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 September 30, 2009  [_]  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 registrant as specified in its charter)  Delaware04-3253298(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 issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]  Indicate by check mark
whether the registrant 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 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 [  ] Accelerated filer [   ] Non-accelerated filer   [  ]  (Do not check if a
smaller reporting company) Smaller reporting company [X]  Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [  ] No [X]  Indicate the number of
shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date:  As of October 31, 2009 there were 57,309,858
shares of Common Stock, $.01 par value per share, outstanding.   1    ARTIFICIAL LIFE, INC.

INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 2009


PAGE

PART I-FINANCIAL INFORMATION

Item 1  Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2009 (unaudited) and December 31, 2008
3
Condensed Consolidated Statements of Operations and Comprehensive Income for the
Three Months and Nine Months Ended September 30, 2009 and 2008 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (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
18

Item 4  Controls and Procedures
18



PART II - OTHER INFORMATION

Item 1  Legal Proceedings
19

Item 1A  Risk Factors
19

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
19

Item 3  Defaults Upon Senior Securities
19

Item 4  Submission of Matters to a Vote of Security Holders
19

Item 5  Other Information
19

Item 6  Exhibits
19

Signatures
20




2




PART I   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ARTIFICIAL LIFE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
September 30, 2009
December 31, 2008
-----------------------
-----------------------
(unaudited)
Current assets:
Cash
$
175,023
$
1,430,578
Accounts receivable, net
27,379,991
13,859,315
Prepaid expenses and other
696,228
914,372
Deferred tax asset
-
500,000
----------------
----------------

Total current assets
28,251,242
16,704,265
----------------
----------------

Fixed assets, net
1,808,247
3,140,067
----------------
----------------

License rights, net
15,250,107
9,617,198
Prepaid expenses, deposits and other assets
2,005,513
828,943
----------------
----------------
17,255,620
10,446,141
----------------
----------------

$
47,315,109
$
30,290,473
=========
=========

LIABILITIES AND STOCKHOLDERS EQUITY

Accounts payable
$
5,346,399
$
669,745
Accrued expenses and other
618,496
472,813
Income tax payable
187,000
60,000
Note payable  officer/stockholder
981,877
737,771
Notes payable
1,000,000
1,000,000
----------------
----------------
Total liabilities (all current)
8,133,772
2,940,329
----------------
----------------
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,
-
-
50,422,073 shares issued and outstanding as of September 30, 2009 and
47,724,132 shares issued and outstanding as of December 31, 2008
504,221
477,241
Additional paid-in capital
53,820,682
51,708,712
Notes receivable from stockholders
(19,577)
(19,577)
Accumulated deficit
(15,296,285)
(24,686,144)
Accumulated other comprehensive income (loss)
172,296
(130,088)
----------------
----------------

Total stockholders equity
39,181,337
27,350,144
----------------
---------------

$
47,315,109
$
30,290,473
=========
=========
See accompanying notes to unaudited condensed consolidated financial statements.
m
3




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

Three-month Period Ended
Nine-month Period Ended
September 30,
September 30,
-------------
-------------
-------------
-------------
2009
2008
2009
2008
Revenues:
Software license revenue
$8,722,381
$5,835,733
$23,351,979
$
15,430,034
Reseller license revenue
-
769,800
-
769,800
Application services and other revenue
1,100
23,064
12,671
35,237
--------------
--------------
--------------
-------------
8,723,481
6,628,597
23,364,650
16,235,071
--------------
--------------
--------------
-------------

Cost of revenues:
Cost of software license revenue
1,676,575
892,258
3,493,825
1,704,384
Cost of application services and other
revenue
56,223
31,092
77,992
88,812
--------------
--------------
--------------
-------------
1,732,798
923,350
3,571,817
1,793,196
--------------
--------------
--------------
-------------
Gross Profit
6,990,683
5,705,247
19,792,833
14,441,875
--------------
--------------
--------------
-------------

Operating expenses:
General and administrative
1,750,366
451,518
4,726,579
1,480,310
Research and development
1,015,483
928,487
2,798,120
2,279,160
Sales and marketing
474,066
740,696
2,006,594
1,676,952
--------------
--------------
--------------
--------------
Total operating expenses
3,239,915
2,120,701
9,531,293
5,436,422
--------------
--------------
--------------
--------------
Income from operations
3,750,768
3,584,546
10,261,540
9,005,453
--------------
--------------
--------------
--------------

Other income (expenses):
Interest income and other
219,761
533
329,264
4,492
Interest expense
(39,356)
(64,661)
(105,836)
(162,722)
Foreign currency transaction (losses) gains
(55,749)
(35,368)
(468,109)
323,037
--------------
--------------
--------------
--------------

124,656
(99,496)
(244,681)
164,807
--------------
--------------
--------------
--------------

Income before income taxes
3,875,424
3,485,050
10,016,859
9,170,260
Income tax benefit (expense)
31,000
-
(627,000)
(501,310)
--------------
--------------
--------------
--------------

Net income
3,906,424
3,485,050
9,389,859
8,668,950
Foreign currency translation adjustment
163,366
(126,116)
302,384
(72,816)
--------------
--------------
--------------
--------------
Comprehensive income
$
4,069,790
$
3,358,934
$
9,692,243
$
8,596,134
=========
=========
=========
=========
4



Net income per share
Basic
$
0.08
$
0.07
$
0.19
$
0.19
=========
=========
=========
=========
Diluted
$
0.08
$
0.07
$
0.19
$
0.18
=========
=========
=========
=========

Weighted average shares outstanding
Basic
50,261,571
47,615,002
48,803,709
45,983,219
=========
=========
=========
=========
Diluted
50,302,915
49,454,372
48,916,809
48,254,906
=========
=========
=========
=========

See accompanying notes to unaudited condensed consolidated financial statements.
5



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

Nine-month Period Ended
September 30,
----------------------
2009
2008
------------------              ----------------
Cash flows from operating activities:
Net income
$
9,389,859
$
8,668,950
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization
3,125,255
1,132,005
Write down of fixed assets and license rights
1,794,999
-
Deferred income tax expense
500,000
59,635
Amortization of discount on notes payable
-
66,000
Provision for losses on doubtful accounts receivable
2,623,162
2,469
Foreign currency transaction losses (gains)
468,109
(323,037)
Interest expense accrued on notes payable officer / stockholder
25,099
7,727
Salary accrued to officer / stockholder
223,442
20,361
Changes in operating assets and liabilities:
Increase in restricted cash
-
(165,000)
Increase in accounts receivable
(22,587,338)
(4,775,893)
Increase in prepaid expenses, deposits and other assets
(958,426)
(932,718)
Increase (decrease) in accounts payable, accrued expenses and other
2,200,057
(413,635)
Increase in income tax payable
127,000
441,675
-----------------
-----------------
Net cash (used in) provided by operating activities
(3,068,782)
3,788,539
-----------------
-----------------
Cash flows from investing activities:
Purchase of fixed assets
(90,853)
(180,960)
Purchase of license rights
(280,869)
(9,639,981)
Deposits on fixed assets
-
(2,871,800)
-----------------
-----------------
Net cash used in investing activities
(371,722)
(12,692,741)
-----------------
-----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock
2,072,950
5,596,602
Advances under note payable to officer / stockholder
202,257
-
Repayment of note payable to officer / stockholder
(206,692)
(303,736)
-----------------
-----------------
Net cash provided by financing activities
2,068,515
5,292,866
-----------------
-----------------

Net decrease in cash
(1,371,989)
(3,611,336)
Cash, beginning of period
1,430,578
6,210,435
Effect of exchange rate changes on cash
116,434
95,948
-----------------
-----------------
Cash, end of period
$
175,023
$
2,695,047
==========
==========

Supplemental disclosure of non-cash activities:

Purchase of license rights and related increase in            accounts payable
$
9,131,779
$
320,786
==========
==========

Issuance of common stock and warrants in satisfaction of            accounts payable
$
66,000
$
-
==========
==========

See accompanying notes to unaudited condensed consolidated financial statements.
6



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 a
complete financial statement presentation.  The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, as follows:

Artificial Life Asia Limited, located in Hong Kong, 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 inter-company balances and transactions have been eliminated
in consolidation.

Operating results for the nine months ended September 30, 2009, are not
necessarily indicative of results that may be expected for the year ending December 31, 2009.  Amounts at December 31, 2008,
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, 2008.

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 issued and adopted accounting standards

In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB
Accounting Standards Codification (the Codification) as the single source of authoritative non-governmental generally
accepted accounting principles (GAAP). All existing accounting standard documents, such as FASB, American Institute of Certified
Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange
Commission (SEC), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature
not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new
structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is
effective for interim or annual periods ending after September 15, 2009, and impacts the Companys consolidated financial
statements, as all future references to authoritative accounting literature will be referenced in accordance with the Codification.
 As a result of the Companys implementation of the Codification during the quarter ended September 30, 2009, previous
references to new accounting standards and literature are no longer applicable.

On January 1, 2009, the Company adopted new guidance issued by the FASB
related to the accounting for business combinations and related disclosures. This new guidance addresses the recognition and
accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. The
guidance also establishes expanded disclosure requirements for business combinations. The guidance was effective for the Company on
January 1, 2009, and the Company will apply this new guidance prospectively to all business combinations subsequent to January 1,
2009.

On January 1, 2009, the Company adopted new guidance issued by the FASB
related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance
requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling companys balance
sheet. It also changes the manner in which the net income of the
7



subsidiary is reported and disclosed in the controlling
companys income statement. The adoption of this guidance had no impact on the Companys consolidated financial
statements.

In April 2009, the FASB issued new accounting guidance related to interim
disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial
instruments whenever a public company issues financial information for interim reporting periods. This guidance is effective for
interim reporting periods ending after June 15, 2009. The Company adopted this guidance upon its issuance, and it had no material
impact on the Companys consolidated financial statements (Note 9).

In June 2009, the FASB issued new accounting guidance related to the
accounting and disclosures of subsequent events. This guidance incorporates the subsequent events guidance contained in the auditing
standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they
have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This guidance is
effective for all interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it
had no material impact on the Companys consolidated financial statements (Note10).

Reclassifications:

Certain amounts reported in the 2008 interim financial statements have been
reclassified to conform to the 2009 presentation.

2.
STOCK-BASED EMPLOYEE COMPENSATION

At January 1, 2009, all outstanding options and warrants issued to
employees were fully vested and exercisable.  There were no stock options granted during the nine-month periods ended September
30, 2009 and 2008.  At September 30, 2009, the Company had outstanding options to purchase 2,065,000 shares of common stock
under its stock option plan, issued to employees as follows:

Weighted average exercise price
$0.88
Aggregate intrinsic value
$237,600
Weighted average remaining contractual term
0.24 year

At September 30, 2009, the Company had outstanding warrants to purchase
700,000 shares of common stock issued to employees as follows:

Weighted average exercise price
$0.83
Aggregate intrinsic value
$77,000
Weighted average remaining contractual term
0.18 year

3.
CUSTOMER CONCENTRATION

Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. 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 the Company has granted 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 probable, 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.
The allowance for doubtful accounts of $2,095,000 at September 30, 2009, and $731,500 at December 31, 2008, is the Companys
best estimate of the amount of probable credit losses in existing accounts receivable. Management reviews the allowance for
doubtful accounts each reporting period based on a detailed analysis of accounts receivable. 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 business relationship and history with its
clients, 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 accounts
receivable were incorrect, adjustments to the allowance may be required, which would reduce profitability.  Since the
Companys accounts receivable are often concentrated in a relatively few number of customers, a significant
8



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 the nine months ended September 30, 2009, the Company entered into agreements with certain of its customers
to offset accounts receivable of approximately $6.4 million from these customers with accounts payable for the same amount to these
customers. The offset of these receivables and payables represents a legal right of setoff pursuant to applicable accounting
standards.

At September 30, 2009, the
Company had 90 telecom carriers, resellers, distributors and general corporate customers compared to 70 such customers at December
31, 2008, and 59 such customers at September 30, 2008. For the three-month and nine-month periods ended September 30, 2009,
resellers and distributors represented approximately 78% and 68% of the Companys revenues, respectively. For the
three-month period ended September 30, 2009, the Company had three customers that represented approximately 48%, 30% and 19% of the
Companys revenues, respectively.  For the three-month period ended September 30, 2008, the Company had two customers that
represented approximately 44% and 33% of the Companys revenues, respectively.  For the nine-month period ended September
30, 2009, the Company had four customers that represented approximately 56%, 12%, 11% and 11% of the Companys revenues,
respectively. For the nine-month period ended September 30, 2008, the Company had three customers that represented approximately
54%, 14% and 13% of the Companys revenues, respectively. At September 30, 2009, accounts receivable were due from 57 customers. Of these, three
customers accounted for approximately 68%, 9% and 9% of the accounts receivable, respectively.  At September 30, 2009, 24% and
56% of accounts receivable were aged within 30 days and 91 to 120 days, respectively.  At September 30, 2009, the average age
of accounts receivable from all customers was 115 days as compared to 83 days at December 31, 2008. The average age of receivables
from the Companys three largest customers at September 30, 2009, was 167 days.


4.
NET INCOME PER SHARE

Basic netincome per share is calculated based on the weighted average number of common shares outstanding for
the three and nine month periods ended September 30, 2009 and 2008.  Diluted earnings per share reflect 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.  The following table sets forth the computation
of fully diluted shares for the three months and nine months ended September 30, 2009 and 2008.

Three-month period ended
Nine-month period ended
September 30,

September 30,
----------------
----------------
----------------
----------------
2009
2008
2009
2008

Shares used in basic per share calculation
50,261,571
47,615,002
48,803,709
45,983,219

Effect of dilutive securities:
Options
25,725
1,027,255
69,910
1,146,549
Warrants
15,619
812,115
43,190
1,125,138
----------------
----------------
----------------
----------------


Shares used in dilutive per share calculation
50,302,915
49,454,372
48,916,809
48,254,906
=========
=========
=========
=========

5.
INCOME TAXES

The difference between the expected and
effective income tax expense recorded for the nine-month periods ended September
30, 2009 and 2008, is due primarily to changes in the valuation allowance on net
deferred tax assets and the expected utilization of available net operating loss
carryforwards.

At September 30, 2009, the Company has
recorded a current income tax payable of $187,000, which consists of estimated
state income taxes and U.S. federal alternative minimum tax.


9



6.
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, and the Court recommended a settlement.  While the Company
cannot predict the outcome of the matter and is in negotiation for a settlement,
the Company believes that the final outcome of this matter will not have a
material adverse impact on its financial position or results of operation.

7.
NOTES PAYABLE

Note payable  officer/stockholder:

The Company has a
revolving note payable to its chief executive officer for advances made by him
to the Company, as well as deferred salary and bonus. The note bears interest at
5%, and is repayable upon demand. On August 10 2009, the Board of Directors of
the Company approved a loan agreement that was executed by the Company and the
chief executive officer under which the note payable is secured by the assets of
the Company.  Activity on the note payable to the chief executive officer
during the nine months ended September 30, 2009 and 2008, was as follows:

2009
2008

Beginning balance, January 1
$737,771
$751,860
Advances202,257
-
Repayments
(206,692)
(303,736)
Accrued salary and bonus
223,442
20,361
Accrued interest
25,099
7,727
-----------
-----------
Ending balance, September 30
$981,877
$476,212
=======
=======


Notes payable:

The Company has promissory
notes payable 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.  The 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.

8.
STOCKHOLDERS EQUITY

During the nine-month
period ended September 30, 2009, the Company issued 2,697,941 shares of common stock along with warrants to purchase an additional
1,549,779 shares of common stock for cash of $2,072,950.  As part of the transaction, 100,000 shares and
warrants to purchase 100,000 shares were issued in satisfaction of $66,000 of accounts payable. This private placement was made to nine institutional
and four individual accredited investors. In connection with this transaction, the Company retained a selling agent, to whom it
paid a commission approximately of $172,000.  The warrants have a two-year term with exercise prices ranging from $0.80 to
$1.25 per share and are immediately exercisable.

In October 2009, the
Company sold 6,447,491 shares of its common stock, at $1.00 per share, for aggregate consideration of $6,447,491.  The issuance
of these shares was made pursuant to terms of a Securities Purchase Agreement (the SPA) with a U.S. company (the
Purchaser).  The SPA was entered into in conjunction with the execution of a collaboration agreement (the
Alliance Agreement), in which the Company and the Purchaser have agreed to collaborate on various technological
projects, as defined. Proceeds from the sale of shares are to be used for general business purposes, including those business
purposes outlined and defined in the Alliance Agreement.  The SPA provides for certain pre-emptive rights in contemplation of a
future issuance of the Companys common stock, in which under certain circumstances, as defined, the Purchaser has the right to
purchase a proportionate number of shares necessary to maintain its defined percentage ownership.

In October 2009, the Company also sold, in three additional private
placements, 440,294 shares of common stock for $423,000.

10



9.
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 non performance.

Accounting standards have established a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within
the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting
standards have established three levels of inputs that may be used to measure fair value:

Level 1  Quoted prices in active markets for identical assets or liabilities.

Level 2  Observable inputs
other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume
or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can
be derived principally from or corroborated by observable market data for substantially the full term of the assets or
liabilities. Level 3  Prices or valuation
techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no
market activity). At September 30, 2009, the Company has no financial
assets or liabilities subject to recurring fair value measurements.

The Company's financial instruments include cash, accounts receivable,
accounts payable, and notes payable. Management estimates that the carrying amounts of the non-related party financial instruments
approximate their fair values due to their short-term nature. The fair value of the related party notes payable is not practicable to
estimate due to the related party nature of the underlying transactions.

10.
SUBSEQUENT EVENTS

In October 2009, the Company entered into a new, two-year lease for its
existing Hong Kong office space, which will expire in December 2011.  The new lease requires a monthly payment of approximately
$18,000.

The Companys management has evaluated events through November 9,
2009, for consideration as a subsequent event to be included in its September 30, 2009, consolidated financial statements
issued November 9, 2009.

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 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-K for the year ended December 31, 2008. 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 third quarter of 2009, we sold over 3,853,000 of our mobile 3G and Java
games globally, primarily to resellers, aggregators and hand set manufacturers.  The sales include one time downloads, end user
subscriptions via operator decks, off-deck sales, bulk reseller packages and pre-installation licenses for cell phones.

Our iPhone games have been downloaded an aggregate of more than 4.6million times.  As of October 31, 2009, we have produced and released 21 games for the
iPhone and iPod touch during the last 12 months.  So far, the best selling game was downloaded close to 1.8 million times, the
second best over 1.4 million times and the third best over 0.55 million times. The average
11



number of downloads per game was about 0.22 million.

Despite the large amount of games available on the Apple App Store, 20 (or
95%) of our games have climbed up to the Top 100 most downloaded rank or higher; 17 games have been ranked in the Top 50; 15 in the
Top 10 downloads; and 11 games have achieved Top 5 or higher.  The best games have reached Top 10 download rankings in 56
countries, i.e. 73% of all countries in which the iPhone is officially sold.  8 of our games have even hit rank 1 in 23
countries.

13 of the produced games are based on licensed and branded intellectual
property from a variety of licensors, and 8 games are based on Artificial Lifes proprietary IP.  The games have been sold
into 72 countries worldwide.  The top 5 countries in terms of numbers of downloads for our products are: United States, United
Kingdom, Germany, Australia and France (with 45.93%, 12.08%, 5.38%, 3.88% and 3.64% of sales respectively).

12 games have stayed in the Top 100 for over 30 days, 8 games for over 90 days
and 6 for over 180 days. The longest continuous Top 100 ranked game has been in the ranks for over 300 days.

The best performing game categories were motor sports and racing games as well
as cartoon based games in which 10 of our games have achieved rankings in the Top 10.

The number of iPhone game downloads is approximately equivalent to 37.8% of
the overall number of games sold by the Company so far in 2009.  The development time for a high quality iPhone game was on
average 3 to 4 months.

Significant events during the third quarter of 2009 include the following:

·
In July 2009, we signed a technology licensing and production agreement with
the Berlin Organising Committee 2009 GmbH (BOC 2009 GmbH) to implement MoPA-TVTM, the Company’s innovative cross platform
technology, at the 12th IAAF World Championships in Athletics Berlin 2009TM to entertain the audience in the Olympiastadion
Berlin and at event sites in the City of Berlin.

·
In July 2009, Starz Digital Media, revealed plans to jointly develop the
official "Spartacus: Blood and Sand" mobile game designed for iPhone and iPod touch with the Company.  The game will
utilize the touch screens and motion sensitive features of the popular mobile devices and bring to life the action, violence and sex
soon to be seen in the series.

·
In August 2009, we signed a two-year exclusive development and distribution
agreement with Red Bull Racing to produce an official racing game on the iPhone and iPod touch platform, featuring Red Bull
Racings Formula One cars and drivers.  The game is tentatively scheduled for release in the fourth quarter of 2009.

·
In August 2009, we announced a collaboration with RDF Digital USA to produce
an interactive animated TV show entitled Sleuths.  Implementing our innovative MoPA-TVTM system, Sleuths will be the first
television show in the United States to let audiences become part of the storyline.

·
In August 2009, we launched the iSink U iPhone game.

·
In August 2009, we announced our strategic decision to expand our business
activities in China.  All iPhone and iPod touch games and applications of the Company will be translated into simplified
Chinese and launched in China as soon as possible.  In addition, the Company will create new and specially tailored iPhone
& iPod applications for the Chinese market.

·
In September 2009, we launched Pandorum, the official movie game for the
upcoming horror film of the same name from Overture Films, on the iPhone and iPod touch platform.

·
In September 2009, we launched the BMW Sauber F1 Team Racing 09, our first
racing title features the current BMW Sauber F1 Team for the 2009 season, on the iPhone and iPod touch platform.  This is the
second collaboration between BMW and Artificial Life developing iPhone applications.

·
In September 2009, we signed an agreement with Robbie Williams, the
multi-BRIT-Award-winning music artist, to launch an iPhone game application featuring Robbie Williams new music from the
forthcoming album Reality Killed the Video Star and incorporate cutting edge 3D game play of the rally driving game
genre.  The launch date of the title is tentatively scheduled for the fourth quarter of 2009, pending approval.  The
artist is releasing the application in parallel to the new album, which features the music and key visual theme of the record.

12



·
In September 2009, we announced our strategic decision to expand our
non-gaming related mobile activities through the launch of our first healthcare application for the iPhone, an intelligent mobile
diabetes monitoring system.  The application is tentatively scheduled for release in the fourth quarter of 2009.

·
In September 2009, we released the VfB Stuttgart 2009/10, the official mobile
game for the traditional soccer club in the German League. The game is already available on designated channels in Germany,
Switzerland and Austria.

During the nine months ended September 30, 2009, 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 65 countries through Apples App
Store/iTunes distribution platform.

In addition to marketing our current products, we continue to focus on
developing more new iPhone/iPod Touch and Smart Phone products, such as real time 3D/3G games and massive multi-player mobile games.
We are also in ongoing talks with global media and major global brands to license additional appealing content and intellectual
property.

Even though several of our 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 September 30, 2009, we had total assets of $47,315,109 and total
liabilities of $8,133,772.  As of September 30, 2009, current assets were $28,251,242 as compared to $16,704,265 at December
31, 2008, and current liabilities were $8,133,772 as compared to $2,940,329 at December 31, 2008.

We had 64 full time employees as of September 30, 2009. 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, 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
including 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, our 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, European and American markets. Gross profit margins will vary from product to product
between products and services and among the countries in which our products are sold. In addition, our sales mix may vary from
period to period and our gross margins will fluctuate accordingly.

In addition, the stability of our earnings is also heavily influenced by
macroeconomic factors. As the economy improves or worsens, our business may be similarly impacted. Macroeconomic factors, such as
the current conditions in the debt markets, have impacted and will continue to impact our business. At this time, we view the
direction of the economy to be uncertain, which does not allow us a high degree of certainty in predicting our earnings.


Results of Operations

Three months ended September 30, 2009 Compared to three months ended September 30, 2008

REVENUES:  Revenues for the quarter ended September 30, 2009 were
$8,723,481 as compared to $6,628,597 for the quarter ended September 30, 2008.  The increase in revenues of $2,094,884, or 32%
was mainly due to increased (a) product license revenue from mobile games, one-time downloads, (b) monthly subscription revenues for
3G games derived from mobile operators, bulk resellers and hand set distributors and (c) license revenues from the sale of our
mobile diabetes and mobile property solutions.

COST OF REVENUES:  Cost of revenues mainly consisted of amortization of
intangible assets (license rights).  Cost of revenues for the quarter ended September 30, 2009 was $1,732,798 as compared to
$923,350 for the quarter ended September 30, 2008. The increase of $809,448, or 88%, was primarily due to the increased amortization
of certain license rights of approximately $560,000.

GROSS MARGIN:  Gross margin for the quarter ended September 30, 2009 was
$6,990,683 as compared to $5,705,247 for the quarter ended September 30, 2008.  The increase of $1,285,436, or 23%, was mainly
due to increased product license income from mobile games, one-time downloads and monthly subscription revenues for 3G games derived
from mobile operators, bulk resellers and hand set distributors and a global license deal for the sale of our mobile diabetes and
mobile property solutions offset by amortization of license rights acquired in earlier periods.
13



GENERAL AND ADMINISTRATIVE:  General and administrative expenses
consisted of salaries of administrative personnel, rent, professional fees and costs associated with employee benefits, supplies,
communications and travel. General and administrative expenses for the quarter ended September 30, 2009 were $1,750,366 as compared
to $451,518 for the quarter ended September 30, 2008.  The increase of $1,298,848, or 288%, was mainly due to the increased
depreciation of fixed assets approximately of $1,235,000.

RESEARCH AND DEVELOPMENT:  Research and development expenses consisted of
salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the design specifications and
production of the products and services from which we derive our revenues.  Research and development expenses for the quarter
ended September 30, 2009 were $1,015,483 as compared to $928,487 for the quarter ended September 30, 2008. The increase of $86,996,
or 9%, was mainly due to increased internet expenses.

SALES AND MARKETING:  Sales and marketing expenses consisted of salaries
of sales and marketing personnel and costs relating to marketing materials, advertising, trade shows, traveling and public relations
activities. Sales and marketing expenses for the quarter ended September 30, 2009 were $474,066 as compared to $740,696 for the
quarter ended September 30, 2008. The decrease of $266,630, or 36%, was primarily due to reductions in expenses related to
marketing, telecommunications and sub-contracting expenses.

OTHER EXPENSE/INCOME:  Other income for the quarter ended September 30,
2009 totaled $124,656, as compared to other expenses of $99,496 for the quarter ended September 30, 2008. The other income of
$124,656 was mainly due to late payment charge income of $219,761, offset by interest expense of $39,356 and foreign currency
transaction losses of approximately $55,749 in this quarter compared to income of approximately $533 in the third quarter of
2008.

INCOME FROM OPERATIONS AND NET INCOME: Income from operations for the quarter
ended September 30, 2009 was $3,750,768 as compared to income from operations of $3,584,546 for the quarter ended September 30,
2008.  Income from operations was mainly due to revenue of $8,723,481 from the sale of product licenses for our mobile games
and technology licenses, which was offset by costs of revenue of $1,732,798 and operational costs of $3,239,915.  Net income
for the quarter ended September 30, 2009 was $3,875,424, compared to net income of $3,485,050 for the quarter ended September 30,
2008.  Basic and diluted net income per share for the quarter ended September 30, 2009 and 2008 was $0.08 and $0.07,
respectively.

Nine Months Ended September 30, 2009 Compared with Nine Months Ended
September 30,2008

REVENUES:  Revenues for the nine months ended September 30, 2009 were
$23,364,650 as compared to $16,235,071 for the nine months ended September 30, 2008.  The increase of revenues of $7,129,579,
or 44% was mainly due to increased (a) product license revenue from mobile game one-time downloads, (b) monthly subscription
revenues for 3G games derived from mobile operators, bulk resellers and hand set distributors and (c) license revenues from the sale
of our mobile diabetes and mobile property solutions and our technology platform Mobile BoosterTM.

COST OF REVENUES:  Cost of revenues mainly consist of amortization of
intangible assets (license rights).  Cost of revenues for the nine month ended September 30, 2009 was $3,571,817 as compared to
$1,793,196 for the nine months ended September 30, 2008. The increase of $1,778,621, or 99%, was primarily due to the amortized
expense of license rights including an increased amortization of certain license rights of approximately $560,000.

GROSS MARGIN:  Gross margin for the nine month ended September 30, 2009
was $19,792,833 as compared to $14,441,875 for the nine months ended September 30, 2008.  The increase of $5,350,958, or 37%,
was mainly due to increased product license income from mobile games, one-time downloads and monthly subscription revenues for 3G
games derived from mobile operators, bulk resellers and hand set distributors and a global license deal for the sale of our mobile
diabetes and mobile property solutions and our technology platform Mobile BoosterTM, offset by amortization of license rights
acquired in earlier periods.

GENERAL AND ADMINISTRATIVE:  General and administrative expenses
consisted of salaries of administrative personnel, rent, professional fees and costs associated with employee benefits, supplies,
communications, travel and the provision for doubtful accounts receivable. General and administrative expenses for the nine months
ended September 30, 2009 were $4,726,579 as compared to $1,480,310 for the nine months ended September 30, 2008. The increase of
$3,246,269, or 219%, was mainly due to a 2009 provision for doubtful accounts receivable of approximately $2.1 million and increased
depreciation of fixed assets approximately of $1,235,000.

RESEARCH AND DEVELOPMENT:  Research and development expenses consisted of
salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the design specifications and
production of the products and services from which we derive our revenues.  Research and development expenses for the nine
months ended September 30, 2009 were $2,798,120 as compared to $2,279,160 for the nine months ended September 30, 2008. The increase
of $518,960 or 23%, was mainly due to increased consulting and telecommunication expenses.
14



SALES AND MARKETING:  Sales and marketing expenses consisted of salary
expenses for sales and marketing personnel and costs relating to marketing materials, advertising, trade shows, traveling and public
relations activities. Sales and marketing expenses for the nine months ended September 30, 2009 were $2,006,594 as compared to
$1,676,952 for the nine months ended September 30, 2008. The increase of $329,642, or 20%, was primarily due to increased allowances
for doubtful accounts.

OTHER EXPENSE/INCOME:  Other expenses for the nine months ended September
30, 2009 totaled $244,681, as compared to other income of $164,807 for the nine months ended September 30, 2008.  The other
expenses of $244,681 were mainly due to interest income of $329,264, interest expense of $105,836 and foreign currency transaction
losses of approximately $468,109 for the nine months ended September 30, 2009 comparing to a gain of $164,807 (primarily resulting
from foreign currency transaction gains) for the nine months ended September 30, 2008.

INCOME FROM OPERATIONS AND NET INCOME: Income from operations for the nine
months ended September 30, 2009 was $10,261,540 as compared to income from operations of $9,005,453 for the nine months ended
September 30, 2008.  Income from operations is mainly due to revenue of $23,364,650 from the sale of product licenses for our
mobile games, one-time downloads and monthly subscription revenues for 3G games and technology licenses, offset by costs of revenue
of $3,571,817 and operational costs of $9,531,293.  Net income for the nine months ended September 30, 2009 was $9,389,859 as
compared to net income of $8,668,950 for the nine months ended September 30, 2008.  Basic net income per share for the nine
months ended September 30, 2009 and 2008 was $0.19.  Diluted net income per share for the nine months ended September 30, 2009
was $0.19, as compared to $0.18 for the nine months ended September 30, 2008.

The difference between the expected and effective income tax expense recorded for the nine-month
periods ended September 30, 2009 and 2008, is due primarily to changes in the valuation allowance on net deferred tax assets and the
expected utilization of available net operating loss carry forwards.

At September 30, 2009, the Company has recorded a current income tax payable of $187,000, which
consists of estimated state income taxes and U.S. federal alternative minimum tax.

CASH FLOW SUMMARY

Our cash flows from operating, investing and financing activities, as reflected in the
consolidated statements of cash flows for the nine-month periods ended September 30, 2009 and 2008, are summarized as follows:


2009
2008

Cash provided by (used in):
Operating activities$(3,068,782)
$3,788,539

Investing activities
(371,722)
(12,692,741)
Financing activities
2,068,515
5,292,866
Effect of exchange rate changes on cash
116,434
95,948
---------------
-----------------

Net decrease in cash, considering effect of exchange rate changes on cash
$(1,255,555)
$(3,515,388)
=========
==========


Cash used in operating activities was $3,068,782 for the nine months ended September 30, 2009,
which was an increase of $6,857,321 compared to the nine months ended September 30, 2008.  This increase in cash used was
due to the increase in the accounts receivable balance compared to the prior period and granting certain customers extended payment
terms (up to 180 days), offset by an increase of net income, non-cash depreciation and
amortization, the provision for losses on doubtful accounts receivable, foreign currency transaction loss and accounts payable,
accrued expenses and other.

Cash used in investing activities was $371,722 for the nine months ended September 30, 2009,
which was a decrease of $12,321,019 compared to the nine months ended September 30, 2008.  This increase was primarily due
to decreased cash expenditures relating to license rights and fixed assets.

Cash provided by financing activities was $2,068,515 for the nine months ended September 30,
2009, which was a decrease of $3,224,351 compared to the nine months ended September 30, 2008.   This decrease was due to
the issuance of common stock and warrants at a comparably lower price during the nine months ended September 30, 2009, compared to
the prior period.

Liquidity and Capital Resources

As of September 30, 2009, we had a working capital surplus of $20,117,470 and
stockholders' equity of $39,181,337.
15



Through September 30, 2009, we completed a private placement raising total
cash proceeds of $2,072,950 through the issuance of 2,697,941 shares of common stock to a number of investors. As part of this
placement, one party received 100,000 shares and warrants to purchase 100,000 shares in satisfaction of $66,000 of accounts payable.

In October 2009, the Company sold 6,447,491 shares of its common stock at a
price of $1 per share, for aggregate consideration of $6,447,491.  We are also in discussions with other potential investors about
investments for the fourth quarter of 2009.  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 a substantial dilution to existing
stockholders.

We have borrowed funds from time to time in the past from our chief executive
officer, Eberhard Schoneburg.  As of September 30, 2009, we owed Mr. Schoneburg an aggregate amount of $981,877, as compared to
$737,771 at December 31, 2008.  During the three months ended September 30, 2009, Mr. Schoneburg advanced deferred salary of
$111,328 to the Company.  The advanced funds bear interest at a rate of 5% per year and are secured by the assets of the
Company.

We expect that cash flow to be generated from remaining 2009 and 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 12 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 a substantial 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 accounts receivable may need to be 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. Nonetheless, continuation or further worsening of these difficult financial and
macroeconomic conditions could have a significant adverse effect on our sales, collectability of our accounts receivables,
profitability and results of operations.

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company extends credit to its customers in the normal course of
business and generally does not require collateral.

The Companys standard payment terms are normally within 90 days. In
2009, the Company has provided 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 of a fee is not
probable, 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. The allowance for doubtful accounts of $2,095,000 at
September 30, 2009, and $731,500 at December 31, 2008, is the Companys best estimate of the amount of probable credit losses
in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a
detailed analysis of accounts receivable. 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, the general
economic conditions and trends and the business relationship and history with its clients 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 accounts receivable were incorrect, adjustments
to the allowance may be required, which would reduce profitability.  Since the Companys accounts 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 material adverse effect on the Companys financial statements.  During the nine months ended
September 30, 2009, the Company entered into agreements with certain of its customers to offset accounts receivable of approximately
$6.4 million from these customers with accounts payable for the same amount to these customers. The offset of these receivables and
payables represents a legal right of setoff pursuant to applicable accounting standards.
16



Recently Issued and Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB)
approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative
nongovernmental generally accepted accounting principles (GAAP). All existing accounting standard documents, such as FASB, American
Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the
Securities and Exchange Commission (SEC), have been superseded by the Codification. All other non-grandfathered, non-SEC
accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but
instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the
Companys consolidated financial statements, as all future references to authoritative accounting literature will be referenced
in accordance with the Codification. As a result of the Companys implementation of the Codification during the quarter ended
September 30, 2009, previous references to new accounting standards and literature are no longer applicable.

On January 1, 2009, the Company adopted new guidance issued by the FASB
related to the accounting for business combinations and related disclosures. This new guidance addresses the recognition and
accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. The
guidance also establishes expanded disclosure requirements for business combinations. The guidance was effective for the Company on
January 1, 2009, and the Company will apply this new guidance prospectively to all business combinations subsequent to January 1,
2009.

On January 1, 2009, the Company adopted new guidance issued by the FASB
related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance
requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling companys balance
sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling
companys income statement. The adoption of this guidance had no impact on the Companys consolidated financial
statements.

In April 2009, the FASB issued new accounting guidance related to interim
disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial
instruments whenever a public company issues financial information for interim reporting periods. This guidance is effective for
interim reporting periods ending after June 15, 2009. The Company adopted this guidance upon its issuance, and it had no material
impact on the Companys consolidated financial statements.

In June 2009, the FASB issued new accounting guidance related to the
accounting and disclosures of subsequent events. This guidance incorporates the subsequent events guidance contained in the auditing
standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they
have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This guidance is
effective for all interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it
had no material impact on the Companys consolidated financial statements.

Off-Balance Sheet Arrangements

At September 30, 2009, we did not have any material off-balance sheet arrangements.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

(a)
Evaluation of Disclosure Controls.  Our Chief
Executive Officer and 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

17



management, as appropriate to allow
timely decisions regarding required disclosure.  Based on his evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of September 30, 2009.

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 2009 as we implement our Sarbanes
Oxley testing methodologies.

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 and the court recommended a settlement.  While the Company cannot
predict the outcome of the matter and is in negotiation for a settlement, the Company does not believe that the final outcome will
have a material adverse impact on its financial position or results of operations.

ITEM 1A  RISK FACTORS

There have been no material changes to the Companys risk factors as
previously disclosed in Item 1A Risk Factors in the Companys Form 10-K for the fiscal year ended December 31,
2008.

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

Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

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 200231.2*Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232*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
*
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: November 9, 2009
By:/s/ Eberhard Schoneburg
Name: Eberhard Schoneburg
Title: Chief Executive Officer and
Chief Financial Officer





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