UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB



(Mark One)



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

ACT OF 1934



For the quarterly period ended September 30, 2007



[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



For the transition period from ___________________  to  _____________

Commission file number 000-25075



ARTIFICIAL LIFE, INC.

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



DELAWARE
        04-3253298


(State or other jurisdiction of
        (I.R.S. Employer


incorporation or organization)
        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)



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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNo [X ]



State the number of shares of each of the Issuer's classes of common equity, as of the latest practicable date:  As of November 8, 2007, there were 38,173,147 shares of Common Stock, $.01 par value per share, outstanding.



Transitional Small Business Disclosure Format (Check one):  Yes [_] Nox

---

ARTIFICIAL LIFE, INC.



INDEX OF INFORMATION CONTAINED IN FORM 10-QSB FOR THE

QUARTER ENDED SEPTEMBER 30, 2007



PAGE

PART I-FINANCIAL INFORMATION



Item 1  Financial Statements (Unaudited)


Condensed Consolidated Balance Sheet at September 30, 2007
        3


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


Three Months and Nine Months Ended September 30, 2007 and September 30, 2006
        4


Condensed Consolidated Statements of Cash Flows for the Nine Months Ended


September 30, 2007 and September 30, 2006
        5


Notes to Condensed Consolidated Financial Statements
        6




Item 2  Managements Discussion and Analysis or Plan of Operations
        9




Item 3  Controls and Procedures
        12






PART II - OTHER INFORMATION



Item 1 - Legal Proceedings
        13




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


Item 5 - Other Information
        14


Item 6 - Exhibits
        14




Signatures
        15








2

---





PART I FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




ARTIFICIAL LIFE, INC. CONDENSED CONSOLIDATED BALANCE
SHEET September 30, 2007 (UNAUDITED)







|ASSETS                                                                                                |  |  |  |   |             |  
|----------------------------------------------------------------------------------------------------- |  |  |  | - | ----------- | -
|Current
assets:                                                                                       |  |  |  |   |             |  
|Cash and cash
equivalents                                                                             |  |  |  | $ | 1,357,878   |  
|Accounts
receivable, net                                                                              |  |  |  |   | 2,433,289   |  
|Prepaid
expenses and other                                                                            |  |  |  |   | 478,900     |  
|Total current
assets                                                                                  |  |  |  |   | 4,270,067   |  
|                                                                                                      |  |  |  |   |             |  
|Fixed
assets:                                                                                         |  |  |  |   |             |  
|                                                                                                      |  |  |  |   |             |  
|Office
equipment, net of accumulated depreciation of $26,917                                          |  |  |  |   | 71,099      |  
|Computer
equipment, net of accumulated depreciation of $104,702                                       |  |  |  |   | 96,643      |  
|Office
furniture, net of accumulated depreciation of $44,044                                          |  |  |  |   | 72,403      |  
|Software
license, net of accumulated amortization of $26,667                                          |  |  |  |   | 553,333     |  
|                                                                                                      |  |  |  |   | 793,478     |  
|                                                                                                      |  |  |  |   |             |  
|Intangible
asset, net of accumulated amortization of $3,667                                           |  |  |  |   | 21,333      |  
|                                                                                                      |  |  |  |   |             |  
|Prepaid
license rights                                                                                |  |  |  |   | 1,301,753   |  
|Prepaid
expenses, deposits and other assets                                                           |  |  |  |   | 313,916     |  
|                                                                                                      |  |  |  |   | 1,615,669   |  
|TOTAL ASSETS                                                                                          |  |  |  | $ | 6,700,547   |  
|                                                                                                      |  |  |  |   |             |  
|LIABILITIES
& STOCKHOLDERS EQUITY                                                                    |  |  |  |   |             |  
|                                                                                                      |  |  |  |   |             |  
|Current
liabilities:                                                                                  |  |  |  |   |             |  
|Accounts
payable                                                                                      |  |  |  | $ | 1,946,461   |  
|Note payable
 officer/stockholder                                                                    |  |  |  |   | 79,355      |  
|Convertible
promissory notes, net of discount of $460,000                                             |  |  |  |   | 540,000     |  
|Accrued
expenses                                                                                      |  |  |  |   | 567,225     |  
|                                                                                                      |  |  |  |   |             |  
|Total
liabilities (all current)                                                                       |  |  |  |   | 3,133,041   |  
|                                                                                                      |  |  |  |   |             |  
|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, 37,398,812 shares issued and outstanding |  |  |  |   | 373,988     |  
|Additional
paid-in capital                                                                            |  |  |  |   | 40,691,304  |  
|Notes
receivable from stockholders                                                                    |  |  |  |   | (19,577     | )
|Accumulated
deficit                                                                                   |  |  |  |   | (37,461,424 | )
|Other
comprehensive loss                                                                              |  |  |  |   | (16,785     | )
|                                                                                                      |  |  |  |   |             |  
|Total
stockholders equity                                                                            |  |  |  |   | 3,567,506   |  
|                                                                                                      |  |  |  |   |             |  
|TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY                                                            |  |  |  | $ | 6,700,547   |  



See accompanying notes to unaudited condensed consolidated
financial statements.




3


---



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







|                                               |  |  |  | Three-month Period Ended September 30, |            | Nine-month Period Ended September 30, | 
|---------------------------------------------- |  |  |  | -------------------------------------- | ---------- | ------------------------------------- | 
|
|Revenues:                                      |  |  |  |                                        |            |                                       | 
|Software
license agreements                    |  |  |  | $                                      | 1,611,704  |                                       | 
|Application
services and other                 |  |  |  |                                        |           |                                       | 
|                                               |  |  |  |                                        | 1,611,704  |                                       | 
|Operating
expenses:                            |  |  |  |                                        |            |                                       | 
|General and
administrative                     |  |  |  |                                        |            |                                       | 
|Stock-based
compensation                       |  |  |  |                                        |           |                                       | 
|Other                                          |  |  |  |                                        | 390,730    |                                       | 
|Engineering
and cost of sales                  |  |  |  |                                        | 360,510    |                                       | 
|Research and
development                       |  |  |  |                                        | 53,799     |                                       | 
|Sales and
marketing                            |  |  |  |                                        | 340,606    |                                       | 
|Total
operating expenses                       |  |  |  |                                        | 1,145,645  |                                       | 
|                                               |  |  |  |                                        |            |                                      
|Income / (loss)
from operations                |  |  |  |                                        | 466,059    |                                       | 
|                                               |  |  |  |                                        |            |                                      
|Other income
(expenses):                       |  |  |  |                                        |            |                                       | 
|Interest
expense                               |  |  |  |                                        | (482,694   | )                                     | 
|Other                                          |  |  |  |                                        | 45,113     |                                       | 
|Gain / (loss)
on value of derivative liability |  |  |  |                                        |           |                                       | 
|                                               |  |  |  |                                        | (437,581   | )                                     | 
|                                               |  |  |  |                                        |            |                                      
|Net income /
(loss)                            |  |  |  |                                        | 28,478     |                                       | 
|Foreign
currency translation adjustment        |  |  |  |                                        | (23,670    | )                                     | 
|                                               |  |  |  |                                        |            |                                      
|Comprehensive
income / (loss)                  |  |  |  | $                                      | 4,808      |                                       | 
|Net income /
(loss) per share                  |  |  |  |                                        |            |                                       | 
|Basic                                          |  |  |  | $                                      | *          |                                       | 
|Diluted                                        |  |  |  | $                                      | *          |                                       | 
|Weighted
average shares outstanding            |  |  |  |                                        |            |                                       | 
|Basic                                          |  |  |  |                                        | 36,370,877 |                                       | 
|Diluted                                        |  |  |  |                                        | 42,923,343 |                                       | 

*     Less than
$0.01 per share



See accompanying notes to unaudited condensed consolidated
financial statements




4


---



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







|                                                                               |  |  |  | Nine-month Period Ended September 30, |           
|------------------------------------------------------------------------------ |  |  |  | ------------------------------------- | ----------
|
|Cash flows
from operating activities:                                          |  |  |  |                                       |           
|Net loss                                                                       |  |  |  | $                                     | (1,188,179
|Adjustments
to reconcile net loss to net cash used in operating activities:    |  |  |  |                                       |           
|Depreciation
and amortization                                                  |  |  |  |                                       | 92,900    
|Loss on
disposal of fixed assets                                               |  |  |  |                                       | 571       
|Amortization of
discount on convertible notes                                  |  |  |  |                                       | 460,000   
|Bad debt
expense                                                               |  |  |  |                                       |          
|Interest
expense accrued on advances from officer / stockholder                |  |  |  |                                       | 6,263     
|Stock based
compensation                                                       |  |  |  |                                       | 123,900   
|Gain on value
of derivative liability                                          |  |  |  |                                       |          
|Salary
accrued to officer/stockholder                                          |  |  |  |                                       |           
|Changes in operating assets and liabilities:                                   |  |  |  |                                       |           
|Increase in accounts receivable                                                |  |  |  |                                       | (2,139,284
|Increase in
prepaid license rights, prepaid expenses deposits and other assets |  |  |  |                                       | (1,561,962
|Increase /
(decrease) in accounts payable and accrued expenses                 |  |  |  |                                       | 685,362   
|Net cash used
in operating activities                                          |  |  |  |                                       | (3,520,429
|                                                                               |  |  |  |                                       |           
|Cash flows
from investing activities:                                          |  |  |  |                                       |           
|Purchase of
fixed assets                                                       |  |  |  |                                       | (534,485  
|Cash paid for
intangible asset                                                 |  |  |  |                                       | (25,000   
|Net cash used
in investing activities                                          |  |  |  |                                       | (559,485  
|                                                                               |  |  |  |                                       |           
|Cash flows
from financing activities:                                          |  |  |  |                                       |           
|Proceeds from
issuance of common stock, net                                    |  |  |  |                                       | 3,266,132 
|Proceeds from
convertible promissory notes                                     |  |  |  |                                       | 1,000,000 
|Repayment of note payable -
officer / stockholder                              |  |  |  |                                       | (149,713  
|Repayment of
short-term loan payable to stockholder                            |  |  |  |                                       |          
|Net cash
provided by financing activities                                      |  |  |  |                                       | 4,116,419 
|                                                                               |  |  |  |                                       |           
|Net increase
in cash and cash equivalents                                      |  |  |  |                                       | 36,505    
|Cash and cash
equivalents at beginning of period                               |  |  |  |                                       | 1,338,158 
|Effect of
exchange rate changes on cash and cash equivalents                   |  |  |  |                                       | (16,785   
|Cash and cash
equivalents at end of period                                     |  |  |  | $                                     | 1,357,878 
|                                                                               |  |  |  |                                       |           
|Supplemental
disclosure of non-cash investing and financing activities:        |  |  |  |                                       |           
|Common stock
issuance for partial payment of software license purchased        |  |  |  | $                                     | 250,000   
|Reclassification of options and warrants as derivative liabilities             |  |  |  | $                                     |          
|Reclassification of derivative liabilities to equity                           |  |  |  | $                                     |          



See accompanying notes to unaudited condensed consolidated
financial statements.




5


---



ARTIFICIAL LIFE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1.
        BASIS OF PRESENTATION




The accompanying unaudited condensed consolidated financial statements of Artificial Life, Inc.
(the Company) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information
and in accordance with the instructions to Form 10-QSB and Regulation S-B.  Accordingly, they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statement presentation.  The consolidated financial statements include the accounts of the Company, and its wholly owned
subsidiaries: Artificial Life Ventures, Inc. (Artificial Life Ventures), Artificial Life USA, Inc. (Artificial Life USA), Artificial Life Mobile
Computing, Inc. (Artificial Life Mobile Computing), Artificial Life Asia Limited (Artificial Life Asia), 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 and nine months ended September 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007.  For further information, refer to the audited consolidated financial statements and notes thereto included in the Companys annual Report on Form 10-KSB for the year ended December 31, 2006.



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



In July 2007, we acquired Artificial Life Japan Ltd. for expansion of our marketing activities in Japan.  The acquisition cost of $25,000 has been allocated to intangible asset, which is being amortized over a twelve month period.



2.
        STOCK BASED COMPENSATION




The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). At January 1, 2007 and 2006, all outstanding options were fully vested. No option was issued under the Amended and Restated 1998 Equity Incentive Plan (the Plan) during the 3-month period ended September 30, 2007.



At September 30, 2007, the Company had outstanding and exercisable options to purchase 5,045,000 shares of common stock under the Plan issued to employees as follows:



|Outstanding
and exercisable options issued to employees: |  |  |  |   | 5,045,000 
|-------------------------------------------------------- |  |  |  | - | ----------
|Weighted
average exercise price:                         |  |  |  | $ | 0.74      
|Aggregate
intrinsic value:                               |  |  |  | $ | 5,110,250 
|Weighted
average remaining contractual term              |  |  |  |   | 1.18 years



At September 30, 2007, the Company had outstanding and exercisable warrants to purchase 962,500 shares of common stock issued to employees as follows:



|Outstanding
and exercisable warrants issued to employees: |  |  |  |   | 962,500   
|--------------------------------------------------------- |  |  |  | - | ----------
|Weighted
average exercise price:                          |  |  |  | $ | 0.76      
|Aggregate
intrinsic value:                                |  |  |  | $ | 948,375   
|Weighted
average remaining contractual term               |  |  |  |   | 1.77 years



6

---





3.
        CUSTOMER CONCENTRATION




At September 30, 2007, the Company has 44 customers. Three customers accounted for 99% of total accounts receivable, one accounted for approximately 64%, one accounted for approximately 25% and one accounted for approximately10%.  For the three-month period ended September 30, 2007, the Company had one customer which represented approximately 96% of the Companys sales for the period.  For the three-month period ended September 30, 2006, the Company had one customer which represented approximately 92% of the Companys sales for the period.



4.
        NET INCOME / (LOSS) PER SHARE




Basic netloss per share is calculated based on the weighted average number of common shares outstanding for the three and nine month periods ended September 30, 2007 and 2006.  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 all periods presented, except for the three months ended September 30, 2007 and 2006, the basic and diluted net loss per share is 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 September 30, 2007 and 2006.



|                                              |  |  |  | 2007 |            | 2006
|--------------------------------------------- |  |  |  | ---- | ---------- | ----
|Shares used
in basic per share calculation    |  |  |  |      | 36,370,877 |     
|Effect of
dilutive securities:                |  |  |  |      |            |     
|Options                                       |  |  |  |      | 5,339,353  |     
|Warrants                                      |  |  |  |      | 1,213,113  |     
|Shares used
in dilutive per share calculation |  |  |  |      | 42,923,343 |     



5.
        INCOME TAXES




There is no provision for income taxes for the three and nine months ended September 30, 2007.  During the nine months ended September 30, 2007, the Company reported a net loss of $1,188,179 and at December 31, 2006, the Company had approximately $24,200,000 of federal net operating loss carry forwards expiring through 2022, for U.S. income tax purposes.  The net operating loss carry forwards may be subject to annual limitations based on ownership changes in the Companys common stock as provided by in Section 382 of the Internal Revenue Code.  At December 31, 2006 approximately $5,900,000 of net operating loss carryforwards were available for Hong Kong income tax purposes that may be carried forward indefinitely.



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



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



The Companys policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  As of the date of the adoption of FIN 48 there was no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter.



7

---





6.
        NOTE PAYABLE OFFICER/ STOCKHOLDER




At September 30, 2007 the Company owed its chief executive officer $79,355 which reflected a net decrease of $143,451 from the principal amount of indebtedness outstanding at December 31, 2006.   Interest of $6,263 was accrued during the nine months ended September 30, 2007.  The remaining advances bear interest at a rate of 5% per year and are unsecured.



7.
        SEGMENT INFORMATION




The Company markets and supports mobile phone games and applications and related intellectual property. The Companys products target mobile phone platforms, primarily 3G (third generation broadband networks and platforms). Products have the form of applications as well as enabling technology for mobile devices. The Company believes that it currently operates in one business segment: games and applications for mobile platforms.



8.
        COMMITMENTS AND CONTINGENCIES




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



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



In July 2007, Artificial Life Japan Ltd. in Tokyo entered into a one-year lease agreement with monthly charges of $2,000 per month plus consumption tax and renewable after one year on the same terms and conditions.

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
September 30, 2007.

9.
        SALES OF COMMON STOCK




In July 2007, the Company issued 100,000 shares of common stock valued at $2.50 per share (the market price at the date of the transaction) in connection with the purchase of a software license.



During the three months ended September 30, 2007, in connection with the exercise of certain options granted between April 2005 and February 2006, the Company issued 1,999,860 shares of common stock and received total cash proceeds of $1,661,860.  The exercise price for the options ranged from $0.36 to $1.00 per share.



10.
        CONVERTIBLE PROMISSORY NOTES




On June 30, 2007, the Company issued convertible promissory notes to two individuals for an aggregate principal amount of $1,000,000 (Convertible Notes).   The Convertible Notes bear an annual interest rate of ten percent, and mature on December 31, 2007 (the Maturity Date).  The holders may convert the Convertible Notes and any unpaid interest accumulated thereon after the Maturity Date into shares of common stock at a conversion price of $2.50 per share.  In connection with the issuance of the Convertible Notes, the Company issued warrants to purchase 300,000 shares of the Companys common stock at $3.00 per share, with a 3-year term.



The Convertible Notes were considered to have an embedded beneficial conversion feature because the conversion price was less than the quoted market price at the time of the issuance.  The Company allocated the proceeds of the Convertible Notes between the warrants and the Convertible Notes based on their relative fair values which amounted to $400,000 and $600,000, respectively.  The beneficial conversion feature of $520,000 was recorded separately based on the intrinsic value method per EITF00-27.  The Company is amortizing the discount to interest expense over the 6 months ending December 31, 2007, and $460,000 was amortized to interest expense during the three months ended September 30, 2007.



8

---



11.
        SUBSEQUENT EVENT




On October 11, 2007, the Company issued 755,200 shares of common stock to an investor in connection with the exercise of stock options granted in December 2005.  Total proceeds to the Company were $377,600.



On October 17, 2007, the Company issued 19,135 shares of common stock to an employee as a result of the cashless exercise of 50,000 stock options at $1.00 per share.



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.



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-QSB. 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" as well as other factors described 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 third quarter of 2007, we achieved a second major milestone in our corporate development and business plan. During the first nine months of 2007 we rolled out over 2,200,000 paid installations of our mobile games of which over 1,100,000 installations were sold in the third quarter alone. This again is a major increase compared to the 100,000 game installations accumulated up to the end of 2006. The new installations in 2007 include one time downloads, end user subscriptions via operator decks, off-deck sales and mostly pre-installations on cell phones.



During the three months ended September 30, 2007, we continued to market and expand the distribution of our products in Europe and Asia by entering into various strategic relationships.



In July 2007 we launched our first POPSTAR games with the major German TV station ProSieben/Sat 1 and have since launched several  more POPSTAR games with them. Also in July 2007 we signed up Oxygen Media Interactive to launch the Bad Girls Club game that is based on the popular US TV show.



In August 2007 we signed licensing and distribution agreements with IDEA Cellular in India, Telstra in Australia and Channel [V] to launch our games in over 10 countries in South East Asia.



In September 2007 we signed an exclusive two year license deal with the upcoming European cult band Tokio Hotel and have scheduled the first game release for the band in the fourth quarter of 2007.



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.



9

---



Revenues for the quarter ended September 30, 2007 were $1,611,704 as compared to $189,697 for the quarter ended September 30, 2006 and as compared to $707,066 for the second quarter of 2007. The increase of revenues of $1,422,007 or 750% compared to Q3, 2006 and $904,638 or 128% compared to Q2, 2007 respectively was mainly due to increased product license income from pre-installation deals for mobile handsets, one time downloads and monthly subscription revenues for our 3G games derived from mobile operators, resellers and hand set distributors and license fees for SMS Galaxy.



As of September 30, 2007, we had total assets of $6,700,547 and total liabilities of $3,133,041.  As of September 30, 2007, current assets were $4,270,067 as compared to $2,688,046 at June 30, 2007, and current liabilities were $3,133,041 as compared to $2,128,937 at June 30, 2007.



We had51 full time employees as of September 30, 2007. We also hire temporary staff, external consultants and interns to support our operations. We currently have 13 people on staff for our new European operations and expect this number to exceed 20 people by the end of 2007.



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



RESULTS OF OPERATIONS



THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006



REVENUES:  Revenues for the quarter ended September 30, 2007 were $1,611,704 as compared to $189,697 for the quarter ended September 30, 2006.  The increase of revenues of $1,422,007 or 749% was mainly due to increased sales of 3G game licenses to handset manufacturers for pre-installations on mobile phones.



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 September 30, 2007 were $390,730 as compared to $257,915 for the quarter ended September 30 2006. The increase of $132,815 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 September 30, 2007 were $360,510 as compared to $266,559 for the quarter ended September 30, 2006. The increase of $93,951 was mainly due to an increase of $15,000 in head office personnel costs and an increase of $81,000 in rental and personnel costs incurred by Artificial Life, Europe.



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 September 30, 2007 were $53,799 as compared to $76,168 for the quarter ended September 30, 2006. The decrease of $22,369 was mainly due to the termination of a consulting contract in July 2007.



10

---



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 September 30, 2007 were $340,606 as compared to $120,672 for the quarter ended September 30, 2006. The increase of $219,934 was primarily due to increases in marketing activities and public relations expenses in Africa and Europe, traveling expenses, personnel and sub-contractor costs and new costs incurred by our newly-formed 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 September 30, 2007 was $45,113 as compared to $8,307 for the quarter ended September 30, 2006.



INTEREST EXPENSE: Debt discount of $460,000 was amortized in the third quarter of 2007 in connection with the $1,000,000 principal amount of convertible promissory notes and warrants issued on June 30, 2007.  The convertible promissory notes mature on December 31, 2007 and we therefore expect to amortize a similar amount in the fourth quarter of 2007 for the remaining debt discount attributable to these notes and warrants.



GAIN/LOSS ON VALUE  OF DERIVATIVE LIABILITY: Gain on value of derivative liability of $2,004,000 in the third quarter of 2006 resulted from the fair value of options and warrants classified as derivative liabilities being marked to market at September 30,2006.  This gain was a one-time reclassification in the third quarter of 2006 and therefore there was no similar gain recorded in third quarter of 2007.



INCOME FROM OPERATIONS AND NET PROFIT (LOSS): Income from operations for the quarter ended September 30, 2007 was $466,059 as compared to loss from operations of $531,617 for the quarter ended September 30, 2006.  The income from operations is mainly due to revenue of $1,540,000 from the sale of 3G game licenses to handset manufacturers for pre-installations on mobile phones offset by operational cost of $1,151,645.  Net income for the quarter ended September 30, 2007 was $28,478 as compared to income of $1,475,469 for the quarter ended September 30. 2006.  The change is attributable to the one time gain of $2,004,000 on the value of derivative liability in the third quarter of 2006 and amortization of debt discount of $460,000 in the third quarter 2007.  The basic and diluted net income / (loss) per share for the
third quarter of 2007 was ($0.00) and ($0.00), respectively, as compared to $0.05 and $0.04 for the quarter ended September 30, 2006.



NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006



REVENUES:  Revenues for the nine month period ended September 30, 2007 were $2,684,458 as compared to $596,452 for the nine month period September 30, 2006.  The increase of revenues of $2,088,006 or 350% was mainly due to pre-installations, downloads and subscriptions for our 3G games received from mobile operators, resellers and handset manufacturers and product license fees for newly signed contracts and revenues generated from mobile operators.



GENERAL AND ADMINISTRATIVE:  General and administrative expenses consist of salary for administrative personnel, rent, professional fees and costs associated with employee benefits, supplies, communications and travel. General and administrative expenses for the nine month period ended September 30, 2007 were $1,086,751 as compared to $672,662 for the nine month period ended September 30, 2006. The increase of $414,089 was primarily due to increases in personnel expenses, stock-based compensation expenses recognized in accordance with SFAS 123R and administrative cost 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 nine month period ended September 30, 2007 were $1,114,504 as compared to $751,411 for the nine month period ended September 30, 2006. The increase of $363,093 was the result of an increase in trademark, legal, traveling, personnel and engineering expenses incurred by Artificial Life, Europe.



11

---



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 nine month period ended September 30, 2007 were $181,372 as compared to $165,409 for the nine month period ended September 30, 2006. The increase in operating expenses of $15,963 was mainly due to an increase in personnel, travel and miscellaneous expenses offset by decreased consulting expenses.



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 nine month period ended September 30, 2007 were $1,073,903 as compared to $259,067 for the nine month period ended September 30, 2006. The increase of $814,836 was primarily due to increases in marketing activities and public relations expenses in Africa, Europe and the United States, traveling, entertaining, personnel and new cost incurred by new 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 nine months ended September 30, 2007 was $59,131 as compared to $12,749 for nine months ended September 30, 2006.



INTEREST EXPENSES: Debt discount of $460,000 was amortized in the third quarter of 2007 in connection with the $1,000,000 principal amount of convertible promissory notes and warrants issued on June 30, 2007.  The convertible promissory notes mature on December 31, 2007 and we therefore expect to amortize a similar amount in the fourth quarter of 2007 for the remaining debt discount attributable to these notes and warrants.



GAIN / (LOSS) ON VALUE OF DERIVATIVE LIABILITY: Gain on value of derivative liability of $547,000 in the nine months ended September 30, 2006 resulted from the fair value of options and warrants reclassified as derivative liabilities being marked to market at September 30, 2006.  This gain was a one-time reclassification in the third quarter of 2006 and therefore there was no similar gain recorded in third quarter of 2007.



LOSS FROM OPERATIONS AND NET LOSS: Loss from operations for the nine months ended September 30, 2007 was $772,072 as compared to loss from operations of $1,252,097 for the nine month period ended September 30, 2006.  The decrease in loss from operations resulted from a substantial increase in pre-installations, downloads and subscriptions for our 3G games received from mobile operators, resellers and handset manufacturers, product license fees for newly signed contracts, and revenues generated from mobile operators. Net loss for the nine month period ended September 30, 2007 was $1,188,179 as compared to a net loss of $710,846 for the nine month period ended September 30, 2006.  The increase in net loss of $477,333 is mainly due to the gain of $547,000 on derivative liabilities for the nine month period ended September 30, 2006, amortization of debt discount of $460,000 and increased operating expenses
for the period ended September 30, 2007.  The basic and diluted net loss per share for the nine month period ended September 30, 2007 was ($0.04) as compared to ($0.02) for the nine month period ended September 30, 2006.



LIQUIDITY AND CAPITAL RESOURCES



As of September 30, 2007, we had a working capital surplus of $1,137,026 and stockholders' equity of $3,567,506.



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 September 30, 2007 we owed our CEO an aggregate amount of $79,355, as compared to $147,563 at June 30, 2007. The advanced funds bear interest at a rate of 5% per year and are unsecured.



To further improve the generation of revenues from the roll out of our mobile technology, we are seeking additional financing through various sources to meet the needs of our current operations, capital expenditures and commitments.



12

---



For the three months ended September 30, 2007, we issued a total of 2,099,860 shares of common stock, which consists of 100,000 shares valued at $2.50 per share being partial payment in connection with the purchase of a software license, and 1,999,860 shares issued upon exercise of certain options at exercise prices ranging from $0.36 to $1.00 per share.  Subsequent to September 30, 2007, we issued an additional 774,335 shares upon exercise of certain options at exercise prices ranging from $0.50 to $1.00 per share.  In connection with the exercise of options and private placements, we received total cash proceeds of approximately $2,039,460 during period from July 2007 to October 2007.  Management believes that these proceeds, together with additional sales of common stock and warrants and any cash flow generated from operating activities will be sufficient to fund our operations and working capital needs
for the next twelve months.



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



Contractual obligations at September 30, 2007 are as follows:



|                                  |  |  |  | Total |           | Less than 1 year |  | 1  3 years |           | 4  5 years
|--------------------------------- |  |  |  | ----- | --------- | ---------------- |  | ----------- | --------- | -----------
|Operating
leases                  |  |  |  | $     | 800,944   |                  |  | $           | 239,095   |            
|Note payable,
officer/stockholder |  |  |  |       | 79,355    |                  |  |             | 79,355    |            
|Convertible
promissory notes      |  |  |  |       | 1,000,000 |                  |  |             | 1,000,000 |            
|                                  |  |  |  | $     | 1,880,299 |                  |  | $           | 1,318,450 |            



OFF-BALANCE SHEET ARRANGEMENTS



At September 30, 2007, we did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.



ITEM 3. CONTROLS AND PROCEDURES



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



13

---

PART II - OTHER INFORMATION



ITEM 1  LEGAL PROCEEDINGS



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



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



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



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



In July 2007, we issued 100,000 shares of common stock at $2.50 per share representing partial payment in connection with the purchase of a software license.



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 5  OTHER INFORMATION



In July 2007, we acquired Artificial Life Japan Ltd. for expansion of our marketing activities in Japan.



ITEM 6  EXHIBITS



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






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



14

---

SIGNATURES



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



ARTIFICIAL LIFE, INC.






Date: November 8, 2007

By:__/s/ Eberhard Schoneburg_Name: Eberhard SchoneburgTitle:  Chief Executive Officer andPrincipal Financial Officer




15

---