UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For
the quarterly period ended March 31, 2010

or

oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For
the transition period from ___________________ to _____________

Commission file number 000-25075

ARTIFICIAL LIFE, INC.(Exact name of
registrant as specified in its charter)

|                          |                                      
|------------------------- | -------------------------------------
|Delaware                  | 04-3253298                           
|(State
 of incorporation) | (I.R.S.
 Employer Identification No.)

520 Broadway, Suite 350 
Santa Monica, CA 90401 
U.S.A.(Address of principal
executive offices)

(310) 496-4288(Issuers telephone
number, including area code)

Not Applicable(Former name, former address and former fiscal year, 
if changed since last report)

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

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

|                           |  |                      |  |                                              |  |                             
|-------------------------- |  | -------------------- |  | -------------------------------------------- |  | ----------------------------
|Large
 accelerated filer o |  | Accelerated
 filer o |  | Non-accelerated
 filer o                     |  | Smaller
 reporting company þ
|                           |  |                      |  | (Do not check if smaller
 reporting company) |  |                             

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

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

As
of April 30, 2010, the Registrant had 60,590,489 shares of common stock, $.01
par value per share, outstanding.

1

---



ARTIFICIAL LIFE, INC.

INDEX OF INFORMATION CONTAINED IN FORM 10-Q
FOR THE 
QUARTERLY PERIOD ENDED MARCH 31, 2010

|           |                                                                                                                                              |  |         
|---------- | -------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|           |                                                                                                                                              |  | Page No.
|           |                                                                                                                                              |  |         
|           | PART I - FINANCIAL INFORMATION                                                                                                               |  |         
|           |                                                                                                                                              |  |         
|Item 1.    | Unaudited Condensed Consolidated Financial
 Statements                                                                                       |  |         
|           |                                                                                                                                              |  |         
|           | Condensed Consolidated Balance Sheets as of
 March 31, 2010 and December 31, 2009 (unaudited)                                                |  | 3       
|           |                                                                                                                                              |  |         
|           | Condensed Consolidated Statements of Income
 and Comprehensive Income for the Three-Month Periods Ended March 31, 2010 and
 2009 (unaudited) |  | 4       
|           |                                                                                                                                              |  |         
|           | Condensed Consolidated Statement of Changes in Stockholders Equity
 for the Three-Month Period Ended March 31, 2010 (unaudited)             |  | 5       
|           |                                                                                                                                              |  |         
|           | Condensed Consolidated Statements of Cash
 Flows for the Three-Month Periods Ended March 31, 2010 and 2009 (unaudited)                       |  | 6       
|           |                                                                                                                                              |  |         
|           | Notes to Condensed Consolidated Financial
 Statements (unaudited)                                                                            |  | 7       
|           |                                                                                                                                              |  |         
|Item 2.    | Managements Discussion and Analysis of
 Financial Condition and Results of Operations                                                       |  | 12      
|           |                                                                                                                                              |  |         
|Item 3.    | Quantitative and Qualitative Disclosure
 About Market Risk                                                                                   |  | 17      
|           |                                                                                                                                              |  |         
|Item 4T.   | Controls and Procedures                                                                                                                      |  | 17      
|           |                                                                                                                                              |  |         
|           | PART II - OTHER INFORMATION                                                                                                                  |  |         
|           |                                                                                                                                              |  |         
|Item 1.    | Legal Proceedings                                                                                                                            |  | 18      
|           |                                                                                                                                              |  |         
|Item 1A.   | Risk Factors                                                                                                                                 |  | 18      
|           |                                                                                                                                              |  |         
|Item 2.    | Unregistered Sales of Equity Securities and
 Use of Proceeds                                                                                 |  | 18      
|           |                                                                                                                                              |  |         
|Item 3.    | Defaults Upon Senior Securities                                                                                                              |  | 18      
|           |                                                                                                                                              |  |         
|Item 4.    | [Removed and Reserved]                                                                                                                       |  | 18      
|           |                                                                                                                                              |  |         
|Item 5.    | Other Information                                                                                                                            |  | 18      
|           |                                                                                                                                              |  |         
|Item 6.    | Exhibits                                                                                                                                     |  | 18      
|           |                                                                                                                                              |  |         
|Signatures |                                                                                                                                              |  | 19      

2

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PART I  FINANCIAL INFORMATION

ITEM
1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ARTIFICIAL LIFE, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)

|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ----------- | ------------------ | - | ----------- | -
|                                                                                                                                                                                                  |  | March 31,
 2010 |             | December 31,
 2009 |  
|                                                                                                                                                                                                  |  |                 |             |                    |  
|                                                                                                                                                                                                  |  | USD             |             | USD                |  
|ASSETS                                                                                                                                                                                           
|Current assets:                                                                                                                                                                                   |  |                 |             |                    |   |             |  
|Cash                                                                                                                                                                                              |  | $               | 921,903     |                    | $ | 2,356,336   |  
|Trade accounts receivables, net of discount
 interest of $208,218                                                                                                                                 |  |                 | 10,933,164  |                    |   | 9,498,896   |  
|Trade installment receivables, net of
 discount interest of $139,743                                                                                                                              |  |                 | 6,741,534   |                    |   | 8,473,270   |  
|Prepaid expenses and other                                                                                                                                                                        |  |                 | 756,386     |                    |   | 473,166     |  
|Deferred tax asset                                                                                                                                                                                |  |                 | 1,100,107   |                    |   | 1,000,000   |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|Total current assets                                                                                                                                                                              |  |                 | 20,453,094  |                    |   | 21,801,668  |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|Fixed assets, net of accumulated
 depreciation of $2,144,900 and $1,932,684, respectively                                                                                                         |  |                 | 1,376,650   |                    |   | 1,575,531   |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|License rights, net of accumulated
 amortization of $7,713,471 and $6,317,060, respectively                                                                                                       |  |                 | 31,262,452  |                    |   | 26,421,105  |  
|Prepaid expenses, deposits and other assets                                                                                                                                                       |  |                 | 1,578,695   |                    |   | 1,325,702   |  
|Deferred tax asset                                                                                                                                                                                |  |                 | 909,770     |                    |   | 710,000     |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 | 33,750,917  |                    |   | 28,456,807  |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|TOTAL ASSETS                                                                                                                                                                                      |  | $               | 55,580,661  |                    | $ | 51,834,006  |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                             
|Current liabilities:                                                                                                                                                                              |  |                 |             |                    |   |             |  
|Accounts payable                                                                                                                                                                                  |  | $               | 2,103,816   |                    | $ | 2,297,854   |  
|Accrued expenses and other                                                                                                                                                                        |  |                 | 463,417     |                    |   | 737,128     |  
|Income tax payable                                                                                                                                                                                |  |                 | 605,028     |                    |   | 17,394      |  
|Note payable  officer/stockholder                                                                                                                                                                |  |                 | 1,755,611   |                    |   | 1,606,328   |  
|Note payable  stockholder                                                                                                                                                                        |  |                 |            |                    |   | 666,667     |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|Total liabilities (all current)                                                                                                                                                                   |  |                 | 4,927,872   |                    |   | 5,325,371   |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|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, 57,882,337 shares issued and outstanding as of March 31,
 2010 and 57,411,203 shares issued and outstanding as of December 31, 2009 |  |                 | 578,823     |                    |   | 574,111     |  
|Additional paid-in capital                                                                                                                                                                        |  |                 | 63,610,670  |                    |   | 63,006,782  |  
|Notes receivable from stockholders                                                                                                                                                                |  |                 | (19,577     | )                  |   | (19,577     | )
|Accumulated deficit                                                                                                                                                                               |  |                 | (13,468,628 | )                  |   | (17,117,425 | )
|Accumulated other comprehensive (loss)
 income                                                                                                                                                    |  |                 | (48,499     | )                  |   | 64,744      |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|Total stockholders equity                                                                                                                                                                        |  |                 | 50,652,789  |                    |   | 46,508,635  |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                        |  | $               | 55,580,661  |                    | $ | 51,834,006  |  
|                                                                                                                                                                                                  |  |                 |             |                    |   |             |  

See
accompanying notes to unaudited condensed consolidated financial statements.

3

---



ARTIFICIAL LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
AND COMPREHENSIVE INCOME 
(UNAUDITED)

|                                        |  |                                     |            |      |   |            |  
|--------------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | -
|                                        |  | Three-Month Periods Ended March 31, |           
|                                        |  |                                     |           
|                                        |  | 2010                                |            | 2009 |  
|                                        |  |                                     |            |      |  
|                                        |  |                                     | USD        |      |   | USD        |  
|Revenues:                               |  |                                     |            |      |   |            |  
|Software license agreements             |  | $                                   | 8,179,546  |      | $ | 7,052,373  |  
|Application services and other          |  |                                     | 4,629      |      |   | 10,827     |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     | 8,184,175  |      |   | 7,063,200  |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Cost of revenues:                       |  |                                     |            |      |   |            |  
|Cost of software license agreements     |  |                                     | 1,429,638  |      |   | 721,770    |  
|Others                                  |  |                                     | 60,141     |      |   | 19,642     |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     | 1,489,779  |      |   | 741,412    |  
|                                        |  |                                     |            |      |   |            |  
|Gross profit                            |  |                                     | 6,694,396  |      |   | 6,321,788  |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Operating expenses:                     |  |                                     |            |      |   |            |  
|General and administrative              |  |                                     | 702,135    |      |   | 1,651,891  |  
|Research and development                |  |                                     | 586,039    |      |   | 777,806    |  
|Sales and marketing                     |  |                                     | 496,299    |      |   | 447,510    |  
|Depreciation and amortization           |  |                                     | 221,604    |      |   | 57,912     |  
|                                        |  |                                     |            |      |   |            |  
|Total operating expenses                |  |                                     | 2,006,077  |      |   | 2,935,119  |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Income from operations                  |  |                                     | 4,688,319  |      |   | 3,386,669  |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Other income (expenses):                |  |                                     |            |      |   |            |  
|Interest income and other income        |  |                                     | 32         |      |   | 20         |  
|Interest expense                        |  |                                     | (20,370    | )    |   | (30,252    | )
|Foreign currency transaction loss       |  |                                     | (715,427   | )    |   | (129,206   | )
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     | (735,765   | )    |   | (159,438   | )
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Income before income tax                |  |                                     | 3,952,554  |      |   | 3,227,231  |  
|Income tax expense                      |  |                                     | (303,757   | )    |   | (515,000   | )
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Net income                              |  |                                     | 3,648,797  |      |   | 2,712,231  |  
|Foreign currency translation adjustment |  |                                     | (113,243   | )    |   | (92,678    | )
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Comprehensive income                    |  | $                                   | 3,535,554  |      | $ | 2,619,553  |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Net income per share:                   |  |                                     |            |      |   |            |  
|Basic                                   |  | $                                   | 0.06       |      | $ | 0.06       |  
|                                        |  |                                     |            |      |   |            |  
|Diluted                                 |  | $                                   | 0.06       |      | $ | 0.06       |  
|                                        |  |                                     |            |      |   |            |  
|                                        |  |                                     |            |      |   |            |  
|Weighted average shares outstanding:    |  |                                     |            |      |   |            |  
|Basic                                   |  |                                     | 57,752,470 |      |   | 47,724,132 |  
|                                        |  |                                     |            |      |   |            |  
|Diluted                                 |  |                                     | 60,022,934 |      |   | 48,044,509 |  
|                                        |  |                                     |            |      |   |            |  

See
accompanying notes to unaudited condensed consolidated financial statements.

4

---



ARTIFICIAL LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS EQUITY(UNAUDITED)

|                                                                   |  |              |  |          |  |                            |  |                                    |  |                     |  |                                               |  |                            |  | 
|------------------------------------------------------------------ |  | ------------ |  | -------- |  | -------------------------- |  | ---------------------------------- |  | ------------------- |  | --------------------------------------------- |  | -------------------------- |  | 
|                                                                   |  | Common Stock |  |          |  |                            |  |                                    |  |                     |  |                                              
|                                                                   |  | Shares       |  | Amount   |  | Additional
paid-in
capital |  | Notes
receivable
from
stockholders |  | Accumulated
deficit |  | Accumulated
other
comprehensive
income (loss) |  | Total
stockholders
equity
|                                                                   |  |              |  | USD      |  | USD                        |  | USD                                |  | USD                 |  | USD                                           |  | USD                       
|                                                                   |  |              |  |          |  |                            |  |                                    |  |                     |  |                                               |  |                           
|Balances at January 1, 2010                                        |  | 57,411,203   |  | $574,111 |  | $63,006,782                |  | $(19,577)                          |  | $(17,117,425)       |  | $64,744                                       |  | $46,508,635               
|Issuance of common
stock and warrants in
private placements        |  | 471,134      |  | 4,712    |  | 603,888                    |  |                                   |  |                    |  |                                              |  | 608,600                   
|                                                                   |  |              |  |          |  |                            |  |                                    |  |                     |  |                                               |  |                           
|Net income                                                         |  |             |  |         |  |                           |  |                                   |  | 3,648,797           |  |                                              |  | 3,648,797                 
|                                                                   |  |              |  |          |  |                            |  |                                    |  |                     |  |                                               |  |                           
|Other comprehensive loss 
foreign currency
translation adjustment |  |             |  |         |  |                           |  |                                   |  |                    |  | (113,243)                                     |  | (113,243)                 
|Balances at March 31, 2010                                         |  | 57,882,337   |  | $578,823 |  | $63,610,670                |  | $(19,577)                          |  | $(13,468,628)       |  | $(48,499)                                     |  | $50,652,789               

See
accompanying notes to unaudited condensed consolidated financial statements.

5

---



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

|                                                                                             |  |                                     |            |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                             |  | Three-Month Periods Ended March 31, |           
|                                                                                             |  |                                     |           
|                                                                                             |  | 2010                                |            | 2009 |  
|                                                                                             |  |                                     |            |      |  
|                                                                                             |  |                                     | USD        |      |   | USD        |  
|Cash flows from operating activities:                                                        |  |                                     |            |      |   |            |  
|Net income                                                                                   |  | $                                   | 3,648,797  |      | $ | 2,712,231  |  
|Adjustments to reconcile net income to net
 cash provided by (used in) operating activities: |  |                                     |            |      |   |            |  
|Depreciation and amortization                                                                |  |                                     | 1,651,242  |      |   | 779,683    |  
|Loss on disposal of fixed assets                                                             |  |                                     | 521        |      |   |           |  
|Deferred income tax (benefit) expense                                                        |  |                                     | (299,877   | )    |   | 500,000    |  
|Bad and doubtful debt expense                                                                |  |                                     |           |      |   | 1,095,212  |  
|Foreign currency exchange loss                                                               |  |                                     | 715,427    |      |   | 129,206    |  
|Interest expense accrued on advances from
 officer / stockholder                             |  |                                     | 18,964     |      |   | 4,038      |  
|Salary / bonus accrued to officer /
 stockholder                                             |  |                                     | 55,664     |      |   | 23,052     |  
|Changes in operating assets and liabilities:                                                 |  |                                     |            |      |   |            |  
|Increase in trade accounts and installment
 receivables                                      |  |                                     | (4,767,679 | )    |   | (3,836,206 | )
|Decrease in prepaid expenses, deposits and
 other assets                                     |  |                                     | 145,134    |      |   | 50,533     |  
|Decrease in accounts payable                                                                 |  |                                     | (1,343,964 | )    |   | (2,416,151 | )
|Decrease in accrued expenses and other                                                       |  |                                     | (267,459   | )    |   | (67,874    | )
|Increase in income tax payable                                                               |  |                                     | 587,634    |      |   | 15,000     |  
|                                                                                             |  |                                     |            |      |   |            |  
|Net cash provided by (used in) operating
 activities                                         |  |                                     | 144,404    |      |   | (1,011,276 | )
|                                                                                             |  |                                     |            |      |   |            |  
|                                                                                             |  |                                     |            |      |   |            |  
|Cash flows from investing activities:                                                        |  |                                     |            |      |   |            |  
|Purchase of fixed assets                                                                     |  |                                     | (27,434    | )    |   | (14,105    | )
|Purchase of license rights                                                                   |  |                                     | (1,463,000 | )    |   |           |  
|                                                                                             |  |                                     |            |      |   |            |  
|Net cash used in investing activities                                                        |  |                                     | (1,490,434 | )    |   | (14,105    | )
|                                                                                             |  |                                     |            |      |   |            |  
|                                                                                             |  |                                     |            |      |   |            |  
|Cash flows from financing activities:                                                        |  |                                     |            |      |   |            |  
|Net proceeds from issuance of common stock
 and warrants                                     |  |                                     | 608,600    |      |   |           |  
|Advances under note payable to
 officer/stockholder                                          |  |                                     | 1,093,667  |      |   |           |  
|Repayment of note payable to
 officer/stockholder                                            |  |                                     | (1,019,012 | )    |   | (151,676   | )
|Repayment of note payable to stockholder                                                     |  |                                     | (666,667   | )    |   |           |  
|                                                                                             |  |                                     |            |      |   |            |  
|Net cash provided by (used in) financing
 activities                                         |  |                                     | 16,588     |      |   | (151,676   | )
|                                                                                             |  |                                     |            |      |   |            |  
|                                                                                             |  |                                     |            |      |   |            |  
|Net decrease in cash                                                                         |  |                                     | (1,329,442 | )    |   | (1,177,057 | )
|Cash at beginning of period                                                                  |  |                                     | 2,356,336  |      |   | 1,430,578  |  
|Effect of exchange rate changes on cash                                                      |  |                                     | (104,991   | )    |   | (133,044   | )
|                                                                                             |  |                                     |            |      |   |            |  
|Cash at end of period                                                                        |  | $                                   | 921,903    |      | $ | 120,477    |  
|                                                                                             |  |                                     |            |      |   |            |  
|                                                                                             |  |                                     |            |      |   |            |  
|Supplemental cash flow disclosure:                                                           |  |                                     |            |      |   |            |  
|Cash paid for interest                                                                       |  | $                                   | 70,044     |      | $ | 103,051    |  
|                                                                                             |  |                                     |            |      |   |            |  
|Cash paid for income taxes                                                                   |  | $                                   | 16,000     |      | $ |           |  
|                                                                                             |  |                                     |            |      |   |            |  
|                                                                                             |  |                                     |            |      |   |            |  
|Supplemental disclosure of non-cash
 investing and financing activities:                     |  |                                     |            |      |   |            |  
|Purchase of software hosting service in
 satisfaction for trade accounts receivable          |  | $                                   | 690,000    |      | $ |           |  
|                                                                                             |  |                                     |            |      |   |            |  
|Purchase license rights through offsetting arrangement                                       |  | $                                   | 3,360,000  |      | $ | 2,541,800  |  
|                                                                                             |  |                                     |            |      |   |            |  

See
accompanying notes to unaudited condensed consolidated financial statements.

6

---



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

1. BASIS OF PRESENTATION

The
accompanying unaudited condensed consolidated financial statements of
Artificial Life, Inc. (the Company) and its subsidiaries (the Group) 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-Q and Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for a complete financial statement presentation.
The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, as follows:

| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Artificial Life Asia Limited, located in
 Hong Kong; develops products and supports Artificial Life in its customer
 service and game development.                                                                                   
| |                                                                                                                                                                                                                                      
| | Artificial Life Europe GmbH, located in
 Berlin, Germany; formed in January 2007 to concentrate on customer service
 and support activities of sales and marketing expansion in European, Middle
 Eastern and African (EMEA) markets.
| |                                                                                                                                                                                                                                      
| | Artificial Life Japan Ltd., located in
 Tokyo, Japan; acquired by the Company in July 2007 for support activities of
 sales and marketing expansion in Japanese markets.                                                             
| |                                                                                                                                                                                                                                      
| | Artificial Life America, Inc., located in
 Los Angeles, California; formed in August 2008 to support U.S. customers and
 focus on design and creative direction for game development.                                                
| |                                                                                                                                                                                                                                      
| | Artificial Life Ventures, Inc., Artificial Life USA, Inc., and
 Artificial Life Mobile Computing, Inc.; all
 non-operating, inactive subsidiaries in 2009 and 2008.                                                                  

All
significant intercompany accounts and transactions have been eliminated in
consolidation.

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain 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 periods. Actual results
could differ from those estimates.

Operating
results for the three-month period ended March 31, 2010 are not necessarily
indicative of results that may be expected for the year ending December 31,
2010. Amounts at December 31, 2009 are derived from the Companys audited consolidated
financial statements. For further information, refer to the audited
consolidated financial statements and notes thereto included in the Companys
annual Report on Form 10-K for the year ended December 31, 2009.

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-K for the year ended December 31, 2009,
which has been filed with the Securities and Exchange Commission.

Recently issued and adopted accounting
standards

In
January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Updates (ASU) 2010-06 to improve disclosures regarding
fair value measurements. This update requires entities to (i) disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers and (ii)
present separately information about purchases, sales, issuances, and
settlements (i.e., on a gross basis rather than on a net basis), in the roll
forward of activity in Level 3 fair value measurements. The update requires (i)
fair value disclosures for each class of assets and liabilities rather than by
major category or line item in the statement of financial position and (ii)
disclosure about valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements for assets and
liabilities in both Level 2 and Level 3. ASU 2010-06 will be effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about the gross presentation of activity in the Level 3
roll forward, which will be effective for fiscal years beginning after December
15, 2010, and for interim periods within those fiscal years. The Company does
not expect the adoption of this statement to have an impact on its consolidated
financial statements.

In
October 2009, the FASB issued ASU 2009-13, which amends ASC 605, Revenue
Recognition, to require companies to allocate the overall consideration in
multiple-element arrangements to each deliverable by using

7

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a best
estimate of the selling price of individual deliverables in the arrangement in
the absence of vendor-specific objective evidence or other third-party evidence
of the selling price. ASU 2009-13 will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010, and early adoption will be permitted. The Company does
not expect the adoption of this statement to have a material impact on its
consolidated financial statements.

In
October 2009, the FASB issued ASU 2009-14, which amends ASC 985-605,
Software-Revenue Recognition, to exclude from its requirements (a)
non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products
when the software components and non-software components of the tangible
product function together to deliver the tangible products essential
functionality. ASU 2009-14 will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010, and early adoption will be permitted. The Company does
not expect the adoption of this statement to have a material impact on its
consolidated financial statements.

2. STOCK BASED COMPENSATION

At
January 1, 2010, all outstanding options and warrants issued to employees were
fully vested and exercisable. There were no stock options granted during the
three-month periods ended March 31, 2010 or 2009.

At
March 31, 2010, the Company had outstanding options to purchase 4,165,000
shares of common stock under its stock option plan, issued to employees as follows:

|                                             |  |   |            | 
|-------------------------------------------- |  | - | ---------- | 
|Weighted
 average exercise price             |  | $ | 0.93       | 
|Aggregate
 intrinsic value                   |  | $ | 1,032,900  | 
|Weighted
 average remaining contractual term |  |   | 2.59 years | 

At
March 31, 2010, the Company had outstanding warrants to purchase 1,400,000
shares of common stock issued to employees as follows:

|                                             |  |   |            | 
|-------------------------------------------- |  | - | ---------- | 
|Weighted
 average exercise price             |  | $ | 0.89       | 
|Aggregate
 intrinsic value                   |  | $ | 385,000    | 
|Weighted
 average remaining contractual term |  |   | 2.68 years | 

3. CUSTOMER CONCENTRATION

Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of trade accounts and installment receivables. The
Company extends credit to its customers in the normal course of business and
generally does not require collateral. Due to the global financial crisis and
general market conditions, in 2009 and 2010, the Company granted or extended
payment terms (up to 180 days) to certain customers. The Company assesses the
probability of collection from each customer at the outset of the arrangement
based on a number of factors, including the customers payment history and its
current creditworthiness. If in managements judgment collection is not
reasonably assured, the Company does not record revenue until the uncertainty is removed.

Management
performs ongoing credit evaluations, and the Company maintains an allowance for
potential credit losses based upon its loss history and its aging analysis.
Management reviews the allowance for doubtful accounts each reporting period
based on a detailed analysis of trade receivables and makes the best estimate
of the amount of credit losses in existing trade receivables. In the analysis,
management primarily considers the age of the customers receivable and also
considers the creditworthiness of the customer, the economic conditions of the
customers industry, general economic conditions and trends, and the Companys
business relationship and history with its customers, among other factors. If
any of these factors change, the Company may also change its original
estimates, which could impact the level of the Companys future allowance for
doubtful accounts. If judgments regarding the collectability of receivables
were incorrect, adjustments to the allowance may be required, which would
reduce profitability. Since the Companys trade receivable are often
concentrated in a relatively few number of customers, a significant change in
the liquidity or financial position of any one of these customers could have a

8

---



material
adverse effect on the Companys financial statements. At March 31, 2010 and
December 31, 2009, there was no allowance for doubtful accounts.

Due
to the extended payment terms granted to certain customers, payments from
customers may be collected over an extended period of time. The related
receivables have been discounted using a 3.25% discount rate to reflect the
present value of the future collection of payments, which is to be amortized
using the effective interest method over the period in which payments are made
and the balance is outstanding. The unamortized discount on these
receivables is approximately $208,000 at March 31, 2010 and $208,000 at December 31, 2009.

The
Company has one customer with whom it has a long-standing business
relationship, and to whom it has been selling software since 2007. At December
31, 2009, the Company entered into an installment receivable agreement with
this customer, which is due in various installments through December 31, 2010.
This receivable has been discounted using a 3.25% discount rate to reflect the
interest component of the transaction, which is to be amortized using the
effective interest method over the period in which payments are made and the balance
is outstanding. The unamortized discount on this receivable is
approximately $140,000 at March 31, 2010 and $140,000 at December 31, 2009.

At
March 31, 2010 and December 31, 2009, the Company had 92 telecom carriers,
resellers, distributors and general corporate customers, compared to 80
customers at March 31, 2009. For the three-month period ended March 31, 2010,
the Company had two customers that represented approximately 66% and 33% of the
Companys revenues, of which one of the customers is also the Companys major licensing vendor. For the three-month period ended March 31, 2009, the
Company had two customers that represented approximately 62% and 36% of the
Companys revenues.

At
March 31, 2010, trade receivables were due from 53 customers. Of these, four
customers accounted for approximately 38%, 20%, 15% and 11% of total trade
receivables, respectively. At March 31, 2010, the average age of trade
receivables from all customers was 150 days as compared to 128 days at December
31, 2009. The average age of receivables from the Companys six largest
customers (which accounted for over 99% of total trade receivables) was 109
days at March 31, 2010 as compared to 108 days at December 31, 2009.

During December 2009, the Company commenced discussions with one of the Companys
key licensors with a view to acquiring certain license rights. This purchase was
eventually concluded on March 26, 2010, at a resulting cost to the Company of
Euro 2,500,000 (USD 3,500,000). Consequently, the Company recorded the purchase
of these license rights during the period ended March 31, 2010.

The Company also entered into discussions to sell certain license rights of a newly developed technology of the Company
 to that same party. The sale of such rights was concluded
on March 29, 2010. The Company recognized revenue of Euro 4,000,000 (USD
5,376,000) in relation to this sale during the period ended March 31, 2010.

Management has concluded that both the above transactions were
conducted on an arms length basis in the normal course of business and that
the considerations for the purchase and sale of the respective license rights
reflected their respective fair market value.

In view of the fact that the above transactions involved the same
third party, the Company entered into an offsetting agreement with such party whereby the total
consideration for the sale of certain license rights for Euro 4,000,000 (USD
5,376,000) was partially offset against the amount payable by the Company
related to the acquisition of license rights of Euro 2,500,000 (USD 3,500,000).
Management of the Company considered it appropriate and advantageous for the
Company to minimize cash expenditures and credit risk exposure and thereby
entered into such offsetting arrangement.

4. UNCOLLECTED DEFERRED REVENUE

Because
of the Companys revenue recognition policies, there are circumstances for
which the Company is unable to recognize revenue relating to certain sales
transactions that have been billed, but the related receivable has not been
collected. While the receivable represents a legally enforceable obligation of
the customer, for balance sheet presentation purposes, deferred revenue has
been offset with the related receivable, and no amounts appear in the
consolidated balance sheets for such transactions. The aggregate amount of
unrecognized accounts receivable and deferred revenue was approximately $4.8
million at March 31, 2010 and December 31, 2009.

5. FIXED ASSETS

Fixed assets are stated at cost less depreciation and if applicable, impairment.

6. LICENSE RIGHTS

License rights
consist of the following at March 31, 2010 and December 31, 2009:

|                               |                |  |                 
|------------------------------ | -------------- |  | ----------------
|                               | March 31,2010  |  | December 31,2009
|                               |                |  |                 
|                               | USD            |  | USD             
|License rights                 | $   38,975,923 |  | $   32,738,165  
|Less
 accumulated amortization | (7,713,471)    |  | (6,317,060)     
|                               |                |  |                 
|                               | $   31,262,452 |  | $   26,421,105  
|                               |                |  |                 

Amortization
expenses for the three-month periods ended March 31, 2010 and 2009 were
approximately $1,430,000 and $722,000, respectively.

Beginning
in 2007 and continuing through 2010, the Company acquired from several vendors
certain license rights for the reselling, sublicensing and localization and
marketing of certain technologies in specified geographic regions throughout
the world. In January 2010, the Company entered into a new license rights
agreement with some vendors to combine all previous licenses into one unified
worldwide license. This new license expires on December 31, 2014.

9

---



7. NET INCOME PER SHARE

Basic
net income per share is calculated based on the weighted average number of
common shares outstanding for the three-month periods ended March 31, 2010 and
2009. Diluted net income per share is computed using the weighted average
number of common shares outstanding during the period and the weighted average
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants; common equivalent shares
are excluded from the calculation if their effect is anti-dilutive.

The
following table sets forth the computation of dilutive common shares for the
three-month periods ended March 31, 2010 and 2009.

|                                                          |            |  |           
|--------------------------------------------------------- | ---------- |  | ----------
|                                                          | 2010       |  | 2009      
|                                                          |            |  |           
|Weighted average shares outstanding - basic               | 57,752,470 |  | 47,724,132
|Dilutive securities:                                      |            |  |           
|Stock options                                             | 1,369,626  |  | 245,108   
|Warrants                                                  | 900,838    |  | 75,269    
|                                                          |            |  |           
|Shares used in dilutive net income per
 share calculation | 60,022,934 |  | 48,044,509
|                                                          |            |  |           

8. INCOME TAXES

The difference between the expected and
actual income tax expenses recorded for the three-month periods ended March 31, 2010 and 2009 is primarily due to changes in the
valuation allowance on deferred tax assets in respect of the expected utilization of available tax loss carryforwards.

At March 31, 2010, the Groups deferred
tax asset, of which valuation allowance has been fully provided for, primarily consists of tax loss carryforwards. The recognition
of the net deferred tax asset at March 31, 2010 is based on the Companys analysis of past, current and projected financial
results of the Groups operations. Based on the analysis, management concluded that the net deferred tax asset represents the
amount that is more likely than not of being realized. If future taxable income is less than the amount that has been assumed in
determining the deferred tax asset at March 31, 2010, an increase in the valuation allowance may be required with a corresponding
charge against income. If future taxable income exceeds the level that has been assumed in calculating the deferred tax asset
(including taxable income in foreign jurisdictions), the valuation allowance could be reduced with a corresponding credit to
income.

For the three-month period ended March 31,
2010, the Company recorded an income tax expense of $303,757 (2009: $515,000).  The income tax expense includes a current
income tax expense of $720,796 (2009: $515,000), based on the estimated annual effective income tax rate for the year ending
December 31, 2010, and a deferred tax benefit of $417,039 (2009: nil) as a result of a change in judgment during the period about
the realizability of the deferred tax assets of certain subsidiaries of the Company in future year.  The change in judgment was
mainly due to the successful development and launching of new products during the period.

9. CONTINGENCIES

From
time to time, legal proceedings or disputes arise in the normal course of
business. The Company monitors and reviews these matters and maintains accruals
where appropriate.

In
September 2008, an action was brought against Artificial Life Europe GmbH in
Germany in a contractual dispute, in which a claim of approximately $375,000
was made against the Company. A court hearing was held in September 2009 before
the State Court in Berlin. In February 2010, the Court ordered the Company to
pay the plaintiff a settlement of approximately $350,000 and all court and
attorney fees incurred by the plaintiff. The settlement amount and the estimated
court and attorney fees have been accrued as of March 31, 2010 and December 31, 2009. The Company
filed an appeal with the State Court in Berlin in March 2010, and no payment
will be made until a final judgment is issued by the Court. Management believes
the Company has adequately reserved for litigation and that the ultimate
outcome of the pending appeal will not have a material adverse impact on the
Companys consolidated financial position or results of operations taken as a
whole.

10

---



10. NOTES PAYABLE

Related Party Note Payable:

The
Company has a revolving note payable to its chief executive officer for
advances made by him to the Company, as well as accrued salary and bonus. The
note bears interest at 5%, secured by the assets of the Company and repayable
when sufficient funds are determined by the board of directors to be available.

Activity on
the note payable during the three-month periods ended March 31, 2010 and 2009 is as
follows:

| |                              |  |   |            |   |   |          |  
| | ---------------------------- |  | - | ---------- | - | - | -------- | -
| |                              |  |   | 2010       |   |   | 2009     |  
| |                              |  |   |            |   |   |          |  
| |                              |  |   | USD        |   |   | USD      |  
| | Beginning balance, January 1 |  | $ | 1,606,328  |   | $ | 737,771  |  
| | Advance                      |  |   | 1,093,667  |   |   |         |  
| | Repayments                   |  |   | (1,019,012 | ) |   | (151,676 | )
| | Accrued salary/bonus         |  |   | 55,664     |   |   | 23,052   |  
| | Accrued interest             |  |   | 18,964     |   |   | 4,038    |  
| |                              |  |   |            |   |   |          |  
| | Ending balance, March 31     |  | $ | 1,755,611  |   | $ | 613,185  |  
| |                              |  |   |            |   |   |          |  

Notes payable:

Prior to
January 1, 2008, the Company issued promissory notes to two non-related party
stockholders for an aggregate principal amount of $1,000,000. These notes are
unsecured, bear an annual interest rate of 10%, and matured on December 31,
2008. These notes are due on demand, and the holders may convert the notes and
any unpaid interest accumulated thereon into shares of common stock at a
conversion price of $2.50 per share. The Company determined that the notes did
not have any beneficial conversion feature, as the conversion exercise price
exceeded the market price of the Companys common stock. In the fourth quarter
of 2009, the Company paid one of the notes in full ($333,333). The remaining
note with a balance of $666,667 was fully paid in January 2010.

11. FAIR VALUE MEASUREMENTS

Accounting
standards define fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which the Company would transact and considers assumptions that market participants
would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance.

The fair value of trade accounts
receivables, trade installment receivables, accounts payable and accrued expenses and other approximated the respective carrying
amounts because of the short maturity of these instruments.  The nonfinancial assets and liabilities that are remeasured at
fair value on a nonrecurring basis did not impact our financial position or results of operations; however, it could have an impact
in future periods.  In addition, the Company may have additional disclosure requirements in the event we incur impairment of
our assets in future periods.



11

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12. SUBSEQUENT EVENTS

On March 31, 2010, the Company agreed to a private
placement offering with one institutional investor for 1,666,667 shares of
common stock and warrants to purchase an additional 416,667 shares of common
stock which was completed in April 2010. The aggregate purchase price for the shares of common stock and warrants
was $2,000,000. The transaction closed and such amounts were collected in April 2010.

In
April 2010, the Company closed private placement offerings with one
institutional and one individual accredited investor for 1,001,485 shares of
common stock and warrants to purchase an additional 501,485 shares of common
stock. The shares of common stock and warrants were sold for an aggregate
purchase price of $1,250,980. The warrants have a two-year term with exercise
prices ranging from $0.80 to $2, which are immediately exercisable in April
2010. As part of these offerings, one party received 40,000 common shares and
warrants to purchase 20,000 shares of common stock in satisfaction of a $50,000
commission related to the offerings.

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

GENERAL

The
following Managements Discussion and Analysis is intended to help the reader
understand our results of operations and financial condition and is provided as
a supplement to, and should be read in conjunction with, our financial
statements and the accompanying notes included in this Quarterly Report on Form
10-Q. This discussion contains, in addition to historical statements,
forward-looking statements that involve risks and uncertainties. Our actual
future results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the factors discussed in the
section titled Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2009. Any forward-looking statement speaks only as of the date
on which such statement is made and we do not intend to update any such
forward-looking statements.

OVERVIEW

During
the course of 2009, Artificial Life, Inc. strengthened its position as a
leading full service global mobile software provider by offering a wide variety
of mobile products such as mobile games and entertainment, mobile TV, mobile
advertisement, mobile distribution and aggregation, mobile business
applications, and mobile productivity tools and technology. Those efforts
continued during the first quarter of 2010.

In
January 2010, we changed our Hong Kong branch office to a representative
office. Our Hong Kong operation will be supported by our wholly-owned
subsidiary, Artificial Life Asia Limited, located in Hong Kong.

In
the first quarter of 2010, we focused our sales efforts on the sales of our new
m-commerce platform, OPUS-MTM, and were very successful as over 90%
of our revenues were related and derived from this product already in the first
quarter of its commercial launch.

We
are a registered developer for Apples iPhone, iPod Touch and iPad platforms
and develop games and applications for these platforms and we are a leading
publisher of iPhone/iPod games. Since January 2010 through

12

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May 2010, we
have successfully developed and released the following three iPhone games:

Red
Bull Racing Challenge (with Red Bull Racing Team),
Spartacus:
Blood and Sand (with Starz Digital Media),Linkin
Park 8-bit rebellion (with Linkin Park and Warner
Bros. Records)

Our
iPhone games have been downloaded an aggregate of more than 11.6 million times
since the launch of our first iphone game at the end of 2008. During the first
quarter of 2010, our iPhone games were downloaded over 3.5 million times. In
addition to the mobile game business for 2010, we will focus strongly on mobile
business and lifestyle applications. OPUS-MTM, with its broad
appeal, flexible module concept, innovative pricing, hosting support and
comprehensive feature set is our key product to implement the new expanded
business strategy.

We
are currently preparing and developing new mobile business and lifestyle
products in the following fields:

| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Mobile
 health care and health monitoring for diabetes                                
| |   |                                                                                       
| |  | Mobile
 security, digital watermarking and virtual reconstruction of objects          
| |   |                                                                                       
| |  | Augmented
 reality and mobile image recognition                                       
| |   |                                                                                       
| |  | Mobile green
 technology, environmental protection monitoring and control applications

Significant
events during the first quarter of 2010 include the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January
 2010, we launched the Red Bull Racing
 Challenge, the official game for the prominent Formula One team Red
 Bull Racing on the iPhone and iPod Touch platform.                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In January
 2010, we signed a partnership agreement with China Unicom, one of the largest
 telecom operators in China, to launch a wide selection of Java mobile games
 as an extension to their value-added services in collaboration with their
 subsidiary, China Unicom SK Telecom.                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In January
 2010, we launched the official mobile game for the Starz Entertainment TV
 series Spartacus: Blood and Sand
 with Starz Digital Media. This is the second iPhone game collaboration
 between Starz Digital Media and Artificial Life to develop official mobile
 games.                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In January
 2010, we announced our new OPUS-MTM product, one of the most
 comprehensive m-commerce platforms to be released into the mobile market.
 OPUS-MTM is a modular, carrier-grade m-commerce platform for
 business customers, content providers, and end-consumers. OPUS-MTM
 was released in the first quarter of 2010.                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In March
 2010, we announced our admittance to the Entry Standard market segment of the
 Frankfurt Stock Exchange. Our current trading on the OTCBB in the United
 States will not be affected by this change.                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In March
 2010, we and the two-time-Grammy-winning rock band Linkin Park announced the
 upcoming release of Linkin Park 8-bit
 rebellion, a groundbreaking game application for the iPhone, iPod
 Touch and iPad, featuring Linkin Parks music. The game was released on April
 26, 2010 and was an immediate success and reached #1 rankings for music and
 adventure games in many countries including the USA.

In
April 2010, our Audit Committee of the Board of Directors appointed KPMG,
Certified Public Accountants, Hong Kong (KPMG) as our new independent
registered public accounting firm, replacing GHP Horwath, P.C. The decision to
change auditors was not the result of any disagreement with GHP Horwath, P.C.
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

During
the three-month period ended March 31, 2010, we continued to market and expand
the distribution of our products in Europe, Asia, and the United States by
entering into various strategic relationships. Our products are now sold in
over 100 countries through resellers and telecom partners and in over 70
countries through Apples App Store/iTunes distribution platform.

In
addition to marketing our current products, we continue to focus on developing
new iPhone/iPod Touch, iPad, and Smart Phone products, such as real time 3D/3G
games and massive multi-player mobile games. We are also

13

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in on-going
talks with global media and major global brands to license additional appealing
content and intellectual property.

As
of March 31, 2010, we had total assets of $55,580,661 and total liabilities of
$4,927,872. As of March 31, 2010, current assets were $20,453,094 as compared
to $21,801,668 at December 31, 2009, and current liabilities were $4,927,872 as
compared to $5,325,371 at December 31, 2009.

As
of March 31, 2010, we, together with our subsidiaries, had 60 full-time
employed staff. We also hire temporary staff, external consultants and interns
to support our operations.

RESULTS OF OPERATIONS

THREE-MONTH PERIOD ENDED MARCH 31, 2010
COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2009

REVENUES:
Revenues for the quarter ended March 31, 2010 were $8,184,175 as compared to
$7,063,200 for the quarter ended March 31, 2009. The increase of revenues of
$1,120,975 or 16% was mainly due to global license deals for the sale of our
m-commerce platform, OPUS-M.

COST
OF REVENUES: Cost of revenues mainly consist of amortization of intangible
assets. Cost of revenues for the quarter ended March 31, 2010 was $1,489,779 as
compared to $741,412 for the quarter ended March 31, 2009. The increase of
$748,367 or 101% was primarily due to the increased amortization of license
rights.

GROSS
MARGIN: Gross margin for the quarter ended March 31, 2010 was $6,694,396 as
compared to $6,321,788 for the quarter ended March 31, 2009. The increase of
$372,608 or 6% was mainly due to global license deals for the sale of our
m-commerce platform, OPUS-M, offset by the decreased product license revenue
generated from mobile games and amortization of license rights acquired.

GENERAL
AND ADMINISTRATIVE: General and administrative expenses consisted of salary for
administrative personnel, rent, professional fees, and costs associated with
employee benefits, supplies, communications, travel, and provision for doubtful
accounts. General and administrative expenses for the quarter ended March 31,
2010 were $702,135 as compared to $1,651,891 for the quarter ended March 31,
2009. The decrease of $949,756 or 57% was mainly due to significant decrease in
bad debt expense of approximately $1,095,000, offset by the increase in
professional fees.

SALES
AND MARKETING: Sales and marketing expenses consisted 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, 2010 were $496,299
as compared to $447,510 for the quarter ended March 31, 2009. The increase of
$48,789 or 11% was primarily due to increase in staff and consulting expenses.

RESEARCH
& DEVELOPMENT: Research and development expenses consisted of salary,
training, consulting, subcontracting and other expenses incurred to develop and
fulfill the design specifications and productions of the products and services
from which we derive our revenues. Research and development expenses for the
quarter ended March 31, 2010 were $586,039 as compared to $777,806 for the
quarter ended March 31, 2009. The decrease of $191,767 or 25% was primarily due
to decrease in staff and consulting expenses, offset by increase in data
hosting and web service and travel expenses .

OTHER
EXPENSE/INCOME: Other (expense)/income for the quarter ended March 31, 2010 was
($735,765) as compared to ($159,438) for the quarter ended March 31, 2009. Net expense
of $735,765 was primarily due to foreign currency transaction losses of
approximately $715,000 in this quarter comparing to approximately $129,000 in
the first quarter of 2009.

INCOME
FROM OPERATIONS AND NET INCOME: Income from operations for the quarter ended
March 31, 2010 was $4,688,319 as compared to income from operations of
$3,386,669 for the quarter ended March 31, 2009. The income from operations is
primarily due to revenue of $8,184,175 generated from global license deals for the sale of our
m-commerce platform, OPUS-M, offset by cost of revenue of $1,489,779 and
operational cost of $2,006,077. Net income for the quarter ended March 31, 2010
was $3,648,797 as compared to net income of $2,712,231 for the quarter ended
March 31, 2009. The basic and diluted net income per share for the first
quarter of 2010 was $0.06, as compared to $0.06 for the quarter ended March 31,
2009.

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The difference between the expected and
actual income tax expenses recorded for the three-month periods ended March 31, 2010 and 2009 is primarily due to changes in the
valuation allowance on deferred tax assets in respect of the expected utilization of available tax loss carryforwards.

At March 31, 2010, the Groups deferred
tax asset, of which valuation allowance has been fully provided for, primarily consists of tax loss carryforwards. The recognition
of the net deferred tax asset at March 31, 2010 is based on the Companys analysis of past, current and projected financial
results of the Groups operations. Based on the analysis, management concluded that the net deferred tax asset represents the
amount that is more likely than not of being realized. If future taxable income is less than the amount that has been assumed in
determining the deferred tax asset at March 31, 2010, an increase in the valuation allowance may be required with a corresponding
charge against income. If future taxable in/come exceeds the level that has been assumed in calculating the deferred tax asset
(including taxable income in foreign jurisdictions), the valuation allowance could be reduced with a corresponding credit to
income.

For the three-month period ended March 31,
2010, the Company recorded an income tax expense of $303,757 (2009: $515,000).  The income tax expense includes a current
income tax expense of $720,796 (2009: $515,000), based on the estimated annual effective income tax rate for the year ending
December 31, 2010, and a deferred tax benefit of $417,039 (2009: nil) as a result of a change in judgment during the period about
the realizability of the deferred tax assets of certain subsidiaries of the Company in future year.  The change in judgment was
mainly due to the successful development and launching of new products during the period.

LIQUIDITY AND CAPITAL RESOURCES

Cash
Flow Summary

Our
cash flows from operating, investing and financing activities, as reflected in
the consolidated statements of cash flows for the three-month periods ended
March 31, 2010 and 2009, are summarized as follows:

|                                                                           |  |      |            |      |   |            |  
|-------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                           |  | 2010 |            | 2009 |  
|                                                                           |  |      |            |      |   |            |  
|Cash (used in) provided by:                                                |  | USD  |            | USD  |  
|Operating activities                                                       |  | $    | 144,404    |      | $ | (1,011,276 | )
|Investing activities                                                       |  |      | (1,490,434 | )    |   | (14,105    | )
|Financing activities                                                       |  |      | 16,588     |      |   | (151,676   | )
|Effect of exchange rate changes on cash                                    |  |      | (104,991   | )    |   | (133,044   | )
|                                                                           |  |      |            |      |   |            |  
|Net decrease in cash, considering effect of
 exchange rate changes on cash |  | $    | (1,434,433 | )    | $ | (1,310,101 | )
|                                                                           |  |      |            |      |   |            |  

Net
cash provided by operating activities was $144,404 for the three-month period
ended March 31, 2010, which was an increase of $1,155,680 compared to the
three-month period ended March 31, 2009. This increase in cash provided was due
primarily to the increase in net income, non-cash depreciation and
amortization, offset by the decrease in accounts receivable balance and bad and
doubtful debt expense.

Net
cash used in investing activities was $1,490,434 for the three-month period
ended March 31, 2010, which was an increase of $1,476,329 compared to the
three-month period ended March 31, 2009. This increase was primarily due to
increased cash expenditures for purchase of license rights and fixed assets.

Net
cash provided by financing activities was $16,588 for the three-month period
ended March 31, 2010, which was an increase of $168,264 compared to the
three-month period ended March 31, 2009. This increase was primarily due to
private placements that raised cash proceeds of $608,600, and net advances from
our chief executive officer of $74,655, offset by the repayment of note payable of
$666,667 during the three-month period ended March 31, 2010.

As
of March 31, 2010, we had a working capital surplus of $15,525,222 and
stockholders equity of $50,652,789.

We
have borrowed funds from time to time in the past from our chief executive
officer, Eberhard Schoneburg. As of March 31, 2010, we owed our chief executive
officer an aggregate amount of $1,755,611, as compared to $1,606,328 at
December 31, 2009. During the three-month period ended March 31, 2010, our
chief executive officer advanced an additional $1,149,331, including deferred
salary of $55,664, to the Company. The advanced funds bear interest at a rate
of 5% per year and are secured by the assets of the Company.

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The
Company continued to generate income in the first quarter of 2010, and we
expect that cash flows generated from 2010 operations and additional financing
through various sources will be sufficient to fund the Companys operations,
working capital, and commitment needs for the next twelve months.

Economic
conditions in the United States and in foreign markets in which we operate
could substantially affect our sales and profitability and our cash position
and collection of accounts receivable. Economic activity in the United States
and throughout much of the world has undergone a sudden, sharp economic
downturn in 2008 and 2009 following the housing downturn and subprime lending
collapse in the United States and globally. Global credit and capital markets
have experienced unprecedented volatility and disruption. Business credit and
liquidity have tightened in much of the world. Some of our suppliers and
customers may face credit issues and could experience cash flow problems and
other financial hardships. These factors have had an impact on the timeliness
of receivable collections from our customers. The Company cannot predict at
this point in time how this situation will develop and whether trade receivable
may need to be allowed or for written off in the coming quarters.

Changes
in governmental banking, monetary, and fiscal policies to restore liquidity and
increase credit availability may not be effective in alleviating the global
economic declines. It is difficult to determine the breadth and duration of the
economic and financial market problems and the many ways in which they may
affect our suppliers, customers and our business in general. Continuation or
further worsening of these difficult financial and macroeconomic conditions
could have a significant adverse effect on our sales, collectability of our
trade receivables, profitability and results of operations.

Since
the Companys trade receivables are often concentrated in a relatively few
number of customers, a significant change in the liquidity or financial
position of any one of these customers could have a material adverse effect on
the Companys financial statements. During December 2009, the Company commenced discussions with one of the Companys
key licensors with a view to acquiring certain license rights. This purchase was
eventually concluded on March 26, 2010, at a resulting cost to the Company of
Euro 2,500,000 (USD 3,500,000). Consequently, the Company recorded the purchase
of these license rights during the period ended March 31, 2010.

The Company also entered into discussions to sell certain license rights of a newly developed technology of the Company
 to that same party. The sale of such rights was concluded
on March 29, 2010. The Company recognized revenue of Euro 4,000,000 (USD
5,376,000) in relation to this sale during the period ended March 31, 2010.

Management has concluded that both the above transactions were
conducted on an arms length basis in the normal course of business and that
the considerations for the purchase and sale of the respective license rights
reflected their respective fair market value.

In view of the fact that the above transactions involved the same
third party, the Company entered into an offsetting agreement with such party whereby the total
consideration for the sale of certain license rights for Euro 4,000,000 (USD
5,376,000) was partially offset against the amount payable by the Company
related to the acquisition of license rights of Euro 2,500,000 (USD 3,500,000).
Management of the Company considered it appropriate and advantageous for the
Company to minimize cash expenditures and credit risk exposure and thereby
entered into such offsetting arrangement.

Recently Issued and Adopted Accounting
Pronouncements

In
January 2010, the FASB issued ASU 2010-06 to improve disclosures regarding fair
value measurements. This update requires entities to (i) disclose separately
the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers and (ii) present
separately information about purchases, sales, issuances, and settlements (i.e.,
on a gross basis rather than on a net basis), in the roll forward of activity
in Level 3 fair value measurements. The update requires (i) fair value
disclosures for each class of assets and liabilities rather than by major
category or line item in the statement of financial position and (ii)
disclosure about valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements for assets and
liabilities in both Level 2 and Level 3. ASU 2010-06 will be effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about the gross presentation of activity in the Level 3
roll forward, which will be effective for fiscal years beginning after December
15, 2010, and for interim periods within those fiscal years. The Company does
not expect the adoption of this statement to have an impact on its consolidated
financial statements.

In
October 2009, the FASB issued ASU 2009-13, which amends ASC 605, Revenue
Recognition, to require companies to allocate the overall consideration in
multiple-element arrangements to each deliverable by using a best estimate of
the selling price of individual deliverables in the arrangement in the absence
of vendor-specific objective evidence or other third-party evidence of the
selling price. ASU 2009-13 will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010, and early adoption will be permitted. The Company does
not expect the adoption of this statement to have a material impact on its
consolidated financial statements.

In
October 2009, the FASB issued ASU 2009-14, which amends ASC 985-605,
Software-Revenue Recognition, to exclude from its requirements (a)
non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products
when the software components and non-software components of the tangible product
function together to deliver the tangible products essential functionality.
ASU 2009-14 will be effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010,
and early adoption will be permitted. The

16

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Company does
not expect the adoption of this statement to have a material impact on its
consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

At
March 31, 2010, we did not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK

Not
applicable

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of
Disclosure Controls and Procedures

(a) Evaluation of Disclosure Controls. Our
chief executive officer/chief financial officer evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report. Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, as appropriate to allow
timely decisions regarding required disclosure. Based on his evaluation, our
chief executive officer/chief financial officer concluded that our disclosure
controls and procedures were effective as of March 31, 2010.

It
should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.

(b) Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting
that occurred during the last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. Our management team will continue to evaluate our internal control
over financial reporting throughout 2010 as we implement our Sarbanes Oxley
testing methodologies.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

From
time to time, legal proceedings or disputes arise in the normal course of
business. The Company monitors and reviews these matters and maintains accruals
where appropriate.

In
September 2008, an action was brought against Artificial Life Europe GmbH in
Germany in a contractual dispute, in which a claim of approximately $375,000
was made against the Company. A court hearing was held in September 2009 before
the State Court in Berlin. In February 2010, the Court ordered the Company to
pay the plaintiff a settlement of approximately $350,000 and all court and
attorney fees incurred by the plaintiff. The settlement amount and the
estimated court and attorney fees have been accrued as of March 31, 2010 and December 31, 2009.
The Company filed an appeal with the State Court in Berlin in March 2010, and
no payment will be made until a final judgment is issued by the Court.
Management believes the Company has adequately reserved for litigation and that
the ultimate outcome of the pending appeal will not have a material adverse
impact on the Companys consolidated financial position or results of
operations taken as a whole.

ITEM 1A - RISK FACTORS

Not
applicable.

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

None. See Part I, Note 12. Subsequent Events.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not
applicable.

ITEM 4 - [REMOVED AND RESERVED]

ITEM 5 - OTHER INFORMATION

Not
applicable.

ITEM 6 - EXHIBITS

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

* Filed
herewith.

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SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

|                    |        |                             
|------------------- | ------ | ----------------------------
|                    |        | ARTIFICIAL LIFE, INC.       
|Date:
 May 14, 2010 |        |                             
|                    |        |                             
|                    | By:    | /s/ Eberhard
 Schoneburg    
|                    |        |                             
|                    | Name:  | Eberhard
 Schoneburg        
|                    | Title: | Chief
 Executive Officer and
|                    |        | Chief
 Financial Officer    

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