UNITED STATES SECURITIES AND EXCHANGE
COMMISSION  Washington, D.C. 20549




FORM 10-QSB




(Mark One)


| | [X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of the
     Securities Exchange Act of 1934
| | --- |  | --------------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2007


| | [   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
Securities Exchange Act of 1934
| | ----- |  | ----------------------------------------------------------------------------------------



For the transition period from ______________ to ______________




Commission File Number 000-17053   ARTIFICIAL LIFE, INC. (Exact name of
registrant as specified in its charter)







|DELAWARE(State or other jurisdiction ofincorporation or organization) |  |  |  | 04-3253298 (I.R.S. EmployerIdentification No.)
|--------------------------------------------------------------------- |  |  |  | ----------------------------------------------



Artificial Life, Inc. 26/F., 88 Hing Fat Street Causeway Bay Hong Kong(Address of principal executive
offices)




(+852) 3102 2800Issuers telephone number




Not ApplicableFormer name, former address and
former fiscal year, if changed since last report)




Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X ]




State the number of shares of each of the Issuers
classes of common equity, as of the latest practicable date: As of May 14, 2007, there were 34,923,952 shares of Common Stock, $.01 par value per
share, outstanding.




Transitional Small Business Disclosure Format (Check one):
Yes [   ] No [X]


---





ARTIFICIAL LIFE, INC. INDEX OF INFORMATION CONTAINED
IN FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2007


|                             |  | PAGE | 
|---------------------------- |  | ---- | 
|PART
IFINANCIAL INFORMATION |  |      | 
|Item 1
                     |  |      | 
|                             |  |      | 
|                             |  |      | 
|                             |  |      | 
|                             |  |      | 
|Item 2
                     |  |      | 
|Item 3
                     |  |      | 
|PART
IIOTHER INFORMATION    |  |      | 
|Item 1
                     |  |      | 
|Item 2
                     |  |      | 
|Item 6
                     |  |      | 
|Signatures                   |  | 13   | 



2


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PART I   FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




ARTIFICIAL LIFE, INC. CONDENSED CONSOLIDATED BALANCE
SHEET March 31, 2007 (UNAUDITED)


|ASSETS                                                                                                |  |  |  |   |             |  
|----------------------------------------------------------------------------------------------------- |  |  |  | - | ----------- | -
|Current
assets:                                                                                       |  |  |  |   |             |  
|Cash and cash
equivalents                                                                             |  |  |  | $ | 887,466     |  
|Accounts
receivable                                                                                   |  |  |  |   | 614,112     |  
|Other                                                                                                 |  |  |  |   | 48,045      |  
|Total current
assets                                                                                  |  |  |  |   | 1,549,623   |  
|                                                                                                      |  |  |  |   |             |  
|Fixed assets:                                                                                         |  |  |  |   |             |  
|Office
equipment, net of accumulated depreciation of $16,692                                          |  |  |  |   | 64,000      |  
|Computer
equipment, net of accumulated depreciation of $78,579                                        |  |  |  |   | 19,126      |  
|Office
furniture, net of accumulated depreciation of $29,711                                          |  |  |  |   | 61,360      |  
|                                                                                                      |  |  |  |   | 144,486     |  
|                                                                                                      |  |  |  |   |             |  
|Prepaid
license rights                                                                                |  |  |  |   | 600,000     |  
|Deposits and
other assets                                                                             |  |  |  |   | 341,713     |  
|                                                                                                      |  |  |  |   | 941,713     |  
|                                                                                                      |  |  |  |   |             |  
|TOTAL
ASSETS                                                                                          |  |  |  | $ | 2,635,822   |  
|                                                                                                      |  |  |  |   |             |  
|LIABILITIES
& STOCKHOLDERS DEFICIT                                                                   |  |  |  |   |             |  
|Current
liabilities:                                                                                  |  |  |  |   |             |  
|Accounts
payable                                                                                      |  |  |  | $ | 1,394,767   |  
|Note payable
 officer/stockholder                                                                    |  |  |  |   | 209,351     |  
|Accrued
expenses                                                                                      |  |  |  |   | 471,037     |  
|Total
liabilities (all current)                                                                       |  |  |  |   | 2,075,155   |  
|                                                                                                      |  |  |  |   |             |  
|Stockholders equity:                                                                                 |  |  |  |   |             |  
|Preferred
stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding        |  |  |  |   |             |  
|Common stock,
$.01 par value; 130,000,000 shares authorized, 34,397,381 shares issued and outstanding |  |  |  |   | 343,973     |  
|Additional
paid-in capital                                                                            |  |  |  |   | 37,041,559  |  
|Notes
receivable from stockholders                                                                    |  |  |  |   | (19,577     | )
|Accumulated
deficit                                                                                   |  |  |  |   | (36,805,288 | )
|Total
stockholders equity                                                                            |  |  |  |   | 560,667     |  
|TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY                                                            |  |  |  | $ | 2,635,822   |  



See accompanying notes to unaudited condensed consolidated
financial statements.




3


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ARTIFICIAL LIFE, INC. CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)


|                                                      |  |  |  | Three-month Period Ended March 31, |           
|----------------------------------------------------- |  |  |  | ---------------------------------- | ----------
|
|Revenues:                                             |  |  |  |                                    |           
|Software
license agreements                           |  |  |  | $                                  | 365,688   
|Application
services and other                        |  |  |  |                                    |          
|                                                      |  |  |  |                                    | 365,688   
|                                                      |  |  |  |                                    |           
|Operating
expenses:                                   |  |  |  |                                    |           
|General and
administrative                            |  |  |  |                                    | 278,807   
|Engineering
and cost of sales                         |  |  |  |                                    | 283,961   
|Research and
development                              |  |  |  |                                    | 53,639    
|Sales and
marketing                                   |  |  |  |                                    | 293,114   
|Total
operating expenses                              |  |  |  |                                    | 909,521   
|Loss from
operations                                  |  |  |  |                                    | (543,833  
|                                                      |  |  |  |                                    |           
|Other income
(expenses):                              |  |  |  |                                    |           
|Interest
income (expense)                             |  |  |  |                                    | 6,276     
|Other                                                 |  |  |  |                                    | 5,513     
|Loss on value
of derivative liability                 |  |  |  |                                    |          
|                                                      |  |  |  |                                    | 11,789    
|                                                      |  |  |  |                                    |           
|Net loss                                              |  |  |  | $                                  | (532,044  
|                                                      |  |  |  |                                    |           
|Basic and
diluted net loss per share                  |  |  |  | $                                  | (0.02     
|                                                      |  |  |  |                                    |           
|Weighted
average basic and diluted shares outstanding |  |  |  |                                    | 34,177,320



See accompanying notes to unaudited condensed consolidated
financial statements




4


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ARTIFICIAL LIFE, INC. CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)


|                                                                            |  |  |  | Three-month Period Ended March 31, |           
|--------------------------------------------------------------------------- |  |  |  | ---------------------------------- | ----------
|
|Cash flows
from operating activities:                                       |  |  |  |                                    |           
|Net loss                                                                    |  |  |  | $                                  | (532,044  
|Adjustments
to reconcile net loss to net cash used in operating activities: |  |  |  |                                    |           
|Depreciation
and amortization                                               |  |  |  |                                    | 11,892    
|Loss on
disposal of fixed assets                                            |  |  |  |                                    | 877       
|Interest
expense accrued on advances from officer / stockholder             |  |  |  |                                    | 2,640     
|Loss on value
of derivative liabilities                                     |  |  |  |                                    |          
|Increase in
accounts receivable                                             |  |  |  |                                    | (320,107  
|Increase in
prepaid license rights, deposits and other assets               |  |  |  |                                    | (457,151  
|Increase in
accounts payable and accrued expenses                           |  |  |  |                                    | 37,482    
|Net cash used
in operating activities                                       |  |  |  |                                    | (1,256,411
|                                                                            |  |  |  |                                    |           
|Cash flows
from investing activities:                                       |  |  |  |                                    |           
|Purchase of
fixed assets                                                    |  |  |  |                                    | (58,459   
|Net cash used
in investing activities                                       |  |  |  |                                    | (58,459   
|                                                                            |  |  |  |                                    |           
|Cash flows
from financing activities:                                       |  |  |  |                                    |           
|Proceeds from
issuance of common stock, net                                 |  |  |  |                                    | 880,272   
|Payments on
note payable  officer / stockholder                            |  |  |  |                                    | (16,094   
|Net cash
provided by financing activities                                   |  |  |  |                                    | 864,178   
|                                                                            |  |  |  |                                    |           
|Net
(decrease) / increase in cash and cash equivalents                      |  |  |  |                                    | (450,692  
|Cash and cash
equivalents at beginning of period                            |  |  |  |                                    | 1,338,158 
|Cash and cash
equivalents at end of period                                  |  |  |  | $                                  | 887,466   
|                                                                            |  |  |  |                                    |           
|Supplemental
disclosure of non-cash investing and financing activities:     |  |  |  |                                    |           
|Reclassification of options and warrants as derivative liabilities          |  |  |  | $                                  |          



See accompanying notes to unaudited condensed consolidated
financial statements.




5


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ARTIFICIAL LIFE, INC. NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)


|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------



The accompanying unaudited condensed consolidated financial
statements of Artificial Life, Inc. (the Company) have been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and in accordance with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they
do not include all information and footnotes required by generally accepted accounting principles for complete financial statement presentation. The
consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries: Artificial Life Ventures, Inc.
(Artificial Life Ventures), Artificial Life USA, Inc. (Artificial Life USA), Artificial Life Mobile Computing, Inc.
(Artificial Life Mobile Computing), Artificial Life Asia Limited (Artificial Life Asia) and Artificial Life Europe GmbH
(Artificial Life Europe). All significant inter-company balances and transactions have been eliminated in consolidation.




Operating results for the three months ended March 31, 2007
are not necessarily indicative of results that may be expected for the year ending December 31, 2007. For further information, refer to the audited
consolidated financial statements and notes thereto included in the Companys annual Report on Form 10-KSB for the year ended December 31,
2006.




The financial information included in this report has been
prepared in conformity with the accounting policies reflected in the financial statements included in the Companys Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission.


|2. |  | STOCK BASED COMPENSATION
|-- |  | ------------------------



The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements
and is measured based on the grant date fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over
the period during which an employee is required to provide service in exchange for the award (the vesting period). At January 1, 2007 and 2006, all
outstanding options were fully vested, and no options were issued to employees during the three months ended March 31, 2007 and 2006. Therefore, there
is no stock based compensation during the 3 months ended March 31, 2007 and 2006.




At March 31, 2007, the Company had outstanding and
exercisable options to purchase 5,670,000 shares of common stock under the Plan issued to employees as follows:


|Outstanding and
exercisable options issued to employees: |  |  |  | 5,670,000 
|-------------------------------------------------------- |  |  |  | ----------
|Weighted average
exercise price:                         |  |  |  | $0.68     
|Aggregate
intrinsic value:                               |  |  |  | $9,267,400
|Weighted average
remaining contractual term              |  |  |  | 1.55
years



At March 31, 2007, the Company had outstanding and
exercisable warrants to purchase 962,500 shares of common stock issued to employees as follows:


|Outstanding and
exercisable warrants issued to employees: |  |  |  | 962,500   
|--------------------------------------------------------- |  |  |  | ----------
|Weighted average
exercise price:                          |  |  |  | $0.76     
|Aggregate
intrinsic value:                                |  |  |  | $1,487,000
|Weighted average
remaining contractual term               |  |  |  | 2.07
years



6


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3.    CUSTOMER
CONCENTRATION




At
March 31, 2007, two customers accounted for 98% of total accounts receivable,
one accounted for approximately 41% and the second accounted for approximately
57%. For the three-month period ended March 31, 2007, the
Company had one customer, which represented more than 10% of the Companys
sales for the period. For the three-month period ended March 31, 2006, the
Company had three customers, which represented more than 10% of the
Companys sales for the period, one accounted for approximately 58%, one
accounted for approximately 15%, and the other one accounted for approximately
12%.




4.    NET INCOME / (LOSS) PER
SHARE




Basic net loss per share is calculated based on the
weighted average number of common shares outstanding for the three month periods ended March 31, 2007 and 2006. Diluted earning per share reflects
additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that
would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and
are determined using the treasury stock method. Basic and diluted net loss per share are the same for the three months ended March 31, 2007 and 2006
since the effect of inclusion of all outstanding options and warrants would be anti-dilutive.




5.    INCOME
TAXES




There is no provision for income taxes for the three months
ended March 31, 2007. During the three months ended March 31, 2007, the Company reported a net loss of $532,044 and at December 31, 2006, the Company
had approximately $24,200,000 of federal net operating loss carry forwards expiring through 2022, for U.S. income tax purposes. The
net operating loss carry forwards may be subject to annual limitations based on ownership changes in the Companys common stock as provided by in
Section 382 of the Internal Revenue Code. At December 31, 2006 approximately $5,900,000 of net operating loss carryforwards were available for Hong
Kong income tax purposes that may be carried forward indefinitely.




The Company adopted the provisions of Financial Accounting
Standard Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
(FIN 48), on January 1, 2007. There were no unrecognized tax benefits and there was no effect on the Companys financial condition or
results of operations as a result of implementing FIN48.




The Company files income tax returns in the US federal
jurisdiction and various State and foreign jurisdictions. The Company is no longer subject to US Federal tax examinations for years before 2004, and
State and foreign jurisdictions that remain subject to examination range from 2001 to 2006. Management does not believe there will be any material
changes in our unrecognized tax positions over the next 12 months.




The Companys policy is to recognize interest and
penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of the adoption of FIN48 there was no accrued
interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter.




6.    DERIVATIVE STOCK OPTION AND
WARRANT LIABILITY




In October and December 2005, the Company issued 2,156,298
shares of common stock and 4,150,000 options which resulted in the Companys authorized and unissued shares being insufficient to settle all then
outstanding and exercisable options and warrants. In February and March 2006, the Company issued an additional 3,802,181 shares of common stock and
2,054,405 options. On March 31, 2006, the Company had issued a total of 30,932,160 shares and exceeded its authorized capital. In accordance with EITF
00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, the Company recorded
a partial reclassification of outstanding and exercisable options and warrants issuable to non-employees as derivatives. The Company elected to
reclassify options and warrants with the latest maturity date first. During the three months ended March 31, 2006, options and warrants to
non-employees with a fair value of $1,493,000 were reclassified as derivatives. The reclassified options and warrants had strike prices ranging from
$0.30 to $1.50, were granted on various dates between April 2001 and February 2006, and are exercisable on various dates between December 2006 and
April 2011.




At March 31, 2006, the fair value of all reclassified
options and warrants was $4,867,000 and during the three months ended March 31, 2006, losses of $2,612,000 on the fair value of derivatives were
recognized. During the Annual Meeting of Stockholders held on September 22, 2006, an amendment to the Companys Amended and Restated Certificate
of Incorporation to increase the number of authorized shares of common stock from the then 30 million shares to 130 million shares was
approved.




7


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7.    ADVANCES FROM
SHAREHOLDERS




At March 31, 2007 the Company owed its chief executive
officer $209,351 which reflected a net decrease of $13,454 during the three months then ended. Interest of $2,640 was accrued during the three months
ended March 31, 2007. The remaining advances bear interest at a rate of 5% per year and are unsecured.




8.    SEGMENT
INFORMATION




The Company markets and supports intelligent software
robots, software programs and applications, mobile phone games and applications and related intellectual property. The products target web
applications as well as mobile phone platforms. Products have the form of applications as well as enabling technology for the Internet and mobile
devices. The Company believes that it currently operates in one main business segment: intelligent agents/smart bots for Internet and mobile
platforms.




9.    COMMITMENTS




In August 2006, the Company entered into a three-year
office lease with monthly charges of approximately $10,385 per month.




In February 2007, Artificial Life Europe in Berlin entered
into a five-year office lease with monthly charges of approximately $7,200 per month. The monthly charges increase by 1,100 Euro on each anniversary until 2009
and the lease expires in February 2012.




10.    SALES OF COMMON
STOCK




In January and February, 2007, the Company sold 412,500
shares of common stock at $2.00 per share in private placements and paid $59,500 as commissions. The total proceeds to the Company were $765,500. In
connection with these sales, the Company issued to the same investors warrants to purchase 70,000 shares at $3.00 per share with 24-month
term.




Through March 30, 2007, the Company issued 271,388 shares
of common stock for $114,773 upon the exercise of options.




11.    SUBSEQUENT
EVENTS




On April 20, 2007, the Company issued 16,571 shares of
common stock to an employee as a result of the cashless exercise of 20,000 stock options at $0.36 per share. The Company issued 20,000 shares of
common stock to the same employee in connection with the exercise of stock options at $0.36 per share. The total proceeds to the Company were
$7,200.




On May 8, 2007, the Company issued 250,000 shares of common
stock to an investor in connection with the exercise of stock options at $0.40 per share. The total proceeds to the Company were
$100,000.




On May 9, 2007, the Company issued 5,000 shares of common
stock to an employee in connection with the exercise of stock options at $0.36 per share. The total proceeds to the Company were $1,800.




On May 9, 2007, the Company sold 100,000 shares of common
stock at $2.25 per share in connection with a private placement. The total proceeds to the Company were $225,000.




On May 10, 2007, the Company issued 25,000 and 10,000
shares of common stock to an employee in connection with the exercise of stock options at $0.40 and $1.00 per share, respectively. The total proceeds to
the Company were $20,000.




On May 14, 2007, the Company sold 100,000 shares of common
stock at $2.25 per share in connection with a private placement. The total proceeds to the Company were $225,000.




8


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




GENERAL




The following Managements Discussion and Analysis of
our Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes included elsewhere
in this Quarterly Report on Form 10-QSB. This discussion contains, in addition to historical statements, forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include the factors discussed in the section titled Risk Factors as well as other factors described in
our Annual Report on Form 10-KSB for the year ended December 31, 2006. We do not intend to update any such forward-looking statements.




INTRODUCTION




OVERVIEW




In the first quarter of 2007, we were mainly active with
the continuation and the execution of the international roll out of our 2.5G and 3G products with several telecom operators in Asia, Europe and North
America. Due to the standard operating procedures of some of these telecom operators, the launch of some of the products has been
delayed.




In January 2007, we signed a license and roll out agreement
with Mobilkom, Austrias main mobile operator. Also in January 2007, we launched Americas Next Top Model 7 in Hong Kong and Luxemburg and
launched the Big Brother All Stars game in the USA.




In February 2007, we launched our new European headquarters
in Berlin and the German subsidiary Artificial Life Europe GmbH to support our growing European client base.




In March 2007, we signed an agreement with Bob Mobile for
Germany and Switzerland, launched Americas Next Top Model 8 in the USA, launched our new product Poli  the bear, and signed a license and
roll out agreement with Teliasonera, one of Europes biggest mobile operators serving the Scandinavian and Baltic countries.




We currently developing further new 3G products, such as
massive multi player mobile games. We are also in continuous talks with several global media and game companies to license more appealing content and
intellectual properties.




Even though several of the new products and services have
successfully been launched in several countries, there can be no guarantee that these new products and services will contribute substantially to our
future revenues.




For the quarter ended March 31, 2007, we reported a loss
from operation of $543,833 compared to a loss from operations of $269,964 for the first quarter of 2006. Our net loss for the first quarter of 2007 was
$532,044 as compared to a net loss of $2,891,518 for the first quarter of 2006. The decrease is mainly due to losses on derivative liability of
$2,612,000 in the first quarter of 2006.




As of March 31, 2007, we had total assets of $2,635,822 and
total liabilities of $2,075,155. As of March 31, 2007, current assets were $1,549,623 as compared to $1,632,163 at December 31, 2006, and current
liabilities were $2,075,155 as compared to $2,051,129 at December 31, 2006.




We had 42 full time employees as of March 31, 2007. We also
hire temporary staff and interns to support our operations. Staff for our new European operations is expected to exceed 20 people by the end of
2007.




As we are still in the early phase of the global roll out
of our key mobile products in several countries around the world and as we resume research and development and new engineering efforts, results of
operations to date may not be indicative of our future results of operations. Moreover, we expect to experience significant fluctuations in our future
operating results due to a variety of factors. Factors that may affect our operating results include the speed of the expansion of the 3G mobile
markets, the general market acceptance of our products, our ability to sell and license our third party intellectual property, the increasing diversity
and number of mobile phone handset types, the amount of software consulting we undertake in the future, success in creating and entering into strategic
alliances, our mix of product and service sales, our response to competitive pressure, our ability to attract and retain qualified personnel, and our
ability to execute our business strategy in the Asian and European markets. Gross profit margins will vary from product to product and between products
and services and the countries in which we launch our products. Our sales mix may vary from period to period and our gross margins will fluctuate
accordingly.




9


---



RESULTS OF OPERATIONS




THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2006




REVENUES: Revenues for the quarter ended March 31, 2007
were $365,688 as compared to $185,223 for the quarter ended March 31 2006. The increase of revenues of $180,465 or 97% was mainly due to product
license fees recognized for newly signed contracts and revenues derived from mobile operators.




GENERAL AND ADMINISTRATIVE: General and administrative
expenses consist of salary for administrative personnel, rent, professional fees and costs associated with employee benefits, supplies, communications
and travel. General and administrative expenses for the quarter ended March 31, 2007 were $278,807 as compared to $122,287 for the quarter ended March
31 2006. The increase of $156,520 was primarily due to increases in legal fees, accounting fees and public relations expenses.




ENGINEERING AND COST OF SALES: These costs generally
consist of salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the engineering (design specifications) of
the products and services from which we derive our revenues. Engineering expenses for the quarter ended March 31, 2007 were $283,961 as compared to
$225,410 for the quarter ended March 31 2006. The increase of $58,551 was mainly the result of an increase in personnel costs and the reallocation of
rental and related occupancy costs between operating units.




RESEARCH & DEVELOPMENT: Research and development
expenses are similar in nature to engineering expenses, but they relate to products in their initial stage and are anticipated to generate revenue at a
later date. Research and development expenses for the quarter ended March 31, 2007 were $53,639 as compared to $31,100 for the quarter ended March 31,
2006. The increase of $22,539 was mainly due to the reallocation of rental and related occupancy costs between operating units.




SALES AND MARKETING: Sales and marketing expenses consist
of salary expenses of sales and marketing personnel, costs relating to marketing materials, advertising, trade show related expense, traveling and
public relations activities. Sales and marketing expenses for the quarter ended March 31, 2007 were $293,114 as compared to $76,390 for the quarter
ended March 31 2006. The increase of $216,724 was primarily due to an increase in marketing activities and an increase in personnel
costs.




LOSS ON VALUE OF DERIVATIVE LIABILITY: Loss on value of
derivative liability of $2,612,000 in the first quarter of 2006 resulted from the fair value of options and warrants classified as derivative
liabilities being marked to market at March 31, 2006.




LOSS FROM OPERATIONS AND NET LOSS: Loss from operations for
the quarter ended March 31, 2007 was $543,833 as compared to loss from operations of $269,964 for the quarter ended March 31 2006. The increase in loss
from operations resulted from increased expenses of $273,869 mostly for legal, travel, new staff and public relations. Net loss for the quarter ended
March 31, 2007 was $532,044 as compared to a loss of $2,891,518 for the quarter ended March 31 2006. The decrease in net loss is mainly due to the loss
of $2,612,000 on the value of derivative liabilities in 2006. The basic and diluted net loss per share for the first quarter of 2007 was $0.02, as
compared to $0.10 for the first quarter of 2006.




10


---



LIQUIDITY AND CAPITAL RESOURCES




As of March 31 2007, we had a working capital deficit of
$525,532 and stockholders equity of $560,667.




In order to fund our cash needs we have borrowed funds from
time to time from our chief executive officer, Eberhard Schoeneburg. As of March 31, 2007 we owed our CEO an aggregate amount of $209,351, as compared
to $222,805 at December 31, 2006. The advanced funds bear interest at a rate of 5% per year and are unsecured.




To further improve the generation of revenues from the roll
out of our mobile technology, we are seeking additional financing through various sources to meet the needs of our current operations, capital expenditures
and commitments. From January 1, 2007 through May 14, 2007, we issued 1,210,459 shares of common stock resulting in total proceeds to us of approximately $1.2 million.
Management believes that these proceeds, together with additional sales of common stock and warrants and any cash flow generated from operating
revenues will be sufficient to fund our operations and working capital needs through December 2007.




We expect that we will need to raise additional capital to
support our operations and accommodate planned future growth. However, there can be no guarantees that such funds will be available on commercially
reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired
and operating results may be adversely affected. Debt financing will increase expenses and must be repaid regardless of operating results. Equity
financing could result in dilution to existing stockholders.




Contractual obligations at March 31, 2007 are as
follows:







|                                  |  |  |  | Total |           | Less than 1 year |          | 1  3 years |          | 4  5 years |         
|--------------------------------- |  |  |  | ----- | --------- | ---------------- | -------- | ----------- | -------- | ----------- | --------
|Operating
leases                  |  |  |  | $     | 888,452   |                  | $214,455 |             | $444,157 |             | $231,840
|Note payable,
officer/stockholder |  |  |  |       | 209,351   |                  | 209,351  |             |         |             |        
|                                  |  |  |  | $     | 1,097,803 |                  | $423,806 |             | $444,157 |             | $231,840



ITEM 3.    CONTROLS AND
PROCEDURES




As of the end of the period covered by this report
(Evaluation Date), our management concluded its evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures. As of the Evaluation Date, the our Chief Executive Officer and Principal Financial Officer concluded that we maintain disclosure controls
and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Act
of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our management, including its Chief Executive Officer and Principal Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Our management necessarily applied its judgment in assessing the costs and
benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding managements control objectives.
There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the
Evaluation Date.




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PART IIOTHER INFORMATION




ITEM 1LEGAL PROCEEDINGS




On September 5, 2001 Copley Place Associates filed suit
against us alleging that we breached our commercial lease by vacating our former Boston, Massachusetts corporate headquarters prior to the expiration
of the lease term. Copley Place Associates has alleged damages of approximately $585,000 and the court granted their motion for summary judgment on
March 4, 2002. Damages assessed by the court in July 2002 have confirmed the summary judgment. We offered Copley Place Associates a complete settlement
of the matter for $50,000 and Copley Place Associates counter-offered $100,000. No final settlement has been achieved. We have accrued $100,000 in
connection with this matter.




In connection with claims for certain unpaid wages and
vacation pay made by former employees of its former U.S. operations in 2002, we had accrued $108,000 representing the potential liability for these
asserted claims with respect to this matter, as confirmed by an Administrative Law Magistrate. In January 2005 we received a court claim and a default
judgment from the pending cases against some of these former US employees. We filed a counter claim and a motion to void the default judgment. In
October 2006, we and the former employees, except Robert Pantano, our former CFO, signed a settlement agreement and general release under which we paid
$105,000. A court order reflecting dismissal of the non-CFO claims was issued on October 10, 2006. On March 27, 2007, the court granted Mr.
Pantanos motion for summary judgment with respect to his wage claim and with respect to the counterclaims that had been asserted against him. The
court also allowed Mr. Pantanos motion to amend his complaint to add a claim for retaliation, which claim is still pending. We and our Chief
Executive Officer have the right to appeal the courts decisions and intend to do so. We accrued $100,000 in the fourth quarter representing the
potential liabilities for the remaining CFO claim, which we believe is our maximum liability under this claim.




It is possible that we may become a party to legal
proceedings arising from the settlement of our outstanding liabilities.




ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS




In January 2007, we issued 87,500 and 13,532 shares of
common stock to two investors as a result of two cashless stock option exercises of 100,000 shares at $0.30 per share, and 25,000 shares at $1.50 per
share, respectively.




In January and February, 2007, we sold 412,500 shares of
common stock at $2.00 per share and paid $59,500 as commissions, for total net proceeds of $765,500. In connection with these sales, we issued to the
same investors warrants to purchase 70,000 shares at $3.00 per share with a 24-month term.




The securities were offered and sold in private placement
transactions in reliance upon Regulation S under the Securities Act of 1933, as amended, and/or the exemption from registration provided by Section
4(2) of the Securities Act and Regulation D thereunder. The securities were offered without general solicitation or advertisement and were sold to a
limited number of investors who represented to us, among other things, that they (i) they are non-U.S. persons as defined in Regulation S or are
accredited investors as such term is defined in Regulation D, (ii) acquired the securities for investment only and not with a view to distribution
thereof, and (iii) understand that the securities cannot be resold except pursuant to an effective registration statement under the Securities Act or
in reliance upon an applicable exemption from such registration requirements and that the certificates representing such securities will bear a
restrictive legend to that effect.




ITEM 6EXHIBITS







|31.1 |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                    
|---- |  |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2 |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                    
|32   |  |  |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.



Items 3, 4, and 5 of Part II of the report are not
applicable and have been omitted.




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SIGNATURES




In accordance with the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




ARTIFICIAL LIFE, INC.




Date: May 15, 2007


| | By: /s/ Eberhard
Schoeneburg Name: Eberhard Schoeneburg Title: Chief Executive Officer and          Principal Financial
Officer
| | -------------------------------------------------------------------------------------------------------------------------------



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