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

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ANTS SOFTWARE INC.
CONDENSED BALANCE SHEETS
(Unaudited)
	September 30,			December 31,
ASSETS	2006			2005
Current assets:
Cash and cash equivalents	$	5,335,756		$	6,381,932
Accounts receivable, net of allowance for doubtful accounts of $49,738 and $16,000 in 2006 and 2005, respectively		34,995			45,228
Prepaid insurance and other expenses		232,135			73,560
Total current assets		5,602,886			6,500,720
Restricted cash		185,958			105,399
Prepaid expense from warrant issued to customer, net		129,766			173,021
Property and equipment, net		858,869			622,515
Other assets		34,702			34,702
Total assets	$	6,812,181		$	7,436,357
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses	$	351,112		$	548,178
Accrued bonuses and commissions payable		43,750			218,750
Accrued vacation payable		172,377			149,573
Deferred revenues		121,522			58,603
Total current liabilities		668,761			975,104
Long-term liabilities:
Accrued rent		26,402			48,667
Total liabilities		715,163			1,023,771
Commitment 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			4,487
Common stock subscribed, not issued		-			243,608
Additional paid-in capital		60,656,436			49,690,324
Accumulated deficit		(54,564,649	)		(43,525,833	)
Total stockholders’ equity		6,097,018			6,412,586
Total 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 Months
	ended September 30,						ended September 30,
	2006			2005			2006			2005
Revenues:
Licenses and royalties	$	11,364		$	78,400		$	103,426		$	272,500
Maintenance		25,484			16,833			85,069			24,500
Professional services		11,364			-			11,364			19,500
Total revenues		48,212			95,233			199,859			316,500
Cost of Goods Sold:
Licenses		2,000			-			17,096			-
Gross profit		46,212			95,233			182,763			316,500
Operating Expenses:
Sales and marketing		1,378,552			1,085,532			4,010,123			2,516,067
Research and development		2,058,145			951,787			4,767,956			2,534,969
General and administrative		1,091,430			420,568			2,596,034			1,406,660
Total operating expenses		4,528,127			2,457,887			11,374,113			6,457,696
Loss 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			15,780
Gain on legal settlement and other		(163	)		1,000			2,837			3,500
Write-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 ended
	September 30,
	2006			2005
Cash 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			206,267
Amortization of accrued rent, net of cash payments		(1,825	)		51,222
Amortization of warrant issued to customer for support services		43,255			-
Bad debt expense		33,738			16,000
Compensation expense recognized on options granted to non-employees		9,657			45,636
Compensation expense recognized on "G" Units granted to non-employees		-			8,786
Compensation 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		-			36,194
Write-off of unrecoverable security deposits related to prior office facilities		-			8,818
Changes 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	)		2,833
Accrued bonuses and commissions payable		(175,000	)		53,700
Accrued vacation		22,804			56,992
Deferred revenue		62,919			74,986
Net 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			4,730,151
Proceeds from common stock subscribed for private placement units		-			200,000
Proceeds from exercise of options		593,954			125,591
Proceeds from exercise of warrants, net of commissions		125,873			3,741,996
Payments on capital lease obligations		-			(5,519	)
Net cash provided by financing activities		9,792,080			8,792,219
Net increase (decrease) in cash and cash equivalents		(1,046,176	)		2,226,155
Cash and cash equivalents at beginning of period		6,381,932			1,448,724
Cash and cash equivalents at end of period	$	5,335,756		$	3,674,879
Non-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 Months
	ended September 30,						ended September 30,
	2006			2005			2006			2005
Net 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			39,417,107
Basic 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 accordancewith 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 Months
	Ended		Ended
	September 30, 2006		September 30, 2006
Sales and marketing	$	58,615	$	131,527
Research and development		176,288		306,330
General and administrative		370,676		477,311
Stock-based compensation before income taxes		605,579		915,168
Income 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 Months
	Ended			Ended
	September 30, 2005			September 30, 2005
Net 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 ended
	September 30,
	2006		2005
Employee Stock Options:
Expected Life in Years		3.00		5.00
Volatility		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		5.00
Volatility		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:

							Weighted
	Shares						Average		Aggregate
	Available			Outstanding			Exercise		Intrinsic
	For Grant			Stock Options			Price		Value
Outstanding at January 1, 2006		1,818,940			8,060,801		$	2.17		N/A
Granted		(2,830,000	)		2,830,000		$	2.24		N/A
Exercised through cash consideration		-			( 367,902	)	$	1.61	$	(147,161	)
Retired or forfeited		2,716,337			( 2,716,337	)	$	2.46		N/A
Outstanding at September 30, 2006		1,705,277			7,806,562		$	2.12	$	858,722
Exercisable 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 Exercisable
	Number of		Weighted Average		Number of		Weighted Average
	Options		Remaining		Options		Exercise Price
	Outstanding		Contractual Life		Exercisable		Per Share
Range 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	$	3.05
Total 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' Equity
	For the Nine Months ended
	September 30,
	2006	2005
Total stockholders' equity, beginning of period	$ 6,412,586	$ 1,529,181
Cash transactions:
Proceeds from private placements:
Sales of "F" Units at $1.00 per unit	-	933,000
Cash 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		3,042,000
Cash commissions on sales of "G" units		(75,000)
Sales of "H" units at $1.60 per unit	204,000	1,245,000
Cash 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	4,930,150
Proceeds 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	3,935,796
Warrants 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	3,741,996
Proceeds from cash exercise of stock options	593,954	125,591
Total cash transactions	9,792,080	8,797,737
Non-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	-	3,526
Expense incurred from issuing 5,492 “G” Units to vendor		8,786
Expense incurred from extending exercise period on non-employee stock option grant	-	30,130
Vesting of stock options issued to continuing consultants	9,657	11,980
Total non-employee compensation expense	25,657	54,422
Total non-cash transactions	931,168	54,422
Net 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.

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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		21,182,381
Granted		2,830,000		2,012,756		4,842,756
Exercised		367,702		302,500		670,202
Retired/forfeited		2,716,337		6,618,925		9,335,262
Balance, 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 $83,340in 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 oftwo 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 ended
	September 30,									September 30,
	2006			2005			% Change			2006			2005			% Change
Revenues	$	48		$	95			-49	%	$	200		$	317			-37	%
Cost of goods sold		2			-			N/A			17			-			N/A
Gross 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 and
diluted 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 from
	Avg. FTE		% of			Avg. FTE		% of			2005 to 2006
	FYTD 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 Total
Sales 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 Total
Sales 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.

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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.

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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.

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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 ended
	September 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.

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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 Period
			Less than		1-3		3-5		More than
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Operating 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.

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The Company believes the following represents its critical accounting policies:

· Revenue recognition

· Stock-based compensation

· Income taxes

Revenue Recognition - We recognize revenue in accordancewith 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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 Kozak
		Joe Kozak, Chief Executive Officer and President

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

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