**UNITED
      STATES**





**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


_____________________




**FORM
      10-Q**


**(Mark
      One)**





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





**For
      the quarterly period ended: September 30, 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 **Incorporation
                or Organization)****
            **(IRS
                Employer Identification Number)****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:




52,547,085
      shares of common stock as of October 31, 2006












**TABLE
      OF CONTENTS**








PART
                I. Financial InformationItem
              1.
            Condensed
              Financial StatementsBalance
                Sheets as of September 30, 2006 and December
                31, 2005
            3Statements
                of Operations for the Three and Nine Months
                ended September 30, 2006 and 2005
            4Statements
                of Cash Flows for the Nine Months ended
                September 30, 2005 and 2006
            5Notes
              to Condensed Financial Statements
            6-16Item
              2.
            Management’s Discussion
              and Analysis of Financial
              Condition and Results of Operations
            16-25Item
              3.
            Quantitative
              and Qualitative Disclosures About Market
              Risk
            25Item
              4.
            Controls
              and Procedures
            25PART
                II. Other InformationItem
              1.
            Legal
              Proceedings
            25Item
              1A.
            Risk
              Factors
            25-29Item
              2.
            Unregistered
              Sales of Equity Securities and Use
              of Proceeds
            29Item
              3.
            Defaults
              Upon Senior Securities
            29Item
              4.
            Submission
              of Matters to a Vote of Security
              Holders
            29Item
              5.
            Other
              Information
            30Item
              6.
            Exhibits
              and Reports on Form 8-K
            30Signatures
            31




2


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**




**ANTS
                SOFTWARE INC.****CONDENSED
                BALANCE SHEETS****(Unaudited)**September
                30,
            
            December
                31,ASSETS
            
            2006
            
            2005Current
                assets:Cash
                and cash equivalents
            
            $
            5,335,756
            
            $
            6,381,932Accounts
                  receivable, net of allowance for doubtful accounts of $49,738 and
                  $16,000
                in
                  2006 and 2005, respectively
            
            
            34,995
            
            
            45,228Prepaid
                insurance and other expenses
            
            
            232,135
            
            
            73,560Total
                current assets
            
            
            5,602,886
            
            
            6,500,720Restricted
                cash
            
            
            185,958
            
            
            105,399Prepaid
                expense from warrant issued to customer, net
            
            
            129,766
            
            
            173,021Property
                and equipment, net
            
            
            858,869
            
            
            622,515Other
                assets
            
            
            34,702
            
            
            34,702Total
                assets
            
            $
            6,812,181
            
            $
            7,436,357LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable and other accrued expenses
            
            $
            351,112
            
            $
            548,178Accrued
                bonuses and commissions payable
            
            
            43,750
            
            
            218,750Accrued
                vacation payable
            
            
            172,377
            
            
            149,573Deferred
                revenues
            
            
            121,522
            
            
            58,603Total
                current liabilities
            
            
            668,761
            
            
            975,104Long-term
                liabilities:Accrued
                rent
            
            
            26,402
            
            
            48,667Total
                liabilities
            
            
            715,163
            
            
            1,023,771Commitment
                and contingencies
            
            
            -
            
            
            -Stockholders’
                equity:Preferred
                  stock, $0.0001 par value; 50,000,000 shares authorized,
                no
                  shares issued and outstanding, respectively
            
            
            -
            
            
            -Common
                stock, $0.0001 par value; 200,000,000 shares authorized;
              52,305,417
                and 44,862,058 shares issued and outstanding, respectively
            
            
            5,231
            
            
            4,487Common
                stock subscribed, not issued
            
            
            -
            
            
            243,608Additional
                paid-in capital
            
            
            60,656,436
            
            
            49,690,324Accumulated
                deficit
            
            
            (54,564,649
            )
            
            (43,525,833
            )Total
                stockholders’ equity
            
            
            6,097,018
            
            
            6,412,586Total
                liabilities and stockholders' equity
            
            $
            6,812,181
            
            $
            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 Nine Monthsended
                September 30,
            
            ended
                September 30,2006
            
            2005
            
            2006
            
            2005Revenues:Licenses
                and royalties
            
            $
            11,364
            
            $
            78,400
            
            $
            103,426
            
            $
            272,500Maintenance
            
            
            25,484
            
            
            16,833
            
            
            85,069
            
            
            24,500Professional
                services
            
            
            11,364
            
            
            -
            
            
            11,364
            
            
            19,500Total
                revenues
            
            
            48,212
            
            
            95,233
            
            
            199,859
            
            
            316,500Cost
                of Goods Sold:Licenses
            
            
            2,000
            
            
            -
            
            
            17,096
            
            
            -Gross
                profit
            
            
            46,212
            
            
            95,233
            
            
            182,763
            
            
            316,500Operating
                Expenses:Sales
                and marketing
            
            
            1,378,552
            
            
            1,085,532
            
            
            4,010,123
            
            
            2,516,067Research
                and development
            
            
            2,058,145
            
            
            951,787
            
            
            4,767,956
            
            
            2,534,969General
                and administrative
            
            
            1,091,430
            
            
            420,568
            
            
            2,596,034
            
            
            1,406,660Total
                operating expenses
            
            
            4,528,127
            
            
            2,457,887
            
            
            11,374,113
            
            
            6,457,696Loss
                from operations
            
            
            (4,481,915
            )
            
            (2,362,654
            )
            
            (11,191,350
            )
            
            (6,141,196
            )Other
                income (expense):Interest
                income
            
            
            89,422
            
            
            7,219
            
            
            153,463
            
            
            15,780Gain
                on legal settlement and other
            
            
            (163
            )
            
            1,000
            
            
            2,837
            
            
            3,500Write-off
                of leasehold improvements
            
            
            -
            
            
            -
            
            
            -
            
            
            (45,012
            )Interest
                expense
            
            
            -
            
            
            (927
            )
            
            (3,766
            )
            
            (2,627
            )Other
                income (expense), net
            
            
            89,259
            
            
            7,292
            
            
            152,534
            
            
            (28,359
            )Net
                loss
            
            $
            (4,392,656
            )
            $
            (2,355,362
            )
            $
            (11,038,816
            )
            $
            (6,169,555
            )Basic
                and diluted net loss per common share
            
            $
            (0.08
            )
            $
            (0.06
            )
            $
            (0.22
            )
            $
            (0.16
            )Shares
                used in computing basic and diluted net loss per share
            
            
            52,053,558
            
            
            41,492,402
            
            
            49,695,060
            
            
            39,417,107




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


4




**ANTS
                SOFTWARE INC.****CONDENSED
                STATEMENTS OF CASH
                FLOWS****(Unaudited)**For
                the Nine Months endedSeptember
                30,2006
            
            2005Cash
                flows used in operating activities:Net
                loss
            
            $
            (11,038,816
            )
            $
            (6,169,555
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            254,151
            
            
            206,267Amortization
                of accrued rent, net of cash payments
            
            
            (1,825
            )
            
            51,222Amortization
                of warrant issued to customer for support services
            
            
            43,255
            
            
            -Bad
                debt expense
            
            
            33,738
            
            
            16,000Compensation
                expense recognized on options granted to non-employees
            
            
            9,657
            
            
            45,636Compensation
                expense recognized on "G" Units granted to non-employees
            
            
            -
            
            
            8,786Compensation
                  expense recognized on restricted shares of common stock granted
                  to
                  non-employee
            
            
            16,000
            
            
            -Compensation
                expense recognized on vesting of employee stock options
            
            
            905,511
            
            
            -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
            
            
            (23,505
            )
            
            (269,890
            )Prepaid
                insurance and expenses
            
            
            (158,215
            )
            
            (8,277
            )Other
                assets
            
            
            -
            
            
            (34,420
            )Accounts
                payable and other accrued expenses
            
            
            (217,866
            )
            
            2,833Accrued
                bonuses and commissions payable
            
            
            (175,000
            )
            
            53,700Accrued
                vacation
            
            
            22,804
            
            
            56,992Deferred
                revenue
            
            
            62,919
            
            
            74,986Net
                cash used in operating activities
            
            
            (10,267,192
            )
            
            (5,920,708
            )Cash
                flows used in investing activities:Transfer
                operating funds to restricted cash
            
            
            (80,559
            )
            
            (105,000
            )Purchases
                of office furniture, fixtures and equipment and security
                deposits
            
            
            (490,505
            )
            
            (540,356
            )Net
                cash used in investing activities
            
            
            (571,064
            )
            
            (645,356
            )Cash
                flows from financing activities:Proceeds
                from private placements, net of commissions
            
            
            9,072,253
            
            
            4,730,151Proceeds
                from common stock subscribed for private placement units
            
            
            -
            
            
            200,000Proceeds
                from exercise of options
            
            
            593,954
            
            
            125,591Proceeds
                from exercise of warrants, net of commissions
            
            
            125,873
            
            
            3,741,996Payments
                on capital lease obligations
            
            
            -
            
            
            (5,519
            )Net
                cash provided by financing activities
            
            
            9,792,080
            
            
            8,792,219Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,046,176
            )
            
            2,226,155Cash
                and cash equivalents at beginning of period
            
            
            6,381,932
            
            
            1,448,724Cash
                and cash equivalents at end of period
            
            $
            5,335,756
            
            $
            3,674,879Non-cash
                investing and financing activities:Common
                stock issued for subscribed shares
            
            $
            243,608
            
            $
            30,000





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 nine months ended September 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.





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 Nine Monthsended
                September 30,
            
            ended
                September 30,2006
            
            2005
            
            2006
            
            2005Net
                loss
            
            $
            (4,392,656
            )
            $
            (2,355,362
            )
            $
            (11,038,816
            )
            $
            (6,169,555
            )Weighted
                  average shares of common stock
                outstanding
                  - basic and dilutive
            
            
            52,053,558
            
            
            41,492,402
            
            
            49,695,060
            
            
            39,417,107Basic
                and diluted net loss per share
            
            $
            (0.08
            )
            $
            (0.06
            )
            $
            (0.22
            )
            $
            (0.16
            )




6


As
      of
      September 30, 2006 and 2005, outstanding options and warrants for the purchase
      of up to 16,019,473 shares of common
      stock at prices ranging $0.52 to $6.38 per share, and 19,767,563 shares of
      common stock at prices ranging from $0.52 to $8.25 per share, respectively,
      were
      anti-dilutive, and therefore, not included in the computation of diluted loss
      per share.





**3.** **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. The deferred revenue is 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**




We
      have a
      stock-based compensation program (the ANTs software inc. 2000 Stock Option
      Plan
      or the “Plan”) which is intended to attract, retain and provide incentives for
      talented employees, officers, directors and consultants, and to align
      stockholder and employee interests. We consider stock-based compensation
      critical to our operation and productivity; essentially all of our employees
      and
      directors participate, as well as certain consultants. Under the Plan, 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.




7


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. Outside directors
      generally receive an option to purchase 50,000 shares of common stock for each
      12 months of service, and an additional 10,000 shares for each 12 months of
      service as chairman of a Board committee, all vesting over the period of
      service. Directors generally serve for terms of three years. Options granted
      to
      directors generally include a one-year lock-up provision following termination
      of their director status, during which period the option cannot be exercised.





On
      August
      16, 2006, Mr. Boyd Pearce, the Company’s former CEO, resigned and he and the
      Company entered into a separation agreement pursuant to which (i) a stock option
      granted to Mr. Pearce in April 2005, covering 750,000 shares of Company common
      stock was cancelled and replaced by a five-year warrant to purchase the same
      number of shares at the same exercise price; (ii) stock options granted in
      October 2004 covering a total of 750,000 shares of common stock were modified
      to
      have a five-year exercise period, and; (iii) restrictions were placed on Mr.
      Pearce’s ability to sell stock purchased under both the newly granted warrant
      and the modified options. The Company recorded no expense in its Statements
      of
      Operations related to the cancellation of the April 2005 option grant and the
      subsequent warrant grant since the exercise price of the warrant was greater
      than the market price of the Company’s common stock on the date of the warrant
      grant, and the fair value of the warrant, calculated using the Black-Scholes
      valuation model, was less than the fair value of the original option grant.
      The
      Company recorded compensation expense of $198,750 during the period ending
      September 30, 2006 related to the modification of the October 2004 option
      grants. No future expense is anticipated as the warrant was fully vested on
      grant date.





On
      August
      22, 2006, the Company entered into Cancellation and Regrant Agreements with
      directors Thomas Holt, Homer Dunn, John Gaulding, and Robert Henry Kite. Under
      these Agreements certain non-qualified options to purchase shares of the
      Company’s common stock were replaced with Warrants to purchase shares of the
      Company’s common stock. The exercise prices and terms of the warrants mirrored
      the exercise prices and terms of the non-qualified stock options. The exercise
      prices ranged from $2.60 per share to $6.38 per share for Thomas Holt, from
      $2.60 per share to $2.85 per share for John Gaulding, from $2.60 per share
      to
      $2.85 per share for Homer Dunn, and from $2.35 per share to $2.85 per share
      for
      Robert Henry Kite. The cancelled stock options and granted warrants covered
      an
      aggregate of 192,500 shares for Thomas Holt, 322,500 shares for John Gaulding,
      262,500 shares for Homer Dunn, and 245,000 shares for Robert Henry Kite. No
      financial benefit was conferred on the directors from the exchange of their
      stock options for warrants as the exercise prices and terms of the warrants
      mirrored the exercise prices and terms of the options. These option
      cancellations and warrant grants helped the Company through a period of heavy
      recruiting. The Company intends to reduce the number of shares in one or more
      future intended stock option or equity incentive plans by the aggregate number
      of shares covered by these warrants. The Company recorded no expense in its
      Statements of Operations for these transactions since the warrants all had
      exercise prices greater than the market price of the stock on the date of grant,
      and the fair value of the warrant awards calculated using the Black-Scholes
      valuation model was less than the fair value of the original option awards.





On
      September 8, 2006, Mr. Girish Mundada, the Company’s former vice president of
      engineering, resigned and he and the Company entered into a separation agreement
      pursuant to which: (i) stock options covering an aggregate of 410,000 shares
      of
      Company common stock were modified to extend the standard post-termination
      exercise period from three months following termination through June 8, 2008;
      (ii) restrictions were placed on Mr. Mundada’s ability to sell stock purchased
      under the stock options, and; (iii) stock options covering an aggregate of
      250,000 shares of Company common stock were cancelled. The Company recorded
      compensation expense of $66,000 during the period ending September 30, 2006
      related to the modification of Mr. Mundada’s options. No future expense is
      anticipated as the warrant was fully vested on grant date.




8


As
      of
      September 30, 2006, the Company had a total of 1,705,277 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 nine months ended
      September 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, generally 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
      employees, outside directors and consultants for the three and nine month
      periods ended September 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 nine month periods ended September 30,
      2006.





Three
                Months
            
            Nine
                MonthsEnded
            
            EndedSeptember
                30, 2006
            
            September
                30, 2006Sales
                and marketing
            
            $
            58,615
            
            $
            131,527Research
                and development
            
            
            176,288
            
            
            306,330General
                and administrative
            
            
            370,676
            
            
            477,311Stock-based
                compensation before income taxes
            
            
            605,579
            
            
            915,168Income
                tax benefit
            
            
            -
            
            
            -Total
                stock-based compensation expense after income taxes
            
            $
            605,579
            
            $
            915,168




Total
      stock-based compensation expense in the three and nine month periods ended
      September 30, 2006, of $605,579 and $915,168, 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 and $0.02 for those periods,
      respectively. There was no impact on cash flows used in operations, or cash
      flows from financing activities, for the three and nine month periods ended
      September 30, 2006 related to employee stock-based compensation
expense.





The
      total
      stock-based compensation expense, net of income taxes, for the three months
      ended September 30, 2006 comprised $603,112 attributable to the vesting of
      employee and outside director (collectively referred to as “employee”) stock
      options, and $2,467 charged to research and development (“R&D”) professional
      fees attributable to vesting of options issued to non-employee R&D
      consultants. The total stock-based compensation expense, net of income taxes,
      for the nine months ended September 30, 2006 comprised $905,511 attributable
      to
      the vesting of employee stock options, and $9,657 charged to R&D
      professional fees attributable to vesting of options issued to non-employee
      R&D consultants. During the three and nine month periods ended September 30,
      2005, the Company recognized R&D professional fees of $6,287 and $11,980,
      respectively, related to the vesting of non-employee stock options.




9


Net
      cash
      proceeds from the exercise of stock options were $36,950 and $593,954 for the
      three and nine month periods ended September 30, 2006, respectively. No income
      tax benefit was realized from stock option exercises during the three and
      nine-month periods ended September 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 nine months ended September 30,
      2005:




Three
                Months
            
            Nine
                MonthsEnded
            
            EndedSeptember
                30, 2005
            
            September
                30, 2005Net
                loss as reported
            
            $
            (2,355,362
            )
            $
            (6,169,555
            )Less:
                total stock-based compensation expense for employees
              determined
                under the SFAS 123 fair-value method
            
            
            (709,128
            )
            
            (1,549,046
            )Net
                loss, pro forma
            
            $
            (3,064,490
            )
            $
            (7,718,601
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (0.06
            )
            $
            (0.16
            )Pro
                forma
            
            $
            (0.07
            )
            $
            (0.20
            )




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 September 30, 2006 and 2005:




Three
                Months endedSeptember
                30,2006
            
            2005Employee
                Stock Options:Expected
                Life in Years
            
            
            3.00
            
            
            5.00Volatility
            
            
            82.00%
            
            
            97.50%Interest
                Rate
            
            
            4.87%
            
            
            3.76%Yield
                Rate
            
            
            0.00%
            
            
            0.00%Non-Employee
                Stock Options:Expected
                Life in Years
            
            
            4.00
            
            
            5.00Volatility
            
            
            86.00%
            
            
            97.50%Interest
                Rate
            
            
            4.86%
            
            
            3.76%Yield
                Rate
            
            
            0.00%
            
            
            0.00%




10


Our
      computation of expected volatility for the three months ended September 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 nine
      months ended September 30, 2006, was 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
            
            
            (2,830,000
            )
            
            2,830,000
            
            $
            2.24
            
            
            N/AExercised
                through cash consideration
            
            
            -
            
            
            (
                367,902
            )
            $
            1.61
            
            $
            (147,161
            )Retired
                or forfeited
            
            
            2,716,337
            
            
            (
                2,716,337
            )
            $
            2.46
            
            
            N/AOutstanding
                at September 30, 2006
            
            
            1,705,277
            
            
            7,806,562
            
            $
            2.12
            
            $
            858,722Exercisable
                at September 30, 2006
            
            
            
            
            
            5,783,445
            
            $
            2.08
            
            $
            404,841





The
      aggregate intrinsic value of total stock options outstanding and exercisable,
      and of total stock options exercised during the nine months ended September
      30,
      2006 in the table above, represents the total pretax intrinsic value (i.e.,
      the
      difference between the Company’s closing stock price on September 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 September
      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 September 30,
      2006 was $2.01.





As
      of
      September 30, 2006, there was approximately $3.5 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 2.5 years. Total
      unrecognized compensation cost will be adjusted for future changes in estimated
      forfeitures.





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




Options
                Outstanding
            
            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
            
            
            427,500
            
            
            6.75
            
            
            427,500
            
            $
            0.70$1.00
                - $1.99
            
            
            2,115,161
            
            
            5.60
            
            
            2,036,017
            
            $
            1.55$2.00
                - $2.99
            
            
            4,538,460
            
            
            7.79
            
            
            2,594,487
            
            $
            2.44$3.00
                - $3.99
            
            
            725,441
            
            
            6.68
            
            
            725,441
            
            $
            3.05Total
                stock options
            
            
            7,806,562
            
            
            7.03
            
            
            5,783,445
            
            $
            2.08




11


**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 nine months ended September
      30, 2006 was $14,418 and $43,255, respectively, leaving a net balance in the
      prepaid asset account of $129,766 on September 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




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




Changes
                in Stockholders' EquityFor
                the Nine Months endedSeptember
                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
            
            
            3,042,000Cash
                commissions on sales of "G" units
            
            
            (75,000)Sales
                of "H" units at $1.60 per unit
            204,000
            
            1,245,000Cash
                commissions on sales of "H" units
            (20,000)
            
            (124,500)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
            
            4,930,150Proceeds
                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
            
            3,935,796Warrants
                with exercise price of $2.00 exercised at $2.00 per share
            55,000
            
            -Cash
                commissions on exercise of warrants
            (39,125)
            
            (193,800)Net
                proceeds from warrant exercises
            125,873
            
            3,741,996Proceeds
                from cash exercise of stock options
            593,954
            
            125,591Total
                cash transactions
            9,792,080
            
            8,797,737Non-cash
                transactions:Employee
                compensation expense - vesting of equity-based awards
            905,511
            
            -Non-employee
                compensation expense:Restricted
                stock issued to vendor
            16,000
            
            -Stock
                options expensed in 2004, exercised in 2005 by executive
              recruiter
                in payment for search for new president
            -
            
            3,526Expense
                incurred from issuing 5,492 “G” Units to vendor
            
            
            8,786Expense
                incurred from extending exercise period on non-employee stock option
                grant
            -
            
            30,130Vesting
                of stock options issued to continuing consultants
            9,657
            
            11,980Total
                non-employee compensation expense
            25,657
            
            54,422Total
                non-cash transactions
            931,168
            
            54,422Net
                loss for fiscal period
            (11,038,816)
            
            (6,169,555)Total
                stockholders' equity, end of period
            $
                6,097,018
            
            $
                4,211,785




12


During
      the
      quarter ended September 30, 2006, three investors exercised warrants to purchase
      229,168 shares at $2.00 per share for a total of $458,336. The Company received
      payment prior to September 30, 2006 for one of the three exercises. This
      transaction, totaling $55,000 for the exercise of a warrant covering 27,500
      shares, is reflected in the financial statements for the period ending September
      30, 2006. Payment from the remaining investors, totaling $403,336, for the
      exercise of two warrants covering a total of 201,668 shares was received and
      recorded in the Company’s financial statements in October 2006. The
      sale
      of these securities was made in reliance upon Rule 506 and Section 4(2) of
      the
      Securities Act of 1933.





During
      the
      three and nine month periods ended September 30, 2006, a total of 49,000 and
      367,902 shares of common stock of the Company were purchased through the
      exercise of stock options, resulting in cash proceeds to the Company
      of ** $36,950
      and $593,954, respectively.





For
      the
      three and nine month periods ending September 30, 2006, the Company recognized
      $603,112 and $905,511 in compensation expense related to vesting of employee
      stock options, respectively, and $2,467 and $9,657 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
      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
      paid in Common Stock to the placement agent totaled $496,475. 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 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.





13


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.





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. Warrants covering a total
      of
      2,140,283 shares were exercised, resulting in gross proceeds to the Company
      of
      $2,996,396. The Company paid cash commissions of $109,800 in connection with
      the
      exercise of these warrants 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, generating cash proceeds
      to
      the Company of $24,999. The option was previously granted in lieu of cash
      compensation. Non-employee stock compensation expense of $3,526 related to
      the
      exercise was recognized during the six months ended June 30, 2005.





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.





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 will issue 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 90 days 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
      quarter ended September 30, 2005, the Company recognized $8,786 in expense
      related to issuing 5,492 G Units to a vendor for services.





During
      the
      nine months ended September 30, 2005, $11,980 in non-employee stock compensation
      expense was recognized related to the vesting of options held by continuing
      consultants.





During
      the
      nine months ended September 30, 2005, a total of 103,704 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.





14





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





As
      of
      September 30, 2006, the Company had outstanding options to purchase up to
      7,806,762 shares of common stock, and warrants to purchase up to 8,212,911
      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.


**Stock****Options**
            
            **Warrants**
            
            **Total**Balance,
                December 31, 2005
            
            
            8,060,801
            
            
            13,121,580
            
            
            21,182,381Granted
            
            
            2,830,000
            
            
            2,012,756
            
            
            4,842,756Exercised
            
            
            367,702
            
            
            302,500
            
            
            670,202Retired/forfeited
            
            
            2,716,337
            
            
            6,618,925
            
            
            9,335,262Balance,
                September 30, 2006
            
            
            7,806,762
            
            
            8,212,911
            
            
            16,019,673





As
      of
      September 30, 2006, 1,705,277 options were available in the option reserve
      for
      future grants.





**7. DEFERRED
      REVENUES**





As
      of
      September 30, 2006 deferred revenues of $121,522 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 nine month periods
      ended September 30, 2006 and 2005, the Company recognized $25,484 and $85,069,
      and $16,833 and $24,500, 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.





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 nine
      months ended September 30, 2006, the Company recognized a total of $50,004
      and
      $150,012 in rental expense for this lease. During the same periods in 2005,
      the
      Company recognized $50,004 and $83,340 ****** in
      rental
      expense, respectively.





As
      of
      September 30, 2006, the total remaining unamortized deferred rent was $51,222,
      of which $24,820 was included as a current liability in accounts payable and
      other accrued expenses, and $26,402 is in long-term liabilities on the balance
      sheet. As of September 30, 2006, the total remaining off-balance sheet lease
      obligation was $367,920.





15




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.*





The
      Company is engaged in the development and marketing of the ANTs Data Server,
      a
      high-performance relational database management system (“RDBMS”) that is
      compatible with applications written for many other database products. The
      ANTs
      Data Server can 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 two advantages over other RDBMS’s:
      compatibility and high performance.





16
 **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.





**High
      Performance**





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 nine 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 compatibility and high-performance 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 that generally
                  have deep expertise in certain vertical markets and who integrate
                  the best
                  products to develop complete solutions for their customers.
 **Results
        of Operations**





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


Summary
                  of Statement of Operations
                ($
                    in 000's)For
                  the Three Months ended
              
              For
                  the Nine Months endedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              %
                  Change
              
              2006
              
              2005
              
              %
                  ChangeRevenues
              
              $
              48
              
              $
              95
              
              
              -49
              %
              $
              200
              
              $
              317
              
              
              -37
              %Cost
                  of goods sold
              
              
              2
              
              
              -
              
              
              N/A
              
              
              17
              
              
              -
              
              
              N/AGross
                  profit
              
              
              46
              
              
              95
              
              
              -52
              %
              
              183
              
              
              317
              
              
              -42
              %Operating
                  expenses
              
              
              4,528
              
              
              2,457
              
              
              84
              %
              
              11,374
              
              
              6,458
              
              
              76
              %Loss
                  from operations
              
              
              (4,482
              )
              
              (2,362
              )
              
              90
              %
              
              (11,191
              )
              
              (6,141
              )
              
              82
              %Other
                  income (expense), net
              
              
              89
              
              
              7
              
              
              1171
              %
              
              152
              
              
              (28
              )
              
              643
              %Net
                  loss
              
              $
              (4,393
              )
              $
              (2,355
              )
              
              87
              %
              $
              (11,039
              )
              $
              (6,169
              )
              
              79
              %Net
                  loss per share -basic
                  and diluted
              
              $
              (0.08
              )
              $
              (0.06
              )
              
              33
              %
              $
              (0.22
              )
              $
              (0.16
              )
              
              38
              %Shares
                  used in computing basic anddiluted
                  net loss per share (in 000's)
              
              
              52,054
              
              
              41,492
              
              
              25
              %
              
              49,695
              
              
              39,417
              
              
              26
              %


17
 **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 nine month periods ending September 30, 2006, the Company recorded
      total revenue of $48 thousand and $200 thousand, respectively, as compared
      to
      $95 thousand and $317 thousand during the same periods in 2005.





Total
      revenue for the three month periods ending September 30, 2006 and 2005 comprised
      $11 thousand and $78 thousand in licenses and royalties, respectively; $26
      thousand and $17 thousand of recognized deferred maintenance revenue,
      respectively; and $11 and $0 in professional service revenue, respectively.





For
      the
      nine month periods ending September 30, 2006 and 2005, total revenue comprised
      $103 thousand and $273 thousand in licenses and royalties, respectively; $85
      thousand and $25 thousand of recognized deferred maintenance revenue,
      respectively; and $11 and $19 thousand in professional service revenue,
      respectively.





For
      the
      three and nine month periods ended September 30, 2006, license fees and
      royalties for one customer accounted for $11 thousand, and four customers
      accounted for $103 thousand of total revenue in those periods. For the three
      and
      nine month periods ended September 30, 2005, license fees for one customer
      accounted for $62 thousand and $252 thousand, respectively, of total revenue
      in
      those periods.





**Cost
      of Goods Sold**





Cost
      of
      goods sold during the three and nine month periods ending September 30, 2006
      is
      $2 thousand and $17 thousand, respectively. There was no cost of goods sold
      for
      the same periods of 2005. Cost of goods sold comprise payments for third-party
      commissions and services, and equipment needed to install the ANTs Data Server
      at a customer site.





**Overview
      of Operating Expenses**





During
      the
      three and nine months ending September 30, 2005, the Company completed a
      transition from heavy focus on research and development of the ANTs Data Server
      (“ADS”) 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.





Throughout
      the fiscal period ended September 30, 2006, the Company’s operating expenses
      increased significantly as compared to 2005. For the three months ending
      September 30, 2006 as compared to the same period in 2005, total operating
      expenses increased to $4.5 million from $2.5 million, an increase of $2 million,
      or 84%. For the nine months ended September 30, 2006 as compared to the same
      period in 2005, total operating expenses increased to $11.4 million from $6.5
      million, an increase of $4.9 million, or 76%. The ratio of each operating
      department’s expense levels to total operating expense remained relatively level
      from 2005 to 2006. During the three and nine month periods ending September
      30,
      2006 and 2005, Sales and Marketing (“S&M”) expenses ranged between 30% and
      44% of total operating expenses. During the same periods, Research and
      Development (“R&D”) expenses ranged between 39% and 45% of the total, while
      General and Administrative (“G&A”) expenses ranged between 17% and 24% of
      the total.





18




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 2005 to 2006 is shown in the table below by
      department.




Change
                fromAvg.
                FTE
            
            %
                of
            
            Avg.
                FTE
            
            %
                of
            
            2005
                to 2006FYTD
                2006
            
            Total
            
            FYTD
                2005
            
            Total
            
            No.
            
            
            
            %Sales
                and Marketing
            
            
            14
            
            
            31
            %
            
            11
            
            
            34
            %
            
            3
            
            
            
            
            
            27
            %Research
                and Development
            
            
            24
            
            
            53
            %
            
            16
            
            
            50
            %
            
            8
            
            
            
            
            
            50
            %General
                and Administrative
            
            
            7
            
            
            16
            %
            
            5
            
            
            16
            %
            
            2
            
            
            
            
            
            40
            %Totals
            
            
            45
            
            
            100
            %
            
            32
            
            
            100
            %
            
            13
            
            
            
            
            
            41
            %





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





Operating
                Expenses - Three Months ended September 30,2006
            
            2005%
                Change vs.$
                in
                000's
            
            %
                of
                Total
            
            Prior
                Period
            
            $
                in
                000's
            
            %
                of
                TotalSales
                and marketing
            
            
            $
            1,379
            
            
            30
            %
            
            27
            %
            $
            1,086
            
            
            44
            %Research
                and development
            
            
            
            2,058
            
            
            45
            %
            
            116
            %
            
            952
            
            
            39
            %General
                and administrative
            
            
            
            1,091
            
            
            24
            %
            
            160
            %
            
            420
            
            
            17
            %Total
                operating expenses
            
            
            $
            4,528
            
            
            100
            %
            
            84
            %
            $
            2,458
            
            
            100
            %






Operating
                Expenses - Nine Months ended September 30,2006
            
            2005%
                Change vs.$
                in
                000's
            
            %
                of
                Total
            
            Prior
                Period
            
            $
                in
                000's
            
            %
                of
                TotalSales
                and marketing
            
            $
            4,010
            
            
            35
            %
            
            59
            %
            $
            2,516
            
            
            39
            %Research
                and development
            
            
            4,768
            
            
            42
            %
            
            88
            %
            
            2,535
            
            
            39
            %General
                and administrative
            
            
            2,596
            
            
            23
            %
            
            85
            %
            
            1,407
            
            
            22
            %Total
                operating expenses
            
            $
            11,374
            
            
            100
            %
            
            76
            %
            $
            6,458
            
            
            100
            %




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 employee compensation expense recognized in the
      three and nine month periods ending September 30, 2006 was $603.1 thousand
      and
      $905.5 thousand, respectively. As in prior years, we also continued to recognize
      stock option vesting expense related to stock option awards to outside
      consultants in professional fees.





19


During
      the
      three and nine month periods ended September 30, 2006, R&D professional fees
      included $2.5 thousand and $10 thousand, respectively, of this expense, as
      compared to $6 thousand and $12 thousand during the same periods of 2005.
      Expense details, including employee stock-based compensation expense, by Company
      functional area (departments) are discussed below.





**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
      nine month periods ended September 30, 2006 as compared to the same periods
      in
      2005 were driven by the changes in overall strategic direction discussed
      previously.





S&M
      expenses increased by $293 thousand, or 27%, to $1.4 million in the three months
      ended September 30, 2006 from $1.1 million in the same period in 2005, due
      primarily to the following: 1) an increase of $22 thousand, or 4%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $572 thousand in 2005 to $594 thousand in 2006;
      2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $59 thousand in 2006 as compared
      to
      $0 in 2005; 3) an increase in direct sales-related expenses (bonuses,
      commissions, travel and entertainment) of $114 thousand, or 70%, from $162
      thousand in 2005 to $276 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 $95 thousand, or 29%, from
      $330
      thousand in 2005 to $425 thousand in 2006.




S&M
      expenses increased by $1.5 million, or 59%, to $4 million in the nine month
      period ended September 30, 2006 from $2.5 million in the same period in 2005,
      due primarily to the following: 1) an increase of $500 thousand, or 42%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $1.2 million in 2005 to $1.7 million in 2006; 2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $132 thousand in 2006 as compared
      to
      $0 in 2005; 3) an increase in direct sales-related expenses (bonuses,
      commissions, travel and entertainment) of $299 thousand or 78%, from $382
      thousand in 2005 to $681 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 $534 thousand or 62%, from
      $866
      thousand in 2005 to $1.4 million 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 offshore consultants, depreciation on equipment and software,
      and allocation of general corporate expenses such as rent and office supplies.
      R&D activities include adding functionality to the ANTs Data Server (“ADS”)
      to support moving into new markets, providing technical support to the sales
      and
      marketing team, on-going upgrades to the product, and tailoring the product
      as
      requested by specific customers. Significant increases in R&D expenses for
      the three and nine month periods ended September 30, 2006 as compared to the
      same periods in 2005 were driven by the changes in overall strategic direction
      discussed previously. The change in 2006 in marketing strategy and emphasis
      and
      the increase in customer implementations in 2006 both 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 $1.1 million, or 116%, to $2.1 million in the three months
      ended September 30, 2006 from $952 thousand in the same period in 2005, due
      primarily to the following: 1) an increase of $500 thousand, or 71%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $700 thousand in 2005 to $1.2 million in 2006; 2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $174 thousand in 2006 as compared
      to
      $0 in 2005; and 3) an increase in off-shore consulting expenses of $358
      thousand, or 240%, from $149 thousand in 2005 to $507 thousand in
      2006.




R&D
      expenses increased by $2.2 million, or 88%, to $4.7 million in the nine month
      period ended September 30, 2006 from $2.5 million in the same period in 2005,
      due primarily to the following: 1) an increase of $1.2 million, or 63%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $1.9 million in 2005 to $3.1 million in 2006; 2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $297 thousand in 2006 as compared
      to
      $0 in 2005; and 3) an increase in off-shore consulting expenses of $628
      thousand, or 171%, from $367 thousand in 2005 to $995 thousand in 2006 increase
      in computer supplies of $85 thousand, or 202%, from $42 thousand in 2005 to
      $127
      thousand in 2006.





20


The
      Company expects that, if sufficiently funded, its R&D expenses will increase
      moderately over the next twelve months 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, consulting). Increases in G&A expenses for the three and nine
      month periods ended September 30, 2006 as compared to the same periods in 2005
      were driven both by the 40% increase in average full-time equivalent G&A
      employees (“FTE”) from 2005 to 2006, as well as increases in the costs of
      certain administrative expenses. These administrative expenses largely relate
      to
      the increase in total Company FTE of 41% from 2005 to 2006, 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, and general office
      expenses such as office supplies and communications.





Effective
      January 1, 2006, the Company began implementing a program of accounting
      procedures and controls to achieve compliance with Section 404 of the
      Sarbanes-Oxley Act of 2002, and also to implement the provisions of Financial
      Accounting Standards Board Statement No. 123 (R) *“Share-Based
      Payment”* (“Statement”).
      Compliance with these requirements in 2006 increased the Company’s general and
      administrative expenses significantly from prior year expense levels. As
      discussed in more detail below, the increase in professional fees, driven
      largely by SOX-related consulting and auditing fees, together with the increase
      in employee compensation arising from the recognition of expense related to
      the
      vesting of employee stock options, accounted for approximately 86% and 71%
      of
      the total increase in G&A expenses for the three and nine month periods
      ended September 30, 2006, respectively, as compared to the same periods in
      2005.





G&A
      expenses increased by $671 thousand, or 160%, to $1.1 million in the three
      months ended September 30, 2006 from $420 thousand in the same period in 2005,
      due primarily to the following: 1) an increase of $100 thousand, or 39%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $254 thousand in 2005 to $354 thousand in 2006;
      2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $371 thousand in 2006 as compared
      to
      $0 in 2005; 3) amortization of prepaid warrant expense of $14 thousand in 2006
      as compared to $0 in 2005; and 4) an increase of $204 thousand, or 161%, in
      professional fees, from $127 thousand in 2005 to $331 thousand in 2006. The
      increase in professional fees resulted 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 $1.2 million, or 85%, to $2.6 million for the nine months
      ended September 30, 2006, from $1.4 million in the same period in 2005, due
      primarily to the following: 1) an increase of $200 thousand, or 22%, in
      employee-related expenses (e.g., salaries, benefits, rent, office supplies,
      recruiting and other) from $900 thousand in 2005 to $1.1 million in 2006; 2)
      stock-based employee compensation expense as required by the implementation
      of
      SFAS 123 (R) effective January 1, 2006, of $477 thousand in 2006 as compared
      to
      $0 in 2005; 3) amortization of prepaid warrant expense of $43 thousand in 2006
      as compared to $0 in 2005; 4) an increase of $379 thousand, or 76% in
      professional fees, from $496 thousand in 2005 to $875 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.





21


**Other
      Income (Expense), Net**





The
      components of other income (expense), net, and the changes therein from 2005
      to
      2006, are as follows:




For
                the Three Months ended
            
            For
                the Nine Months endedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            %
              Change
            
            2006
            
            2005
            
            %
              Change($
                in 000's)
            
            
            
            
            
            ($
                in 000's)Other
                Income (Expense):Interest
                income
            
            $
            89
            
            $
            7
            
            
            1171
            %
            $
            153
            
            $
            16
            
            
            856
            %Gain
                on legal settlement and other
            
            
            -
            
            
            1
            
            
            -100
            %
            
            3
            
            
            4
            
            
            -20
            %Write-off
                of leasehold improvements
            
            
            -
            
            
            -
            
            
            N/A
            
            
            -
            
            
            (45
            )
            
            -100
            %Interest
                expense
            
            
            -
            
            
            (1
            )
            
            -100
            %
            
            (4
            )
            
            (2
            )
            
            100
            %Other
                income (expense), net
            
            $
            89
            
            $
            7
            
            
            1143
            %
            $
            152
            
            $
            (28
            )
            
            -652
            %





The
      increases in interest income for the three and nine month periods ended
      September 30, 2006 as compared to the same periods in 2005 were driven by two
      factors: 1) investing cash funds in a higher-yielding money market fund in
      2006
      as compared to a minimum-yield bank investment product in 2005 and 2) an average
      balance of approximately $7.7 million of cash funds invested in fiscal 2006
      as
      compared to $3.2 million in fiscal 2005. Average cash funds available for
      investment have increased over time as the Company has raised increasingly
      larger amounts of equity capital.





During
      the
      nine months ended September 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
      prior six fiscal years, and for the fiscal period ended September 30, 2006,
      the
      Company has reported negative cash flow from operations. During the periods
      from
      fiscal 2000 through fiscal 2004, the Company was focused primarily on research
      and development with its first sales occurring in the first quarter of 2005.
      Throughout this entire period, 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 offered several private placements each year. The offerings
      typically consist of Units, which give the investor shares of restricted common
      stock at a discount to the then-current market price, and a warrant to purchase
      the same number of restricted shares of common stock at a fixed price set at
      a
      premium to the then-current market price. The warrants generally have a life
      of
      three years. The private placements have been the Company’s primary source of
      equity capital. The Company also raises funds as stock options are exercised,
      and as investors exercise outstanding 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 nine months ended
      September 30, 2006 and 2005, cash inflow from sales was $243 thousand and $122
      thousand, respectively. These revenues were significantly less than the
      Company’s need for funds.





During
      the
      nine months ended September 30, 2006, operations used approximately $10.3
      million in cash, and investing activities utilized another $571 thousand for
      total cash outflow of approximately $10.8 million. Since cash received from
      sales during the period was $243 thousand, the Company relied on cash flows
      from
      financing activities, which provided $9.8 million, and cash on hand, to fund
      operations and purchases of computer equipment. Cash on hand decreased from
      $6.4
      million on December 31, 2005 to $5.3 million at September 30, 2006. The Company
      anticipates that, at its current levels of revenues and expenditures that the
      $5.3 million cash balance will fund operations through January 2007, assuming
      no
      more capital is raised during this period.





22


The
      Company has three potential funding sources: 1) Raising funds through private
      placements of its stock and warrants; 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
      September 30, 2006, the Company had certain off-balance sheet arrangements
      as
      described below.





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.





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 nine
      months ended September 30, 2006, the Company recognized a total of $50,004
      and
      $150,012 in rental expense for this lease. During the same periods in 2005,
      the
      Company recognized $50,004 and $83,340 in rental expense,
      respectively.





As
      of
      September 30, 2006, the total remaining unamortized deferred rent was $51,222,
      of which $24,820 was included as a current liability in accounts payable and
      other accrued expenses, and $26,402 is in long-term liabilities on the balance
      sheet. As of September 30, 2006, the total remaining off-balance sheet lease
      obligation was $367,920.





The
      table
      below presents the Company’s total long-term contractual obligations as of
      September 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
            
            $
            367,920
            
            $
            204,400
            
            $
            163,520
            
            
            -
            
            
            -




**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.





23


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.





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. The deferred revenue is 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.





24


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).




*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.





25


***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.





***A
      failure to obtain additional financing could prevent us from executing our
      business plan.*** We
      anticipate that current cash resources will be sufficient to fund our operations
      through January 2007 at our current rate of spending. We believe that securing
      additional sources of financing to enable us to continue the development and
      commercialization of our proprietary technologies will be difficult and there
      is
      no assurance of our ability to secure such financing. A failure to obtain
      additional funding could prevent us from making expenditures that are needed
      to
      pay current obligations, allow us to hire additional personnel and continue
      development of the technology. If we raise additional funds by selling equity
      securities, the relative equity ownership of our existing investors could be
      diluted or the new investors could obtain terms more favorable than previous
      investors. If we raise additional funds through debt financing, we could incur
      significant borrowing costs.





***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.





26


***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:





·
            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, Joseph Kozak and 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.





27


***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. Assuming
      we can attract sufficient financing, and our revenues increase, there is no
      assurance that the Company’s plans will be realized or that it will achieve
      profitability in the future





***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
      January 1, 2006 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.




28


***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.





***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**





There
      were
      no unregistered sales of equity securities during the period covered by this
      report.




**ITEM
      3. DEFAULTS UPON SENIOR
      SECURITIES**





None





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





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





29


**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
                  August 16, 2006, the Company announced: a) the resignation of Mr.
                  Boyd
                  Pearce, the Company’s CEO and a director of the Company, and b) the
                  appointment of Mr. Joseph Kozak as the Company’s CEO and a director of the
                      Company;
 2)
              On
                  August 21, 2006, the Company disclosed that it had entered into
                  a
                  Separation Agreement with Mr. Boyd Pearce, the former
                  CEO;
 3)
              On
                  August 22, 2006, the Company disclosed that it had entered into
                  Cancellation and Regrant Agreements with the four outside directors
                  of the
                  Company;
 4)
              On
                  August 31, 2006 the Company announced the resignation of Mr. Girish
                  Mundada, the Company’s vice president of engineering and an officer of the
                  Company;
 5)
              On
                  September 13, 2006, the Company issued a disclosure as required
                  by
                  Regulation FD regarding a shareholders’ conference call the Company held
                  on September 12, 2006;
 6)
              On
                  September 18, 2006, the Company announced that it would not further
                  extend
                  the exercise termination date for outstanding warrants to purchase
                  an
                  aggregate of approximately 6.8 million shares of the Company’s common
                  stock, that were set to expire on September 30,
                  2006.
 7)
              On
                  September 28, 2006, the Company disclosed that it had entered into
                  a
                  Separation Agreement with Mr. Girish Mundada, the former vice president
                  of
                  engineering.




30





**SIGNATURES**





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




**ANTs
              software inc.**Date: November
              14, 2006
            By:
            /s/ Joe
              KozakJoe
              Kozak, Chief Executive Officer and
              President


Date: November
              14, 2006
            By:
            /s/ Kenneth
              RuotoloKenneth
              Ruotolo, Chief Financial Officer and
              Secretary








31