UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934



For the quarterly period ended March 31, 2008



o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



For the transition period from ___________________  to  _____________



Commission file number 000-25075



ARTIFICIAL LIFE, INC.

(Exact name of small business issuer as specified in its charter)



Delaware
(State or other jurisdiction oforganization)
        04-3253298
(I.R.S. Employer incorporation or
Identification No.)




Artificial Life, Inc.

26/F., 88 Hing Fat Street

Causeway Bay

Hong Kong

(Address of principal executive offices)



(+852) 3102 2800

Issuer's telephone number



Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)



Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo



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 oNon-accelerated filero(Do not check if a smaller reporting company)
        Smaller reporting companyx




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o Nox



State the number of shares of each of the Issuer's classes of common equity, as of the latest practicable date:



As of April 25, 2008 there were 45,350,148 shares of Common Stock, $.01 par value per share, outstanding.



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ARTIFICIAL LIFE, INC.



INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE

QUARTER ENDED MARCH 31, 2008



PAGE




PART I-FINANCIAL INFORMATION



Item 1  Financial Statements

Condensed Consolidated Balance Sheets as of  March 31, 2008 (unaudited) and December 31, 2007
        3


Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the

Three Months Ended March 31, 2008 and 2007 (unaudited)
        4


Condensed Consolidated Statements of Cash Flows for the Three Months Ended


March 31, 2008 and 2007 (unaudited)
        5


Notes to Condensed Consolidated Financial Statements (unaudited)
        6




Item 2  Managements Discussion and Analysis or Plan of Operations
        8




Item 3  Quantitative and Qualitative Disclosure About Market Risk
        11




Item 4  Controls and Procedures
        12






PART II - OTHER INFORMATION



Item 1  Legal Proceedings
        13




Item 1A  Risk Factors
        13




Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
        13




Item 3  Defaults Upon Senior Securities
        13




Item 4  Submission of Matters to a Vote of Security Holders
        13




Item 5  Other Information
        14




Item 6  Exhibits
        14




Signatures
        15








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PART I   FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS



ARTIFICIAL LIFE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2008 AND DECEMBER 31, 2007



ASSETS

March 31, 2008
     
     December 31, 2007(unaudited)Current
assets:Cash and cash
equivalents
     
     
     
     $
     3,160,469
     
     
     $
     6,210,435Restricted cash
     
     
     
     
     165,000
     
     
     
     Accounts
receivable
     
     
     
     
     5,645,238
     
     
     
     5,198,028Receivable
from issuance of common stock
     
     
     
     
     
     
     
     
     224,500Prepaid
expenses and other
     
     
     
     
     561,972
     
     
     
     355,541Deferred tax
asset
     
     
     
     
     207,575
     
     
     
     170,000Total current
assets
     
     
     
     
     9,740,254
     
     
     
     12,158,504Fixed
assets
     
     
     
     
     2,799,504
     
     
     
     1,810,978Prepaid
license rights
     
     
     
     
     1,091,093
     
     
     
     591,093Prepaid
expenses, deposits and other assets
     
     
     
     
     2,938,189
     
     
     
     271,137Deferred tax
asset
     
     
     
     
     
     
     
     
     163,1304,029,282
     
     
     
     1,025,360TOTAL
ASSETS
     
     
     
     $
     16,569,040
     
     
     $
     14,994,842LIABILITIES AND STOCKHOLDERS EQUITYAccounts
payable
     
     
     
     $
     664,304
     
     
     $
     789,166Accrued
expenses
     
     
     
     
     351,112
     
     
     
     1,113,585Note payable
to officer/stockholder
     
     
     
     
     589,684
     
     
     
     751,860Notes
payable, net of discount of $49,500 (2008); $99,000 (2007)
     
     
     
     
     950,500
     
     
     
     901,000Total
liabilities (all current)
     
     
     
     
     2,555,600
     
     
     
     3,555,611Stockholders 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, 44,502,300 shares issued and outstanding as of March 31, 2008 and 43,905,509 shares issued and
outstanding as of December 31, 2007
     
     
     
     
     445,023
     
     
     
     439,055Additional
paid-in capital
     
     
     
     
     46,352,405
     
     
     
     46,315,296Notes
receivable from stockholders
     
     
     
     
     (19,577
     )
     
     
     (19,577
     )Accumulated
deficit
     
     
     
     
     (32,767,844
     )
     
     
     (35,261,429
     )Other
comprehensive gain
     
     
     
     
     3,433
     
     
     
     (34,114
     )Total
stockholders equity
     
     
     
     
     14,013,440
     
     
     
     11,439,231$
     16,569,040
     
     
     $
     14,994,842


See accompanying notes to unaudited condensed consolidated financial statements.




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ARTIFICIAL LIFE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

Three-month Period Ended March 31,2008
     
     2007Revenues:Software
license agreements
     
     
     
     $
     4,118,377
     
     
     $
     365,688Application
services and other
     
     
     
     
     6,627
     
     
     
     4,125,004
     
     
     
     365,688Operating
expenses:General and
administrative
     
     
     
     
     446,932
     
     
     
     278,807Engineering
and cost of sales
     
     
     
     
     646,060
     
     
     
     283,961Research and
development
     
     
     
     
     78,657
     
     
     
     53,639Sales and
marketing
     
     
     
     
     422,635
     
     
     
     293,114Total
operating expenses
     
     
     
     
     1,594,284
     
     
     
     909,521Income
(loss) from operations
     
     
     
     
     2,530,720
     
     
     
     (543,833
     )Other income
(expenses):Interest
(expense) income, net
     
     
     
     
     (80,557
     )
     
     
     6,276Foreign currency transaction gains and other
     
     
     
     
     168,977
     
     
     
     5,51388,420
     
     
     
     11,789Income (loss)
before income tax
     
     
     
     
     2,619,140
     
     
     
     (532,044
     )Income tax
expense
     
     
     

125,555



Net income
(loss)
     
     
     
     
     2,493,585
     
     
     
     (532,044
     )Foreign
currency translation adjustment
     
     
     
     
     37,547
     
     
     
     Comprehensive
income (loss)
     
     
     
     $
     2,531,132
     
     
     $
     (532,044
     )Net income
(loss) per share:Basic
     
     
     
     $
     0.06
     
     
     $
     (0.02
     )Diluted
     
     
     
     $
     0.05
     
     
     $
     (0.02
     )Weighted
average shares outstanding:Basic
     
     
     
     
     44,066,977
     
     
     
     34,177,320Diluted
     
     
     
     
     46,795,329
     
     
     
     34,177,320




See accompanying notes to unaudited condensed consolidated financial statements.



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ARTIFICIAL LIFE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



Three-month Period Ended March 31,2008
     
     2007Cash flows
from operating activities:Net income
(loss)
     
     
     
     $
     2,493,585
     
     
     $
     (532,044
     )Adjustments
to reconcile net income (loss) to net cash used in operating activities:Depreciation
and amortization
     
     
     
     
     214,762
     
     
     
     11,892Loss on
disposal of fixed assets
     
     
     
     
     
     
     
     
     877Deferred income tax expense
     
     
     
     
     125,555
     
     
     
     Amortization
of discount on notes payable
     
     
     
     
     49,500
     
     
     
     Foreign
currency exchange gain
     
     
     
     
     (167,933
     )
     
     
     Interest
expense accrued on advances from officer / stockholder
     
     
     
     
     7,727
     
     
     
     2,640Bonus accrued
to officer / stockholder
     
     
     
     
     20,361
     
     
     
     Changes in
operating assets and liabilities:Increase in restricted cash
     
     
     
     
     (165,000
     )
     
     
     Increase in
accounts receivable
     
     
     
     
     (318,584
     )
     
     
     (320,107
     )Increase in
prepaid license rights
     
     
     
     
     (500,000
     )
     
     
     (400,000
     )Increase in
prepaid expenses, deposits and other assets
     
     
     
     
     (2,876,116
     )
     
     
     (57,151
     )(Decrease)
increase in accounts payable and accrued expenses
     
     
     
     
     (920,004
     )
     
     
     37,482Net cash used
in operating activities
     
     
     
     
     (2,036,147
     )
     
     
     (1,256,411
     )Cash flows
from investing activities:Purchase of
fixed assets
     
     
     
     
     (1,133,133
     )
     
     
     (58,459
     )Net cash used
in investing activities
     
     
     
     
     (1,133,133
     )
     
     
     (58,459
     )Cash flows
from financing activities:Net proceeds
from issuance of common stock
     
     
     
     
     267,577
     
     
     
     880,272Repayment of
note payable to officer / stockholder
     
     
     
     
     (190,264
     )
     
     
     (16,094
     )Net cash provided by financing activities
     
     
     
     
     77,313
     
     
     
     864,178Net decrease
in cash and cash equivalents
     
     
     
     
     (3,091,967
     )
     
     
     (450,692
     )Cash and cash
equivalents at beginning of period
     
     
     
     
     6,210,435
     
     
     
     1,338,158Effect of
exchange rate changes on cash and cash equivalents
     
     
     
     
     42,001
     
     
     
     Cash and cash
equivalents at end of period
     
     
     
     $
     3,160,469
     
     
     $
     877,466




See accompanying notes to unaudited condensed consolidated financial statements.



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



1.
        BASIS OF PRESENTATION




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



Operating results for the three months ended March 31, 2008 are not necessarily indicative of results that may be expected for the year ending December 31, 2008. Amounts at December 31, 2007, 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, 2007.



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 filed with the Securities and Exchange Commission.



Recently adopted accounting standards



In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, SFAS 159 specifies that unrealized gains and losses for that instrument be reported in earnings at each subsequent reporting date. SFAS 159 was effective for the Company on January 1, 2008. The Company did not apply the fair value option to any of its outstanding instruments and therefore, SFAS 159 did not have an impact on the Companys consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 was effective for the Company on January 1, 2008 for all financial assets and liabilities. For all nonfinancial assets and liabilities, SFAS 157 is effective for the Company on January 1, 2009. As it relates to the Companys financial assets and liabilities, the adoption of SFAS 157 did not have a material impact on the Companys consolidated financial statements.  The Company is still in the process of evaluating the impact that SFAS 157 will have on its nonfinancial assets and liabilities.



2.
        STOCK BASED COMPENSATION




At January 1, 2008, all outstanding options were fully vested. There were no stock options issued during the 3-month periods ended March 31, 2008 or 2007.



At March 31, 2008, the Company had outstanding and exercisable options to purchase 3,065,000 shares of common stock under the Plan, issued to employees as follows:

Outstanding and
exercisable options issued to employees
     
     
     
     3,065,000Weighted average
exercise price
     
     
     
     $0.75Aggregate
intrinsic value
     
     
     
     $2,648,500Weighted average
remaining contractual term
     
     
     
     1.3
yearsAt March 31, 2008, the Company had outstanding and exercisable, warrants to purchase 962,500 shares of common stock issued to employees as follows:Outstanding and
exercisable warrants issued to employees
     
     
     
     962,500Weighted average
exercise price
     
     
     
     $0.76Aggregate
intrinsic value
     
     
     
     $804,000Weighted average
remaining contractual term
     
     
     
     1.27
years




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3.
        CUSTOMER CONCENTRATION




At March 31, 2008 and at December 31, 2007, the Company has 45 customers, mostly telecom operators or carriers and resellers.  Three customers accounted for 97% of total accounts receivable, one accounted for approximately 51%, one accounted for approximately 28% and one accounted for approximately 18%.  For the three-month period ended March 31, 2008, the Company had one customer which represented approximately 70% of the Companys sales.  For the three-month period ended March 31, 2007, the Company had one customer which represented approximately 96% of the Companys sales.



4.
        NET INCOME (LOSS) PER SHARE




Basic net income (loss) per share is calculated based on the weighted average number of common shares outstanding for the three month periods ended March 31, 2008 and 2007.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method.  For the three months ended March 31, 2007, the basic and diluted net loss per share are the same since the effect of inclusion of all outstanding options and warrants would be anti-dilutive. The following table sets forth the computation of fully diluted shares for the three months ended March 31, 2008.



2008Shares used
in basic per share calculation
     
     
     
     
     44,066,977Effect of
dilutive securities:Options
     
     
     
     
     1,695,682Warrants
     
     
     
     
     1,032,670Shares used
in dilutive per share calculation
     
     
     
     
     46,795,329




5.
        INCOME TAXES




For the three months ended March
31, 2008, the Company recorded $125,555 of net deferred income tax expense attributable to pre-tax income recognized in its Hong
Kong jurisdiction.  The gross income tax expense recognized during the quarter ended March 31, 2008 was approximatly $528,000, which has been offset by a deferred income tax benefit of approximatly $403,000 (the result of the  change in valuation allowance attributable to Hong Kong net operating loss carryforwards).



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6.
        COMMITMENTS  AND CONTINGENCIES




In April 2008, the Company began leasing additional space in its Hong Kong office building, requiring total monthly Hong Kong office lease payments of approximately $26,400.



The Company is involved in various legal proceedings in the normal course of business.  Management believes that all necessary accruals in connection with outstanding litigation have been made as of March 31, 2008.



7.
        NOTES PAYABLE




On June 30, 2007, 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 originally matured on December 31, 2007, but were extended until June 2008 (The Maturity Date). The holders may convert the notes and any unpaid interest accumulated thereon only after the Maturity Date into shares of common stock at a conversion price of $2.50 per share. Because these notes are convertible only if the Company does not pay the debt, these notes were determined to have a contingent beneficial conversion feature valued at approximately $520,000, which will only be recorded should the Company not pay the notes. These notes were issued along with warrants with a relative fair value of $198,000.  As a result, a discount of $198,000 was applied against the
principal balance, which is being amortized to interest expense over the term of the debt ($49,500 during the three months ended March 31, 2008).  The effective interest rate on these notes is approximately 30%.



8.
        COMMON STOCK TRANSACTIONS




During the three months ended March 31, 2008, in connection with the cashless exercise of certain options, the Company issued 496,791 shares of common stock. The Company also issued 100,000 shares of common stock upon the exercise of other options, in which the Company received cash proceeds of $70,000. In addition, the Company incurred common stock issuance costs of $26,923 during the quarter ended March 31, 2008.



In April 2008, in connection with the cashless
exercise of certain options, the Company issued 597,848 shares of common stock.  The Company also issued
250,000 shares of common stock upon the exercise of options and warrants.  Total proceeds to the Company
were $100,000.



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 related notes included elsewhere 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-KSB for the year ended December 31, 2006. 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



In the first quarter of 2008, a major milestone in our corporate development and business plan was achieved as a result of our profitability.  During the first three months of 2008, we sold out over 1,800,000 paid installations of our mobile games globally.  The new game sales include one time downloads, end user subscriptions via operator decks, off-deck sales and pre-installation licenses for cell phones.



During the three months ended March 31, 2008, we continued to market and expand the distribution of our products in Europe and Asia by entering into various strategic relationships. We are now selling in over 100 countries globally.



In January 2008, we launched our first Tokio Hotel game which has been one of the best off-deck selling



8





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games in several European countries. We signed up reseller PlayPhone for USA and Canada distribution and won a major contract from Cartoon Networks (a Time Warner company) to develop games for the iPhone® and iPod Touch® platforms.



In February 2008, we signed reseller Thumbplay and globally launched Americas Next Top Model 10.



In March 2008, we launched Germanys Next Top Model  in Germany and announced the release of several iPhone and iPod games.



In addition to marketing our current products, we continue to focus on developing more new 3G products, such as real time 3D/3G games and massive multi-player mobile games. We are also in on-going talks with several global media and game companies to license more appealing content and intellectual properties.



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



As of March 31, 2008, we had total assets of $16,569,040 and total liabilities of $2,555,600.  As of March 31, 2008, current assets were $9,740,254 as compared to $12,158,504 at December 31, 2007, and current liabilities were $2,555,600, as compared to $3,555,611 at December 31, 2007.



We had 51 full time employees as of March 31, 2008. We also hire temporary staff, external consultants and interns to support our operations.



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



RESULTS OF OPERATIONS



THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007



REVENUES:  Revenues for the quarter ended March 31, 2008 were $4,125,004 as compared to $365,688 for the quarter ended March 31, 2007.  The increase of revenues of $3,759,316 or 1028% was mainly due to increased product license income from pre-installation deals for mobile handsets, one time downloads and monthly subscription revenues for 3G games derived from mobile operators, resellers and hand set distributors and first major license deals for mobile business applications.



GENERAL AND ADMINISTRATIVE:  General and administrative expenses consist of salary for administrative personnel, rent, professional fees and costs associated with employee benefits, supplies, communications and travel. General and administrative expenses for the quarter ended March 31, 2008 were $446,932 as compared to $278,807 for the quarter ended March 31, 2007. The increase of $168,125 was primarily due to new company administrative costs incurred by Artificial Life, Europe.



ENGINEERING AND COST OF SALES:  These costs generally consist of salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the engineering (design specifications) of the products and services from which we derive our revenues. Engineering expenses for the quarter ended March 31, 2008 were $646,060 as compared to $283,961 for the quarter ended March 31, 2007. The increase of $362,099 was mainly due to increases of approximately $165,000 in amortization of licensing, $60,000 traveling and personnel expenses of the Hong Kong office and $133,000 in rental, personnel and traveling cost incurred by Artificial Life, Europe.



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RESEARCH & DEVELOPMENT:   Research and development expenses are similar in nature to engineering expenses, but they relate to products in their initial stage and are anticipated to generate revenue at a later date. Research and development expenses for the quarter ended March 31, 2008 were $78,657 as compared to $53,639 for the quarter ended March 31, 2007. The increase of $25,018 was mainly due to increased traveling expenses incurred.



SALES AND MARKETING:  Sales and marketing expenses consist of salary expenses of sales and marketing personnel, costs relating to marketing materials, advertising, trade show related expense, traveling and public relations activities. Sales and marketing expenses for the quarter ended March 31, 2008 were $422,635 as compared to $293,114 for the quarter ended March 31, 2007. The increase of $129,521 was primarily due to increases in personnel and sub-contractor costs incurred by our subsidiary companies, Artificial Life, Europe and Artificial Life, Japan.



OTHER INCOME/EXPENSES:  Other income (expense) is not generated from normal business activities.  Other income for the quarter ended March 31, 2008 was $88,420 as compared to $11,789 for the quarter ended March 31, 2007.



INCOME FROM OPERATIONS AND NET INCOME (LOSS): Income from operations for the quarter ended March 31, 2008 was $2,530,720 as compared to loss from operations of ($543,833) for the quarter ended March 31, 2007.  The income from operations is mainly due to revenue of $4,125,004 from the sale of 3G games and business application licenses, offset by operational cost of $1,594,284.  Net income for the quarter ended March 31, 2008 was $2,493,585 as compared to net loss of ( $532,044) for the quarter ended March 31, 2007.  The basic and diluted net income / (loss) per share for the first quarter of 2008 was $0.06 and $0.05, respectively, as compared to ($0.02) and ($0.02) for the quarter ended March 31, 2007.



For
the three  months  ended March 31,  2008,  the Company  recorded  $125,555 of net deferred  income tax expense
attributable  to pre-tax  income  recognized in its Hong  Kong  jurisdiction.  The income tax expense
recognized  during the quarter ended March 31, 2008, is net of a $528,000 deferred tax benefit as a result of a change in the valuation allowance attributable to the Companys Hong Kong net operating loss carryforwards. There was no income tax expense or benefit  recorded in the three month period
ended March 31, 2007.



LIQUIDITY AND CAPITAL RESOURCES



As of March 31, 2008, we had a working capital surplus of $7,184,654 and stockholders' equity of $14,013,440.



In order to fund our cash needs we have borrowed funds from time to time in the past from our chief executive officer, Eberhard Schoneburg.  As of March 31, 2008, we owed our CEO an aggregate amount of $589,684, as compared to $751,860 at December 31, 2007. The advanced funds bear interest at a rate of 5% per year and are unsecured.



The Company has generated income since 2007 and expects that cash flows generated from 2008 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.



For the three months ended March 31, 2008, we issued a total of 596,791 shares of common stock, which consists of 100,000 shares for $70,000 upon exercise of an option, and 496,791 shares upon cashless exercises.



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



OFF-BALANCE SHEET ARRANGEMENTS



At March 31, 2008, we did not have any off-balance sheet arrangements.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Not applicable.



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ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



(a)Evaluation of Disclosure Controls.Our Chief Executive Officer and Principal 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 and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2008.



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 2008 as we implement our Sarbanes Oxley testing methodologies.



Managements Report on Internal Control over Financial Reporting



Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) and has assessed its effectiveness using the criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.  Our internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.



Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Management concluded that we maintained effective internal control over financial reporting as of March 31, 2008.





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PART II - OTHER INFORMATION



ITEM 1 - LEGAL PROCEEDINGS



In connection with claims for certain unpaid wages and vacation pay made by former employees of its former U.S. operations in 2002, we had accrued $108,000 representing the potential liability for these asserted claims with respect to this matter, as confirmed by an Administrative Law Magistrate. In January 2005, we received a court claim and a default judgment from the pending cases against some of these former US employees.  We filed a counter claim and a motion to void the default judgment. In October 2006, the Company and the former employees (except Robert Pantano, our former CFO) signed a settlement agreement and general release under which we paid $105,000.  On March 27, 2007, the court granted Mr. Pantanos motion for summary judgment with respect to his wage claim and with respect to the counterclaims that had been asserted against him. The court also allowed Mr. Pantano
motion to amend his complaint to add a claim for retaliation which the Company had filed opposition on November 12, 2007. In March 2007, the Court entered summary judgment for unpaid wages and on the counterclaims that had been asserted against Mr. Pantano.  Mr. Pantanos claims for treble damages on his unpaid wages and for retaliation remain for adjudication.  Following adjudication, the Company and the CEO have a right to appeal and intend to do so.  In January 2008, the Court held a hearing on a motion to reach and apply.  The Court allowed reach and apply relief in the amount of $165,000 (which represents the amount claimed and accrued by the Company and legal expenses incurred). However, the Company has only agreed to place this amount in an escrow account, subject to the terms of an escrow agreement between the parties.  The amount can only be released upon approval of the Company or final judgment with no further appeal.



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



ITEM 1A  RISK FACTORS



Not applicable.



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



In February 2008, the Company issued 100,000 shares of common stock to an investor for $70,000 upon exercise of an option issued in February 2006.



In February 2008, the Company issued 267,379 shares of common stock to an investor upon cashless exercise of an option issued in February 2006.



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



ITEM 3  DEFAULTS UPON SENIOR SECURITIES



Not applicable.



ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not applicable.



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ITEM 5  OTHER INFORMATION



Not applicable.



ITEM 6 - EXHIBITS



31.1
        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
        Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
        Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.








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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: April 28, 2008

By: /s/ Eberhard Schoneburg
Name: Eberhard Schoneburg
Title:  Chief Executive Officer and


            Principal Financial Officer




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