were made in reliance upon Rule 506 and Section 4(2) of
      the
      Securities Act of 1933.








13




From
        April
        14, 2005 through June 30, 2005, the Company sold to accredited investors,
        through a private offering, 1,651,250 G Units at a price of one dollar and
        sixty
        cents ($1.60) per G Unit, with each G Unit consisting of (i) one (1) share
        of
        common stock of the Company, and (ii) a warrant to purchase up to one (1)
        share
        of common stock of the Company at a per share exercise price of three dollars
        and fifty cents ($3.50), exercisable until April 14, 2008. The gross proceeds
        from the offering were $2,642,000. The Company paid cash commissions of $75,000,
        and issued 29,829 G Units to the placement agent in connection with this
        private
        offering. The sales of these securities were made in reliance upon Rule 506
        and
        Section 4(2) of the Securities Act of 1933.


In
      January
      2005 a sales consultant’s contract terminated, and as part of the termination
      agreement, the Company agreed to extend the period for exercising certain stock
      options from the standard three months allowed under the 2002 Stock
      Option Plan to one year. On May 1, 2005, the Company recognized non-employee
      stock compensation expense of $30,130 related to the extension.





During
      the
      six months ended June 30, 2005, $5,692 in non-employee stock compensation
      expense was recognized related to the vesting of options held by continuing
      consultants.





During
      the
      six months ended June 30, 2005, a total of 116,590 shares of common stock
      of the Company were purchased through the exercise of stock options, resulting
      in cash proceeds to the Company of ** $125,591.





**6.**  **WARRANTS
      AND STOCK OPTIONS**





As
      of June
      30, 2006, the Company had outstanding options to purchase up to 9,133,062 shares
      of common stock, and warrants to purchase up to 13,252,141 shares of common
      stock. These securities give the holder the right to purchase shares of the
      Company’s common stock in accordance with the terms of the
      instrument.





StockOptions
            Warrants
            TotalBalance,
                December 31, 2005
            8,060,801
            13,121,580
            21,182,381Granted
            1,605,000
            240,256
            1,845,256Exercised
            318,902
            73,332
            392,234Retired/forfeited
            213,837
            36,363
            250,200Balance,
                June 30, 2006
            9,133,062
            13,252,141
            22,385,203





As
      of June
      30, 2006, 427,777 options were available in the option reserve for future
      grants.





**7.              
      DEFERRED REVENUES**





As
      of June
      30, 2006 deferred revenues of $92,724 consisted of: 1) sales of both perpetual
      and limited term (usually three years) licenses to use the ANTs Data Server
      (“ADS”) product where the different elements of the sale (generally license fee,
      maintenance and support and consulting services) have been bundled in the sales
      contract and 2) payments from customers in advance for one-year software
      maintenance under perpetual licenses for which the pricing for the license
      and
      the annual maintenance was not bundled. In accordance with the AICPA’s Statement
      of Position 97-2 (“SOP 97-2”), “ *Software
      Revenue Recognition”* ,
      all
      revenue for contracts with bundled pricing is deferred, and is amortized ratably
      over the life of the contracts. For sales with unbundled pricing, the license
      fee is recognized as revenue in the statement of operations when all the revenue
      recognition criteria of SOP 97-2 are met. Revenue related to the one-year
      maintenance contracts is deferred, and is amortized ratably into the statement
      of operations over the annual period. During the three and six month periods
      ended June 30, 2006 and 2005, the Company recognized $33,196 and $59,585; and
      $7,000 and $7,667, respectively, of deferred revenue in the statement of
      operations.





**8.** **COMMITMENTS AND CONTINGENCIES**





On
      April
      27, 2005, the Company entered into a lease with Bayside Plaza, a partnership,
      for approximately 15,600 square feet of general commercial offices located
      at
      700 Airport Boulevard, Suite 300, Burlingame, California (the “Premises”). The
      Company moved its 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 the
      Company's 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.
      The Company received abated rent for the period from May 1, 2005 to July 30,
      2005. In the event that the Lease is not extended, the total obligations of
      the
      Company related to the lease amount to $600,060.


14


The
      Company is recognizing rent expense for this lease in accordance with Financial
      Technical Bulletin 85-3 (“FTB 85-3”), *“Accounting
      for Operating Leases with Scheduled Rent Increases”.* The base
      rent, the effects of the scheduled rent increases, and the effects of the rent
      abatement are being recognized on a straight-line basis over the lease term.
      This results in monthly rental expense of $16,668. During the three and six
      months ended June 30, 2006, the Company recognized a total of $50,005 and
      $100,010 in rental expense for this lease. During the same periods in 2005,
      the
      Company recognized $33,336 and $83,340 in rental expense,
      respectively.





As
      of June
      30, 2006, the total remaining unamortized deferred rent was $53,777, of which
      $16,060 was included as a current liability in accounts payable and other
      accrued expenses, and $37,717 is in long-term liabilities on the balance sheet.
      As of June 30, 2006, the total remaining off-balance sheet lease obligation
      was
      $420,480.





As
      part of
      a License Agreement (“Agreement”) dated August 1, 2005 with a certain customer,
      the Company has agreed to issue a warrant to purchase 50,000 shares of
      restricted stock of the Company to the customer thirty (30) days after the
      Software Acceptance Date, subject to approval from the Company’s board of
      directors, compliance with applicable securities laws and regulations and
      Licensee representing that it is an accredited investor. The warrant has an
      exercise price of $3.50 per share and shall be exercisable for a period of
      three
      years from the Effective Date of the warrant. If the warrant is not granted
      within thirty (30) days after the Software Acceptance Date without fault of
      Licensee, then Licensee will have the right to terminate the Agreement on notice
      to the Company, and the Company will immediately refund to Licensee all monies
      theretofore paid to the Company under this Agreement. To date, the customer
      has
      not fully accepted the software, thus the warrant has not been
      issued.





**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 6, Management’s Plan of Operations,
      in the Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2005.





*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 the Company will have adequate financial resources to fund
      the development and operation of its business, that there will be no material
      adverse change in the Company’s operations or business, that the Company will
      meet success in marketing and selling its products, and that the Company will
      be
      able to continue to attract and retain skilled employees necessary for its
      business, among other things. The foregoing assumptions are based on judgments
      with respect to, among other things, information available to the Company,
      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 the Company’s control. Accordingly, although the
      Company believes 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 the
      Company’s business and operations, which could cause the Company’s financial
      performance to vary markedly from prior results, or results contemplated by
      the
      forward-looking statements. Such risks include failure of the ANTs technology
      or
      products to work as anticipated, failure to develop commercially viable products
      or services from the ANTs technology, delays or failure in fundraising 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 the Company to alter its capital investment and
      other expenditures, which may also adversely affect the Company’s 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 the Company
      that
      the Company’s objectives or plans will be achieved. The Company undertakes no
      obligation to revise or publicly release the results of any revision to these
      forward-looking statements.*






15


The
      Company is engaged in the development and marketing of the ANTs Data Server,
      a
      relational database management system (“RDBMS”) that is intended to
      significantly lower database infrastructure costs and significantly improve
      application performance. The Company anticipates that over the next twelve
      months its focus will be on sales, marketing, supporting customers, and
      continued research and development.





**Technology
      Development**





The
      ANTs
      Data Server is based on technologies that provide an advantage over other RDBMS’s:
      Universal Compatibility and the ANTs Concurrency Engine.





**Universal
      Compatibility**





Applications
      written to work with one RDBMS are typically incompatible with other RDBMSs
      due
      to proprietary extensions developed and popularized by other RDBMS vendors.
      This
      has the effect of locking in customers to one RDBMS vendor because it will
      generally be cost-prohibitive and time-consuming to port an application which
      currently works with one RDBMS to work with another RDBMS. ANTs has developed
      technology that allows the ANTs Data Server to natively process these
      proprietary extensions from almost all popular RDBMS vendors. This technology,
      which is tightly integrated into the ANTs Data Server, allows customers to
      port
      applications to the ANTs Data Server more easily and at less cost. ANTs believes
      that this universal compatibility technology is not present in any other RDBMS
      product.





**The
      ANTs Concurrency Engine (ACE)**





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





Over
      the
      next twelve months, assuming the Company is sufficiently funded, the Company
      intends to continue to improve and add functionality to the ANTs Data Server.
      The Company has built out the basic functionality to the point where it believes
      that virtually all additional functionality will be driven by partner or
      customer demand. The Company intends to actively engage prospective partners
      and
      customers to determine what features are and will be most in demand. The Company
      intends to mobilize its engineering resources around developing those features.





**Marketing**





The
      benefits of the Company’s Universal Compatibility and ANTs Concurrency Engine
      technologies apply to a wide variety of potential customers and partners.
      Accordingly, the Company’s go-to-market strategy includes:





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


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


·
            Sell
                the ANTs Data Server through three sales
                channels;


o
            Direct
                sales to end-users.


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


o
            Through
                value added resellers and system integrators - companies which generally
                have deep expertise in certain vertical markets and who integrate
                the best
                products to develop complete solutions for their customers.







16





**Results
      of Operations**





The
      results of operations for the three and six months ended June 30, 2006 and
      2005
      are summarized below.








Summary
                of Statements of Operations($
                in 000's)For
                Three Months ending June 30,
            
            For
                Six Months ending June 30,2006
            
            2005
            
            %
                Change
            
            2006
            
            2005
            
            %
                ChangeRevenues
            
            $
            83
            
            $
            135
            
            
            -39
            %
            $
            152
            
            $
            222
            
            
            -32
            %Cost
                of goods sold
            
            
            15
            
            
            -
            
            
            N/A
            
            
            15
            
            
            -
            
            
            N/AGross
                profit
            
            
            68
            
            
            135
            
            
            -50
            %
            
            137
            
            
            222
            
            
            -38
            %Operating
                expenses
            
            
            4,017
            
            
            2,112
            
            
            90
            %
            
            6,846
            
            
            4,000
            
            
            71
            %Loss
                from operations
            
            
            (3,949
            )
            
            (1,977
            )
            
            100
            %
            
            (6,709
            )
            
            (3,778
            )
            
            78
            %Other
                income (expense), net
            
            
            54
            
            
            (39
            )
            
            -238
            %
            
            63
            
            
            (36
            )
            
            -275
            %Net
                loss
            
            $
            (3,895
            )
            $
            (2,016
            )
            
            93
            %
            $
            (6,646
            )
            $
            (3,814
            )
            
            74
            %Net
                      loss per share - basic and diluted
            
            $
            (0.08
            )
            $
            (0.05
            )
            
            60
            %
            $
            (0.14
            )
            $
            (0.10
            )
            
            40
            %Shares
              used in computing basic and diluted netloss
                  per share (in 000's)
            
            
            51,776
            
            
            39,535
            
            
            31
            %
            
            48,496
            
            
            38,362
            
            
            26
            %







**Revenues**




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





During
      the
      three and six months ending June 30, 2006, the Company recorded revenue of
      $83
      thousand and $152 thousand, respectively, as compared to $135 thousand and
      $222
      thousand during the same periods in 2005. For the three and six month periods
      ended June 30, 2005, one customer accounted for $114 thousand, or 84%, and
      $186
      thousand, or 84%, of total revenue (comprising licensing fees and amortization
      of prepaid maintenance and support contracts), respectively. This customer
      did
      renew the annual
      maintenance and support contracts for the licenses purchased in 2005 in the
      first quarter of 2006, and accounted for $24 thousand, or 26%, and $45 thousand,
      or 28%, of earned revenue for the three and six month periods ended June 30,
      2006, respectively.  ****





**Cost
      of Goods Sold**





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





**Overview
      of Operating Expenses**





During
      the
      three and six months ending June 30, 2005, the Company completed a transition
      from heavy focus on research and development of the ANTs Data Server to an
      expanding focus on sales, marketing and customer support. Also during the third
      quarter of 2005, the Company changed strategic direction - while continuing
      to
      focus on the high-performance database market, the Company began pursuing a
      much
      bigger legacy database replacement market by taking advantage of the universal
      compatibility technology in ADS to offer customers a lower-cost, compatible
      alternative to expensive legacy database products. To support the revised
      strategy, the Company initiated an aggressive recruiting campaign in the fourth
      quarter of 2005 to attract additional software engineers and salespeople, expand
      its relationship with partners to provide non-core engineering resources and
      continue to build up its test and development lab.


17


Throughout
      the fiscal period ended June 30, 2006, the Company’s operating expenses
      increased significantly as compared to 2005. For the three month periods ending
      June 30, 2006 and 2005, total operating expenses increased to $4 million from
      $2.1 million, an increase of $1.9 million, or 90%. For the six months ended
      June
      30, 2005 and 2006, total operating expenses increased to $6.8 million from
      $4
      million, an increase of $2.8 million, or 71%. The ratio of each operating
      department’s expense levels to total operating expense remained relatively level
      from 2005 to 2006. During both the three and six month periods ending June
      30,
      2006 and 2005, Sales and Marketing (“S&M”) expenses were 36-40% of total
      operating expenses. During the same periods, Research and Development
      (“R&D”) expenses were 37-40% of the total, while General and Administrative
      (“G&A”) expenses were 22-25% of the total.





All
      areas
      of the Company expanded in 2006 as the company added personnel and relocated
      its
      offices (in May 2005) to accommodate growth. The growth in average full-time
      equivalent employees (“FTE”) from June 30, 2005 to June 30, 2006 is shown in the
      table below by department.





Change
                fromAverage
                FTE
            
            %
                of
            
            Average
                FTE
            
            %
                of
            
            2005
                to 2006FYTD
                2006
            
            Total
            
            FYTD
                2005
            
            Total
            
            Amount
            
            %Sales
                and marketing
            
            
            15
            
            
            35
            %
            
            9
            
            
            31
            %
            
            6
            
            
            67
            %Research
                and development
            
            
            22
            
            
            51
            %
            
            15
            
            
            52
            %
            
            7
            
            
            47
            %General
                and administrative
            
            
            6
            
            
            14
            %
            
            5
            
            
            17
            %
            
            1
            
            
            20
            %Totals
            
            
            43
            
            
            100
            %
            
            29
            
            
            100
            %
            
            14
            
            
            48
            %





In
      accordance with Financial Accounting Standards Board Statement No. 123 (R) *“Share-Based
      Payment”* (“Statement”) *”* ,
      as of
      January 1, 2006, the Company began recognizing employee stock-based compensation
      expense related to employee stock option vesting in the statement of operations.
      The Statement and its application to the Company’s financial statements is
      discussed in greater detail in “Critical Accounting Policies and Estimates”
below. The total stock-based compensation expense recognized in the three and
      six month periods ending June 30, 2006 was $217.6 thousand and $309.6 thousand,
      respectively. The details by Company functional area (departments) are discussed
      below.





Operating
      expenses by department for the three and six months ending June 30, 2006 and
      2005 were as follows:





Operating
                Expenses - Three Months ended June 30,2006
            
            2005%
                Change vs.$
                in 000's
            
            
            %
                of Total
            
            
            Prior
                Period
            
            
            $
                    in 000's
            
            
            %
                of TotalSales
                and marketing
            
            $
            1,560
            
            
            39
            %
            
            82
            %
            $
            855
            
            
            40
            %Research
                and development
            
            
            1,479
            
            
            37
            %
            
            86
            %
            
            796
            
            
            38
            %General
                and administrative
            
            
            978
            
            
            24
            %
            
            112
            %
            
            461
            
            
            22
            %Total
                operating expenses
            
            $
            4,017
            
            
            100
            %
            
            90
            %
            $
            2,112
            
            
            100
            %2006
            2005%
                Change vs.$
                in 000's
            
            
            %
                of Total
            
            
            Prior
                Period
            
            
            $
                    in 000's
            
            
            %
                of TotalSales
                and marketing
            
            $
            2,631
            
            
            38
            %
            
            84
            %
            $
            1,431
            
            
            36
            %Research
                and development
            
            
            2,710
            
            
            40
            %
            
            71
            %
            
            1,583
            
            
            40
            %General
                and administrative
            
            
            1,505
            
            
            22
            %
            
            53
            %
            
            986
            
            
            24
            %Total
                operating expenses
            
            $
            6,846
            
            
            100
            %
            
            71
            %
            $
            4,000
            
            
            100
            %







18


**Sales
      and Marketing Expenses**





Sales
      and
      marketing (“S&M”) expenses consist primarily of employee salaries and
      benefits, consultants’ fees, travel, marketing programs (e.g., trade shows,
      public relations, and lead generation programs), marketing and sales literature
      and presentations, and allocation of general corporate expenses such as rent
      and
      office supplies. Significant increases in S&M expenses for the three and six
      month periods ended June 30, 2006 as compared to the same periods in 2005 were
      driven both by the 67% increase in average full-time equivalent employees from
      2005 to 2006, and the changes in marketing strategy discussed
      above.





S&M
      expenses increased by $705 thousand, or 82%, to $1.56 million in the three
      months ended June 30, 2006 from $855 thousand in the same period in 2005, due
      primarily to the following: 1) an increase of $201.3 thousand, or 51%, in
      employee-related expenses (e.g.,
      salaries, benefits, rent, office supplies, recruiting and other) from
      $393.1 thousand in 2005 to $594.4 thousand in 2006; 2) stock-based employee
      compensation expense as required by the implementation of SFAS 123 (R) effective
      January 1, 2006, of $43 thousand in 2006 as compared to $0 in 2005; 3) an
      increase in direct sales-related expenses (bonuses, commissions, travel and
      entertainment) of $123.3 thousand, or 95%, from $130.2 thousand in 2005 to
      $253.5 thousand in 2006; and 4) an increase in expenses related to marketing
      activities (trade shows and other marketing events, professional fees, lead
      generation programs) of $325 thousand, or 102%, from $319.2 thousand in 2005
      to
      $644.2 thousand in 2006.




S&M
      expenses increased by $1.2 million, or 84%, to $2.63 million in the six month
      period ended June 30, 2006 from $1.43 million in the same period in 2005, due
      primarily to the following: 1) an increase of $479.1 thousand, or 74%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $650.9 thousand in 2005 to $1.13 million in 2006;
      2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $72.9 thousand in 2006 as compared
      to
      $0 in 2005; 3) an increase in direct sales-related expenses (bonuses,
      commissions, travel and entertainment) of $184.7 thousand or 84%, from $220
      thousand in 2005 to $404.7 thousand in 2006; and 4) an increase in expenses
      related to marketing activities (trade shows and other marketing events,
      professional fees, lead generation programs) of $438.7 thousand or 82%, from
      $536.5 thousand in 2005 to $975.2 thousand in 2006.





The
      Company expects that, if sufficiently funded, its marketing and sales expenses
      will increase moderately to substantially as more marketing and sales
      personnel are hired and more programs are implemented.





**Research
      and Development Expenses**





Research
      and development (“R&D”) expenses consist primarily of employee salaries and
      benefits, fees to off-shore consultants, depreciation on equipment and software,
      and allocation of general corporate expenses such as rent and office supplies.
      Significant increases in R&D expenses for the three and six month periods
      ended June 30, 2006 as compared to the same periods in 2005 were driven both
      by
      the 47% increase in average full-time equivalent employees from 2005 to 2006,
      and the changes in marketing strategy discussed above. The change in 2006 in
      marketing strategy and emphasis, and the increase in customer implementations
      in
      2006, required adding significant new engineering resources, in the form of
      both
      employees and increased use of off-shore consultants to support R&D
      operations.





R&D
      expenses increased by $684 thousand, or 86%, to $1.48 million in the three
      months ended June 30, 2006 from $796 thousand in the same period in 2005, due
      primarily to the following: 1) an increase of $395.8 thousand, or 66%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $595.6 thousand in 2005 to $991.4 thousand in 2006;
      2) stock-based employee compensation expense as required by the implementation
      of SFAS 123 (R) effective January 1, 2006, of $66.9 thousand in 2006 as compared
      to $0 in 2005; 3) an increase in off-shore consulting expenses of $152 thousand,
      or 120%, from $127.2 thousand in 2005 to $279.2 thousand in 2006; and 4) an
      increase in computer supplies of $63.5 thousand, or 520%, from $12.2 thousand
      in
      2005 to $75.7 thousand in 2006.




R&D
      expenses increased by $1.13 million, or 71%, to $2.71 million in the six month
      period ended June 30, 2006 from $1.58 million in the same period in 2005, due
      primarily to the following: 1) an increase of $660 thousand, or 54%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $1.22 million in 2005 to $1.88 million in 2006;
      2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $122.9 thousand in 2006 as compared
      to $0 in 2005; 3) an increase in off-shore consulting expenses of $269 thousand,
      or 124%, from $217.8 thousand in 2005 to $486.8 thousand in 2006; and 4) an
      increase in computer supplies of $65.6 thousand, or 272%, from $24.1 thousand
      in
      2005 to $89.6 thousand in 2006.


19




The
      Company expects that, if sufficiently funded, its R&D expenses will increase
      moderately to substantially as additional staff is hired, and additional
      hardware is purchased, to support product development for sales and
      marketing needs.





**General
      and Administrative**




General
      and administrative (“G&A”) expenses consist primarily of employee salaries
      and benefits, facilities costs, general office expenses, travel and
      entertainment and professional fees (e.g., accounting, legal, investor
      relations). Increases in G&A expenses for the three and six month periods
      ended June 30, 2006 as compared to the same periods in 2005 were driven both
      by
      the 20% increase in average full-time equivalent G&A employees (“FTE”) from
      2005 to 2006, and increases in the costs of certain administrative expenses,
      such as medical insurance premiums, office rent (due to relocation of offices
      in
      May 2005 which approximately tripled the Company’s monthly rent from $6 thousand
      to $17 thousand) and other facilities costs such as utilities, costs
      related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX
      404”), and general office expenses such as office supplies and
      communications.





G&A
      expenses increased by $517 thousand, or 112%, to $978 thousand in the three
      months ended June 30, 2006 from $461 thousand in the same period in 2005, due
      primarily to the following: 1) an increase of $140.4 thousand, or 48%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $289.8 thousand in 2005 to $430.2 thousand in 2006;
      2) stock-based employee compensation expense as required by the implementation
      of SFAS 123 (R) effective January 1, 2006, of $98.8 thousand in 2006 as compared
      to $0 in 2005; 3) amortization of prepaid warrant expense of $14.4 thousand
      in
      2006 as compared to $0 in 2005; and 4) an increase of $236.5 thousand, or 142%,
      in professional fees, from $166.4 thousand in 2005 to $402.9 thousand in 2006.
      The increase in professional fees results primarily from consulting fees related
      to SOX 404 compliance incurred in 2006, increases in investor relations expense
      in 2006 due to increased capital-raising efforts, and more frequent public
      communications to investors, and increases in outside accounting costs related
      to the implementation of SOX 404 which commenced in the second quarter of 2006,
      and the Company’s change to reporting its financial results and other required
      information on a Form 10-Q, effective for the first quarter of 2006, rather
      than
      a Form 10-QSB as in previous quarters.





G&A
      expenses increased by $519 thousand, or 53%, to $1.505 million for the six
      months ended June 30, 2006, from $986 thousand in the same period in 2005,
      due
      primarily to the following: 1) an increase of $135.4 thousand, or 22%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $602.5 thousand in 2005 to $737.9 thousand in 2006;
      2) stock-based employee compensation expense as required by the implementation
      of SFAS 123 (R) effective January 1, 2006, of $106.6 thousand in 2006 as
      compared to $0 in 2005; 3) amortization of prepaid warrant expense of $28.8
      thousand in 2006 as compared to $0 in 2005; and 4) an increase of $174.6
      thousand, or 47% in professional fees, from $369 thousand in 2005 to $543.6
      thousand in 2006. The increase in professional fees results primarily from
      consulting fees related to SOX 404 compliance incurred in 2006, increases in
      investor relations expense in 2006 due to increased capital-raising efforts,
      and
      more frequent public communications to investors, and increases in outside
      accounting costs related to the implementation of SFAS 123(R) during the first
      quarter of 2006, the implementation of SOX 404 which commenced in the second
      quarter of 2006, and the Company’s change to reporting its financial results and
      other required information on a Form 10-Q, effective for the first quarter
      of
      2006, rather than a Form 10-QSB as in previous quarters.




The
      Company expects that, if sufficiently funded, its general and administrative
      expenses will increase moderately as the Company expands overall and as the
      accounting area expands internal controls and implements SOX 404-compliance
      initiatives. Although the Company's total cost of compliance in 2006 is
      presently unknown, preliminary investigation indicates that the cost could
      be in
      the $400 - $600 thousands range. To date, the Company has incurred $112.7
      thousand in consulting fees.




**Other
      Income (Expense), Net**





During
      the
      three and six month periods ended June 30, 2006, other income (expense), net
      was
      $54 thousand and $63.3 thousand, respectively. During the same periods in 2005,
      the totals were $(38.8) thousand and $(35.7) thousand, respectively. In both
      years, the income consisted primarily of interest income earned on bank
      deposits, net of interest expense paid on credit card facilities. Interest
      income in the three and six month periods ended June 30, 2006 was $54.3 thousand
      and $64 thousand, respectively, as compared to $6 thousand and $8.6 thousand
      for
      the same periods in 2005, respectively. The three and six month increases from
      2005 to 2006 of $48.3 thousand, or 805%, and $55.4, or 644%, respectively,
      are
      due to a combination of higher monthly cash balances in interest-bearing
      accounts in 2006 as compared to 2005, and the transfer of these balances to
      a
      money-market fund yielding 4-5% interest during the second quarter of 2006,
      as
      compared to the previous interest-bearing account which yielded slightly less
      than 1%. The average monthly cash balance for the six months ended June 30,
      2006
      was approximately $7 million, as compared to approximately $3 million during
      the
      2005 period; an increase of $4 million, or 133%. The increase in invested cash
      balances from fiscal year to fiscal year is due to approximately $23 million
      in
      capital that was raised between December 31, 2004 and June 30, 2006, net of
      cash
      outflows for operations and investing activities.


20


During
      the
      three and six months ended June 30, 2005, the Company wrote off $45 thousand
      in
      leasehold improvements related to its former offices, as compared to $0 in
      2006.





**Liquidity
      and Capital Resources**





For
      the
      last five fiscal years, the Company has reported negative cash flow from
      operations. During the period 2000-2004, the Company was focused primarily
      on
      research and development with its first sales occurring in the first quarter
      of
      2005. Throughout the last five years, the Company has been supported by cash
      flows from financing activities, primarily in the form of equity, rather than
      debt. At present, ANTs has no long-term debt.





The
      Company has financed operations by offering several private placements of its
      common stock each year. The offerings typically consist of Units, which give
      the
      investor shares of restricted common stock at a discount to the then-current
      market price, and a warrant to purchase the same number of restricted shares
      of
      common stock at a fixed price set at a premium to the then-current market price.
      The warrants typically have a life of three years. During the second quarter
      of
      2006, the Company offered a private placement of restricted shares of the
      Company’s common stock at a discounted to the market price of $1.50, with no
      warrants. The Company’s investing activities have been focused almost entirely
      on the acquisition of computer equipment, and expansion of electrical and
      air-conditioning capacity in its 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.





To
      date,
      cash received from sales has been minimal. During the six months ended June
      30,
      2006 and 2005, cash inflow from sales was $114 thousand and $98 thousand,
      respectively. These revenues were significantly less than the Company’s need for
      funds.





During
      the
      six months ended June 30, 2006, operations used approximately $6.7 million
      in
      cash, and investing activities utilized another $365 thousand for total cash
      outflow of approximately $7 million. Since cash received from sales during
      the
      period was $114 thousand, the Company relied on cash flows from financing
      activities, which provided $9.7 million, and cash on hand, to fund operations
      and purchases of computer equipment. Cash on hand increased from $6.4 million
      on
      December 31, 2005 to $9 million at June 30, 2006. The Company anticipates that,
      at its current levels of revenues and expenditures, that the $9 million cash
      balance will fund operations through January 2007, assuming no more capital
      funds are raised during this period.





During
      the
      six months ended June 30, 2005, the Company used $3.7 million in operations,
      and
      $312 thousand in investing activities. The Company raised approximately $7.3
      million in equity capital, and had a remaining cash balance on hand of $1.45
      million at June 30, 2005.





The
      Company has three potential funding sources: 1) Raising funds by issuing stock
      and the exercise of warrants issued in connection with private placements;
      2) as
      the Company develops close relationships with large partners, it will pursue
      strategic investments from those partners; and 3) the Company has begun
      generating revenue and expects to continue generating revenue during the next
      twelve months and, if successful, this should be a source of some operating
      funds. There can be no assurance that any or all of these sources will provide
      sufficient funds to support the Company’s operations beyond January 2007. The
      Company intends to continue its acquisition of computer-related equipment to
      expand and update its computer laboratory; however, the Company presently has
      no
      commitments to acquire assets that would have a material impact on the balance
      sheet or statement of cash flows. The Company plans to fund all acquisitions
      with cash provided by operations and/or cash received from financing
      activities.





During
      the
      three most recent fiscal years, inflation and changing prices have had little
      or
      no effect on the Company’s operations or financial position.





**Off-Balance
      Sheet Arrangements**





As
      of June
      30, 2006, the Company had certain off-balance sheet arrangements as described
      below.





21


On
      April
      27, 2005, the Company entered into a lease with Bayside Plaza, a partnership,
      for approximately 15,600 square feet of general commercial offices located
      at
      700 Airport Boulevard, Suite 300, Burlingame, California (the "Premises").
      The
      Company moved its principal offices to these Premises on May 2, 2005.The
      Premises are used for the purposes of general office use including, without
      limitation, hosting server operations and for software development. The lease
      has an initial term of three years, subject to the Company's 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. The Company received abated
      rent
      for the period from May 1, 2005 to July 30, 2005. In the event that the Lease
      is
      not extended, the total obligations of the Company there under amount to
      $600,060.





The
      Company is recognizing rent expense for this lease in accordance with Financial
      Technical Bulletin 85-3 (“FTB 85-3”), *“Accounting
      for Operating Leases with Scheduled Rent Increases”.* The base
      rent, the effects of the scheduled rent increases, and the effects of the rent
      abatement are being recognized on a straight-line basis over the lease term.
      This results in monthly rental expense of $16,668. During the three and six
      months ended June 30, 2006, the Company recognized a total of $50,005 and
      $100,010 in rental expense for this lease. During the same periods in 2005,
      the
      Company recognized $33,336 and $83,340 in rental expense,
      respectively.





As
      of June
      30, 2006, the total remaining unamortized deferred rent was $53,777, of which
      $16,060 was included as a current liability in accounts payable and other
      accrued expenses, and $37,717 is in long-term liabilities on the balance sheet.
      As of June 30, 2006, the total remaining off-balance sheet lease obligation
      was
      $420,480.





The
      table
      below presents the Company’s total long-term contractual obligations as of June
      30, 2006, 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
            $420,480
            $195,640
            $224,840
            -
            -





**Critical
      Accounting Policies and Estimates**





*Use
      of
      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.
      The
      Company evaluates 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.





The
      Company believes the following represents its critical accounting
      policies:




·
            Revenue
                recognition


·
            Stock-based
                compensation


·
            Income
                taxes





*Revenue
      Recognition -* We
      recognize 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”), royalties from independent software vendors who bundle ADS with their
      product offerings, and professional services.


22


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 support
      fees, and royalties from independent software vendors are recognized when all
      of
      the following criteria are met:





·
            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.





*License
      and Royalty Revenue*





The
      Company recognizes revenue from
      license agreements when earned which generally occurs when agreed upon
      deliverables have been provided, or milestones have been confirmed by licensees,
      and relative fair values of multiple elements can be determined. Royalty revenue
      is recognized when confirmation is received from the ISV that there are no
      concessions or contingencies and collectibility of the royalty is reasonably
      assured.





*Maintenance
      and Technical Support Revenue (“PCS”)*





The
      Company recognizes revenue from maintenance agreements based on the fair value,
      determined using VSOE, of such agreements. Maintenace revenue is deferred
      and amortized into the statement of operations over the period in which such
      services are provided, generally 12 months.





*Professional
      Services Revenue*





These
      revenues comprise primarily consulting services, and are recognized as services
      are performed under an engineering services agreement, when all revenue criteria
      and all obligations have been met. We charge the customer fees based on agreed
      upon billing rates, and the customers also reimburse us for agreed upon
      expenses.





*Stock-Based
      Compensation -* On
      January
      1, 2006, we adopted the provisions of Statement of Financial Accounting
      Standards (“SFAS”) 123(R), *“Share-Based
      Payment”* (the
      “Statement or “SFAS 123(R)”), requiring us to recognize expense related to the
      fair value of our stock-based compensation awards. We elected to use the
      modified prospective transition method as permitted by SFAS 123(R) and therefore
      have not restated our financial results for prior periods. Under this transition
      method, stock-based compensation expense for the three months ended March 31,
      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, which is three years. Grants to new
      employees and directors have an initial six month cliff for
      vesting.




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 overarching 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. The Company is applying the principles of SAB 107 in conjunction with
      its
      adoption of SFAS 123(R).






23


*Income
      Taxes* - The
      carrying value of the Company’s deferred tax assets are dependent upon the
      Company’s ability to generate sufficient future taxable income in certain tax
      jurisdictions. Until such time as the Company establishes a taxable income
      in
      such jurisdictions, the total amount of the deferred tax assets shall be
      completely offset with a valuation allowance.





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





None.





**ITEM
      4.     CONTROLS AND
      PROCEDURES**





The
      effectiveness of the design and operation of the Company's 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 the Company's 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, the Company's Chief Executive
      Officer and Chief Financial Officer have concluded that the Company's 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 the Company's 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 the Company’s internal
      control performed during its last fiscal quarter that has materially affected,
      or is reasonably likely to materially affect, the Company's internal control
      over financial reporting.








**PART
      II. OTHER INFORMATION**





**ITEM
      1.     LEGAL
      PROCEEDINGS**





The
      Company is not a party to any material pending legal proceeding and, to the
      best
      of its knowledge, no such action against the Company has been threatened, nor
      does the Company anticipate any such action.





**ITEM
      1A.   RISK FACTORS**





Our
      business faces 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
      think are 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 the Company’s products and services is not
      guaranteed*** **.** The
      Company is at an early stage of development and its revenue will depend upon
      market acceptance and utilization of its products and services. The Company’s
      product is under constant development and is still maturing. Some customers
      may
      be reluctant to purchase products from a company with an unproven product,
      uncertain finances, or less-experienced support department. Also, due to
      economic conditions some potential customers may have tightened budgets for
      evaluating new products and technologies and the evaluation cycles may be much
      longer than in the recent past. There can be no assurance that the Company’s
      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 when introduced. 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. Defects
      could also lead to product liability as a result of product liability lawsuits
      against us or against our customers. We may agree to indemnify our customers
      in
      some circumstances against liability arising from defects in our products.
      In
      the event of a successful product liability claim, we could be obligated to
      pay
      damages significantly in excess of our product liability insurance limits.






24


***The
      Company competes with large companies.*** **** The
      Company operates in a highly competitive industry. Although the Company believes
      that its technology is unique, can be protected, and, if adopted, will confer
      benefits that will be otherwise unavailable for some significant time, it faces
      very large competitors with greater resources who may adopt various strategies
      to block or slow its market penetration, thereby straining its more limited
      resources. The Company is aware of efforts by competitors to introduce doubt
      about the Company’s financial stability as it competes to win business. Large
      competitors may also seek to hinder the Company’s 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





***The
      Company will need to continue its product development efforts.*** ** The
      Company believes that its market will be characterized by increasing technical
      sophistication. The Company also believes that its eventual success will depend
      on its ability to continue to provide increased and specialized technical
      expertise. There is no assurance that the Company will not fall technologically
      behind competitors with greater resources. Although the Company believes that
      it
      enjoys a significant lead in its product development, and is hopeful that its
      patents provide some protection, it 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 have 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 financial obligations to 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
      the Company is unable to protect its intellectual property, its competitive
      position would be adversely affected*** **.** The
      Company relies on patent protection, as well as trademark and copyright law,
      trade secret protection and confidentiality agreements with its employees and
      others to protect its intellectual property. Despite the Company’s precautions,
      unauthorized third parties may copy its products and services or reverse
      engineer or obtain and use information that it regards as proprietary. The
      Company has filed eight patent applications with the United
      States Patent and Trademark Office and
      intends to file more. Four patents have been granted; however, the Company
      does
      not know if the remaining applications will be granted or whether it 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. The Company’s means of protecting its proprietary
      rights may not be adequate and third parties may infringe or misappropriate
      its
      patents, copyrights, trademarks and similar proprietary rights. If the Company
      fails to protect its intellectual property and proprietary rights, its business,
      financial condition and results of operations would suffer. The Company believes
      that it does not infringe upon the proprietary rights of any third party, and
      no
      third party has asserted an infringement claim against it. It is possible,
      however, that such a claim might be asserted successfully against the Company
      in
      the future. The Company may be forced to suspend its operations to pay
      significant amounts to defend its rights, and a substantial amount of the
      attention of its management may be diverted from its ongoing business, all
      of
      which would materially adversely affect its business.





***The
      Company focuses on the research and development of its proprietary technologies
      and the marketing of its first product*** .
      The
      Company’s present focus is on the research and development of its proprietary
      technologies and the marketing of its first product. The Company believes that
      these technologies are the basis for highly marketable commercial products.
      However, there can be no assurance of this, and it is possible that the
      Company’s proprietary technologies and products will have no commercial benefit
      or potential. In addition, from the Company’s inception to the present, it has
      not recognized any substantial operating revenues.





***Our
      operating results fluctuate, and any failure to meet financial expectations
      may
      disappoint securities analysts or investors and result in a decline in our
      stock
      price.*** We
      have
      experienced, and in the future may experience, resistance to revenue growth
      or
      otherwise fail to meet public market expectations, which could materially and
      adversely affect our business and the market price of our common stock. Our
      total revenues and operating results may fluctuate significantly because of
      a
      number of factors, many of which are outside of our control. These factors
      include, among other things:






25


·
            customer
                confidence in our ability to deliver expected
                results;


·
            the
                demand for database products;


·
            price
                increases by our competitors;


·
            the
                level of incompatibility in potential customers’ application
                databases;


·
            the
                length of our sales cycle and customer buying
                patterns;


·
            the
                size and timing of individual
                transactions;


·
            the
                timing of new product introductions and product
                enhancements;


·
            activities
                of and acquisitions by competitors;


·
            the
                timing of new hires and the allocation of our resources;
                and


·
            our
                ability to develop and market new products and control
                costs.





***The
      Company depends on its key personnel and may have difficulty attracting and
      retaining the skilled staff it needs to execute its growth
      plans*** **.** The
      Company’s success will be dependent largely upon the personal efforts of its
      Chief Executive Officer, Boyd Pearce, its President Joseph Kozak, and its
      Chairman, Francis K. Ruotolo, as well as other senior managers. The loss of
      key
      staff could have a material adverse effect on the Company’s business and
      prospects. To execute its plans, the Company will need to hire additional staff
      and retain current employees. Competition for highly skilled employees with
      technical, management, marketing, sales, product development and other
      specialized training is intense. The Company may not be successful in attracting
      or retaining such qualified personnel. Specifically, the Company may experience
      increased costs in order to attract and retain skilled employees. If the Company
      is unable to hire, train and manage new skilled and experienced employees as
      needed, it would be unable to support its planned growth and future
      operations.





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





***If
      the Company continues at or exceeds its current rate of growth, the Company
      will
      need to manage such growth well.*** The
      Company may experience substantial growth in the size of its staff and the
      scope
      of its operations, resulting in increased responsibilities for management.
      To
      manage this possible growth effectively, the Company will need to continue
      to
      improve its 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,
      the Company expects to experience difficulty in filling its needs for qualified
      personnel. There can be no assurance that the Company will be able to
      effectively achieve or manage any future growth, and its failure to do so could
      delay product development cycles and market penetration or otherwise have a
      material adverse effect on its financial condition and results of
      operations.





***The
      Company could face information and product liability risks and may not have
      adequate insurance*** **.** The
      Company’s product may be used to manage data from critical business
      applications. The Company may become the subject of litigation alleging that
      its
      product was ineffective or disruptive in its treatment of data, or in the
      compilation, processing or manipulation of critical business information. Thus,
      the Company may become the target of lawsuits from injured or disgruntled
      businesses or other users. The Company carries product and information liability
      or errors and omissions insurance, but in the event that the Company is required
      to defend more than a few such actions, or in the event that it is found liable
      in connection with such an action, its business and operations may be severely
      and materially adversely affected.





***Future
      profitability is not guaranteed.*** **** The
      Company has not recognized any substantial operating revenues to date. There
      is
      no assurance that the Company’s plans will be realized, that it will be able to
      generate revenues or that it will achieve profitability in the
      future.






26


***Changes
      to financial accounting standards may affect our results of operations and
      cause
      us to change our business practices.*** We
      prepare our 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 conduct our business. For example, accounting
      principles affecting many aspects of our business, including rules relating
      to
      equity-related compensation, have recently been revised or are under review.
      The
      Financial Accounting Standards Board and other agencies have finalized changes
      to U.S. generally accepted accounting principles that required us, starting
      last
      quarter, to record a charge to earnings for employee stock option grants and
      other equity incentives. We will have significant and ongoing accounting charges
      resulting from option grant and other equity incentive expensing that could
      reduce our overall net income or increase our losses. In addition, since we
      historically have 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 to us and therefore make it more
      difficult to attract and retain employees.





***There
      is a limited market for the Company’s common stock.*** The
      Company’s common stock is not listed on any exchange and trades in the
      over-the-counter (the “OTC”) market. As such, the market for the Company’s
      common stock is limited and is not regulated by the authorities of any exchange.
      Further, the price of the Company’s 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 resell
      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 sell them. The market price of
      our
      common stock will likely fluctuate in response to a number of factors, including
      the following:





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


·
            economic
                conditions within the database
                industry;


·
            our
                failure to meet our 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.





***The
      Company has a long corporate existence and was inactive during much of its
      corporate history.***  **** The
      Company was formed as the Sullivan Computer Corporation, incorporated in
      Delaware in January 1979. **** The
      Company was privately owned until late 1986, at which time its common stock
      began trading in the over-the-counter market. This was a result of the
      registration of the Company’s common stock pursuant to the merger with CHoPP
      Computer Corporation, **** a
      British
      Columbia corporation. During the period from mid-1987 through late 1999, the
      Company had few or no employees. The Company’s operating activities were limited
      and were largely administered personally by its 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.*** We have
      begun and are underway in our compliance with Section 404 of the Sarbanes-Oxley
      Act of 2002. 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 come into 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.





27


***The
      Company has indemnified its officers and directors*** *.* The
      Company has indemnified its Officers and Directors against possible monetary
      liability to the maximum extent permitted under Delaware law.





***Limitation
      on ability for control through proxy contest.***  The
      Company’s 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 the Company by using a proxy contest, since the
      acquirer would only be able to elect two or three 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 our 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 our forward-looking statements as a result
      of many factors, including those set forth above and elsewhere in this report.
      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 June 30, 2006, the Company sold to accredited investors,
      through a private offering, 6,398,335 restricted shares of the Company’s Common
      Stock at a price of one dollar and fifty cents ($1.50) per share. The Company
      received $9,597,503 in gross proceeds from the offering. The Company paid
      $709,250 in cash commissions on these sales to the placement agent, and will
      issue 300,894 restricted shares of Common Stock in the amount of $496,475 to
      the
      placement agent as additional commissions. The sales of these securities were
      made in reliance upon Rule 506 and Section 4(2) of the Securities Act of 1933.




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




**ITEM
      3.     DEFAULTS UPON SENIOR
      SECURITIES**





None





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





The
      annual
      meeting of the shareholders of the Company was held on May 9, 2006. Of the
      45,294,022 shares entitled to vote at the meeting, 36,025,624 shares were voted.
      The results were as follows:





Proposal
      number 1 - Election of Two Class 3 Directors:




**FOR**
            
            **WITHHELD**Francis
                Ruotolo
            
            35,655,572
            
            370,052John
                Gaulding
            
            35,524,192
            
            501,432





28





Proposal
      number 2 - Amendment to our Amended and restated certificate of Incorporation
      to
      authorize an additional 100,000,000 shares of Common Stock:




**FOR**
            
            
            
            **AGAINST**
            
            
            
            **ABSTENTION**34,582,128
            
            
            
            1,168,559
            
            
            
            224,821




Proposal
      number 3 - Ratification of the selection of Burr, Pilger & Mayer, LLP, as
      independent accountants for the Company for the calendar year ending December
      31, 2006:




**FOR**
            
            
            
            **AGAINST**
            
            
            
            **ABSTENTION**35,598,430
            
            
            
            91,113
            
            
            
            336,080





The
      following directors continued in office after the annual shareholder meeting:
      Boyd Pearce, Thomas Holt, Homer G. Dunn and Robert Henry Kite.








**ITEM
      5.     OTHER
      INFORMATION**




None





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





(a) Exhibits




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


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


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


31.2
              Certification
                of the Chief Financial Officer required by Rule 13a-14(a) of the
                Securities Exchange Act of 1934, as amended, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of
                2002.
 32.1
              Certification
                  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 32.2
              Certification
                  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.


(b) 
      Reports on Form 8-K





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





1)
            On
                May 2, 2006, the Company announced that it had completed an offering
                of
                restricted shares of the Company’s Common Stock priced at $1.50 per share
                on May 1, 2006;


2)
            On
                May 10, 2006, the Company disclosed that: a) it had granted stock
                options
                to its four outside directors; b) it disclosed certain results of
                operations for the first quarter of 2006 at the Company’s annual
                shareholders’ meeting held on May 9, 2006; and c) as required by
                Regulation FD, a summary of what transpired at the May 9, 2006 annual
                shareholders’ meeting, including election results and other information
                regarding the Company’s activities;


3)
            On
                June 27, 2006, the Company announced that it had unilaterally extended
                the
                exercise termination date for outstanding warrants to purchase an
                aggregate of approximately 6.8 million shares of common stock at
                $2.00 per
                share from June 30, 2006 to September 30,
                2006.






29





**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.







ANTs
                software inc.Date: August
              14, 2006
            By:
            /s/
                Boyd PearceBoyd
              Pearce, Chief Executive Officer and DirectorDate: August
              14, 2006
            By:
            /s/
                Kenneth RuotoloKenneth
              Ruotolo, Chief Financial Officer and
              Secretary






30