<PAGE>



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

                                   FORM 10-QSB

(Mark One)

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

           [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________  to  _____________

                        Commission file number 000-17053

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

                    DELAWARE                                 04-3253298
         (State or other jurisdiction of                  (I.R.S. Employer
         incorporation or organization)                  Identification No.)

                          LEVEL 30, BANK OF CHINA TOWER
                             1 GARDEN ROAD, CENTRAL
                                    HONG KONG
                    (Address of principal executive offices)

                                (+852) 2251 8195
                            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. Yes [X] No [_]

State the number of shares of each of the Issuer's classes of common equity, as
of the latest practicable date: As of August 2, 2002, there were 12,004,425
shares of Common Stock, $.01 par value per share, outstanding.

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



<PAGE>



                              ARTIFICIAL LIFE, INC.

              INDEX OF INFORMATION CONTAINED IN FORM 10-QSB FOR THE
                           QUARTER ENDED JUNE 30, 2002


<TABLE>
<CAPTION>
                                                                                                            PAGE
                                                                                                            ----
                          PART I-FINANCIAL INFORMATION
<S>                                                                                                        <C>
Item 1 - Financial Statements (Unaudited)
         Condensed Consolidated Balance Sheet at June 30, 2002................................................3
         Condensed Consolidated Statements of Operations for the
             Three and Six Months Ended June 30, 2002 and June 30, 2001.......................................4
         Condensed Consolidated Statements of Cash Flows for the Six Months Ended
             June 30, 2002 and June 30, 2001 .................................................................5
         Notes to Condensed Consolidated Financial Statements.................................................6

Item 2 - Management's Discussion and Analysis of Financial Condition and
              Results of Operations ..........................................................................8

                           PART II - OTHER INFORMATION

Item 1 - Legal Proceedings...................................................................................11

Item 2 - Changes in Securities...............................................................................11

Item 3 - Defaults Upon Senior Securities.....................................................................11

Item 4 - Submission of Matters to a Vote of Security Holders.................................................11

Item 5 - Other Information...................................................................................11

Item 6 - Exhibits and Reports on Form 8-K....................................................................12

Signatures...................................................................................................13
</TABLE>


                                       2

<PAGE>


PART I   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                              ARTIFICIAL LIFE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2002
                                   (UNAUDITED)


                             ASSETS

Current assets:
Cash and cash equivalents                                         $          28
Accounts receivable, trade, net of allowance for doubtful
     accounts of $1,924,690                                           1,301,363
                                                                  -------------
         Total current assets                                         1,301,391
                                                                  -------------

Accounts receivable, net of current portion                             498,000
Furniture and fixtures, net of accumulated depreciation
     and amortization of $640,156                                       220,184
Capitalized software development costs, net of accumulated
     amortization of $53,427                                             17,971
Investments in unconsolidated subsidiaries                              125,000
Deposits and other assets                                                 9,825
                                                                  -------------
                                                                        870,980
                                                                  -------------
TOTAL ASSETS                                                      $   2,172,371
                                                                  =============
               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable                                                  $   1,482,034
Note payable - officer/stockholder                                    1,179,448
Deferred revenue                                                         90,000
Accrued expenses                                                        408,438
                                                                  -------------
     Total current liabilities                                        3,159,920
                                                                  -------------

Commitments and contingencies Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares
     authorized, no shares issued and outstanding                            --
Common stock, $.01 par value; 30,000,000 shares
     authorized 11,643,389 shares issued and outstanding                116,434
Additional paid-in capital                                           26,587,967
Notes receivable from stockholders                                      (19,099)
Accumulated deficit                                                 (27,672,851)
                                                                  -------------
     Total stockholders' equity (deficit)                              (987,549)
                                                                  -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)              $   2,172,371
                                                                  =============

See accompanying notes to unaudited condensed consolidated financial statements.


                                       3

<PAGE>



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

<TABLE>
<CAPTION>
                                                          Three-month Period Ended             Six-month Period Ended
                                                                   June 30,                          June 30,
                                                                   --------                          --------
                                                           2002               2001              2002               2001
                                                           ----               ----              ----               ----
<S>                                                   <C>                <C>                <C>              <C>
Revenues:
Software license agreement                            $     800,000      $     69,000       $ 1,550,000      $     294,381
Application services and other                               72,500           189,445           127,500          1,405,107
                                                      -------------      ------------       -----------      -------------

                                                            872,500           258,445         1,677,500          1,699,488
                                                      -------------      ------------       -----------      -------------
Operating expenses:
General and administrative                                  162,350          1,650,362          339,017          3,623,926
Engineering and cost of sales                               185,543           909,910           387,448          3,153,057
Research and development                                     23,194            84,356            48,433            235,639
Sales and marketing                                          92,771           449,592           193,723          1,527,547
Provision for doubtful accounts                                  --             8,723                --             40,670
Net restructuring charges                                        --           395,676                --            395,676
                                                      -------------      ------------       -----------      -------------

Total operating expenses                                    463,858         3,498,619           968,621          8,976,515
                                                      -------------      ------------       -----------      -------------

Income (loss) from operations                               408,642        (3,240,174)          708,879         (7,277,027)

Other income (expenses):
Foreign exchange gain (loss)                                                      290                              (17,401)
Interest income                                               4,828             2,034             7,627              9,312
Interest expense                                            (26,053)          (55,570)          (51,820)           (72,098)
                                                      -------------      ------------       -----------      -------------

Income (loss) before provision for income taxes             387,417        (3,293,420)          664,686         (7,357,214)

Provision for income tax                                         --                --                --                 --
                                                      -------------      ------------       -----------      -------------

Net income (loss)                                     $     387,417      $ (3,293,420)      $   664,686      $  (7,357,214)
                                                      =============      ============       ===========      =============

Net income (loss) per share
       Basic                                          $        0.04      $      (0.32)      $      0.06      $       (0.71)
                                                      =============      ============       ===========      =============
       Diluted                                        $        0.03      $      (0.32)      $      0.05      $       (0.71)
                                                      =============      ============       ===========      =============

Weighted average shares outstanding:
       Basic                                             10,950,451        10,332,865        10,940,705         10,327,226
                                                      =============      ============       ===========      =============
       Diluted                                           12,891,646        10,332,865        12,871,140         10,327,226
                                                      =============      ============       ===========      =============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.



                                       4

<PAGE>


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

<TABLE>
<CAPTION>
                                                                                Six-month period
                                                                                 Ended June 30,
                                                                            2002                 2001
                                                                            ----                 ----
<S>                                                                  <C>                  <C>
Cash flows from operating activities:
Net income (loss)                                                    $     664,686        $   (7,357,214)
Adjustments to reconcile net income (loss) to net cash
    used by operating activities:
Depreciation and amortization                                              211,656               888,698
Net restructuring charges                                                                        395,676
Interest income accrued on notes receivable from stockholders              (3,264)                (9,312)
Interest expense accrued on advances from officer/stockholder               51,820
Stock options issued for services rendered                                                       392,106
Decrease in accounts receivable, affiliates                                                      159,050
(Increase) decrease in accounts receivable, trade                      (1,374,363)               977,434
Increase in due to/from officer/stockholders                                                     160,552
Decrease in prepaid expenses and other assets                              63,604                 13,673
(Decrease) Increase in accounts payable and accrued expenses             (231,480)             1,671,499
                                                                     ------------         --------------

                 Net cash used by operating activities                   (154,381)            (2,707,838)
                 -------------------------------------               ------------         --------------

Cash flows from investing activities:
Purchases of property and equipment                                                              (58,193)
Proceeds from sales of property and equipment                                                     76,500
Expenditures for capitalized software development costs                                          (93,177)
                                                                     -------------        --------------

                 Net cash used by investing activities                          --               (74,870)
                 -------------------------------------               -------------        --------------

Cash flows from financing activities:
Proceeds from issuance of common stock and warrants                                              250,000
Advances from officer/stockholder                                          139,615             1,085,000
Payments on advance from officer/stockholder                             (121,318)
Proceeds from notes receivable stockholders                                126,000               100,000
Proceeds from bank credit lines                                                                1,006,671
                                                                     -------------        --------------

                 Net cash provided by financing activities                 144,297             2,441,671
                 -----------------------------------------           -------------        --------------

Effect of exchange rate changes on cash                                          -              (358,666)
                                                                     -------------        --------------

                 Net decrease in cash and cash equivalents                (10,084)              (699,703)

Cash and cash equivalents at beginning of period                            10,112               729,696
                                                                     -------------        --------------

Cash and cash equivalents at end of period                           $          28        $       29,993
                                                                     =============        ==============

Supplemental disclosure of cash flow information:
Interest paid                                                        $          --        $       16,528
                                                                     =============        ==============
Exercise of stock options in return for a reduction
   of accrued expenses                                               $     245,000        $      140,000
                                                                     =============        ==============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                       5

<PAGE>

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 its wholly owned subsidiaries: Artificial Life
Ventures, Inc. ("Artificial Life Ventures"), Artificial Life USA, Inc.
("Artificial Life USA"), Artificial Life Mobile Computing, Inc. ("Artificial
Life Mobile Computing") and Artificial Life Asia Limited ("Artificial Life
Asia"). All significant intercompany balances and transactions have been
eliminated in consolidation.

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.

2.   NET INCOME (LOSS) FROM OPERATING ACTIVITIES

During the year ended December 31, 2001, the Company incurred a net loss of
$6,843,762. As of June 30, 2002, the Company had a working capital deficiency of
$1,858,529 and a stockholders' deficit of $987,549. During the six months ended
June 30, 2002, the Company earned net income of $664,686, and used $154,381 of
cash in operating activities. Without continuing to improve profitability,
generating cash from operations, and/or obtaining additional financing or
capital, the Company may not have sufficient resources to fund its operations.
Management is pursuing financing opportunities to meet anticipated liquidity
needs; however, there is no assurance that these activities will be successful.

These factors raise a substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

3.   ACCOUNTS RECEIVABLE

Accounts receivable of $150,000 at June 30, 2002 will be offset in the quarter
ending September 30, 2002 in return for market research services to be provided
to the Company by a customer. Additionally, the Company entered into a contract
with another customer on July 1, 2002, whereby the customer, which owed the
Company $750,000 at June 30, 2002, will provide customer support and call center
servicing to the Company's European clients. Under the agreement, the customer
is to charge the Company $21,000 per month for such services, which may be
applied to the account receivable balance. Accordingly, $498,000 of accounts
receivable are shown as non current on the June 30, 2002 balance sheet.

4.   REVENUE

Revenue for the three months ended June 30, 2002, includes $150,000 resulting
from a settlement of negotiations over an unauthorized extended use of license
rights by a client who purchased software from the Company in 2000.

5.   GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses in the amount of $150,000 for the three
months ended June 30, 2002 have been reduced by $42,000. In connection with the
closing of its Boston office in 2001, the Company had accrued $150,000 of
estimated wages and vacation pay which it cautiously assumed might have been
required to be paid to former employees. In 2002, a Massachusetts Administrative
Law Magistrate reduced the amount of such claims to $108,000.

6.   STOCKHOLDERS' EQUITY

On April 1, 2002, the Company granted Bill Lucky options to purchase 300,000
shares of the Company's common stock at $1.06 per share in accordance with the
Company's incentive stock option plan. At the time, Mr. Lucky held the position
of President of the Company. The options vested immediately and are exercisable
through March 2012, contingent upon Mr. Lucky's continuous employment by the
Company. In June 2002, Mr. Lucky resigned as President of the Company and is no
longer employed by the Company in any capacity. The exercise rights of the
options granted to Mr. Lucky expire 90 days from the date of his termination of
employment with the Company.

On June 27, 2002, the Company granted an officer of the Company options to
purchase 100,000 shares of the Company's common stock at $0.75 per share in
accordance with the stock option plan. The options vested immediately and are
exercisable through June 2005.

During the three month period ended June 30, 2002, the Company granted a
director of the Company options to purchase 66,223 shares of the Company's
common stock at exercise prices ranging from $0.71 to $0.74 per share. The
options vested immediately and are exercisable through 2007.

7.   NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated based on the weighted average
number of common shares outstanding for the three and six month periods ended
June 30, 2001 and 2002. 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. Basic and diluted net loss per share and the number of
weighted shares outstanding
                                       6
<PAGE>


are the same for the three and six month periods ended June 30, 2001, since the
effect of inclusion of all outstanding options and warrants would be
anti-dilutive.

8.   INCOME TAXES

There is no provision for income taxes for the three and six months ended June
30, 2001 and June 30, 2002, as the Company incurred a loss during the three and
six month periods ended June 30, 2001, and income for the three and six month
periods ended June 30, 2002 was offset by net operating loss carryforwards. At
December 31, 2001, the Company had approximately $22,000,000 of federal and
state net operating loss carryforwards expiring in 2021 and 2006, respectively.
The net operating loss carryforwards 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.

9.   ADVANCES FROM SHAREHOLDER

At June 30,2002, the Company owed its chief executive officer $1,179,448, which
increased by $72,303 for the three months ended June 30, 2002 (including accrued
interest of $26,053). The advances bear interest at a rate of 10% per year, are
unsecured and are due on demand.

10.   SEGMENT INFORMATION

The Company markets and supports "intelligent software robots," software
programs, and related intellectual property, that the Company has designed to
automate and simplify time-consuming and complex business-related Internet
functions. The Company operates in one business segment: intelligent
agents/smart bots.

11.   SIGNIFICANT CONCENTRATION OF CREDIT RISK

The Company grants credit, generally without collateral, to its customers. Four
customers accounted for substantially all revenue earned during the six months
ended June 30, 2002, with one customer accounting for approximately 45% of
revenues. Four customers accounted for all the accounts receivable balance at
June 30, 2002, each for greater then 10% of the outstanding balance. During the
six-month period ended June 30, 2001, no one customer accounted for greater than
10% of net revenues.

12.  CONTINGENCY

In June 2001, Artificial Life Schweiz AG and Artificial Life Deutschland AG, two
former subsidiaries of the Company, entered into bankruptcy and dissolution
proceedings. The proceedings for Artificial Life Schweiz AG have been completed
without any additional liabilities incurred by the Company. The Company believes
that it will incur no further liabilities in connection with its German
subsidiary bankruptcy filings. However, the ultimate outcome of these filings
cannot be determined at this time. No provision has been made for any additional
liabilities which may be incurred.

On September 5, 2001, Copley Place Associates filed suit against the Company
alleging that the Company breached its commercial lease by vacating its 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. The Company has offered Copley Place Associates a complete settlement
of the matter for $50,000. No final settlement has been achieved. The Company
has accrued $100,000 in connection with this matter.

In connection with claims for certain unpaid wages and vacation pay made by
former employees of its former U.S. operations, the Company originally accrued
$150,000 representing the maximum amount of damages claimed by former employees.
Although certain of these former employees of the Company's U.S. operations have
filed claims for unpaid wages and vacation pay with the Office of the Attorney
General of the Commonwealth of Massachusetts, to the Company's knowledge, as of
August 1, 2002, no suits had been filed. As discussed in Item 1-Legal
Proceedings, a hearing on these claims was held on July 23, 2002 before an
Administrative Law Magistrate. The potential liability for these asserted claims
has been reduced by the Administrative Law Magistrate to approximately $108,000
and the accrued liability in the Company's books has been reduced accordingly.
After conducting the hearing, the Administrative Law Magistrate confirmed the
claims. The Company is currently negotiating individual settlement agreements
with its former employees.

In May 2002, a New York state court issued a summary judgement against the
Company and assessed damages in the amount of $58,187 for services rendered to
the Company by a vendor. The Company had previously accrued the full amount of
this claim.


                                       7


<PAGE>


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

GENERAL

The following Management's Discussion and Analysis of our Financial Condition
and Results of Operations should be read in conjunction with our financial
statements and the related notes included elsewhere in this Quarterly Report on
Form 10-QSB. This discussion contains, in addition to historical statements,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include the factors discussed in the section titled "Risk Factors"
as well as other factors described in our Annual Report on Form 10-K for the
year ended December 31, 2001. We do not intend to update any such
forward-looking statements.

INTRODUCTION

OVERVIEW

In May 2002, the Company moved its executive offices to Asia (Hong Kong). The
purpose of this move is the Company's plan to focus on the Asian markets. The
Company expects to focus its business in Asia especially in Hong Kong, Greater
China, Singapore, Japan and Korea, seeking to leverage the unique features of
its core Smart Engine (TM) language processing technology that allows
applications in all major Asian languages. The business focus is expected to be
on financial service applications, bio computing and mobile computing as the
Asian markets for these applications are expected to grow.

To reduce operating overhead and further increase efficiency, the Company's U.S.
based operations are being transferred to Hong Kong. The Company will no longer
maintain a direct sales office in the U.S. and will support its clients directly
from its Hong Kong headquarters or through its global partner and reseller
network.

The Company plans an expansion to Singapore and to establish a new subsidiary in
the third quarter of 2002 that will focus on bio computing applications in
Singapore. However, the nature and extent of this planned expansion is
contingent on the availability of new funds to finance the expansion. There can
be no assurance that the Company will be able to raise sufficient funds on
acceptable terms to finance this planned expansion.

We incurred aggregate losses of $7,357,214 through the end of the second quarter
of 2001. As a result of our restructuring efforts beginning in the second
quarter of 2001 and our efforts to maintain cost controls, we achieved
profitability in the third and fourth quarters of 2001 and in the first and
second quarter of 2002. In the quarter ended June 30, 2002, we generated
$872,500 in revenues and had net income of $387,417. However, there can be no
assurances that we will be able to continue to report profits in the future
quarters.

Our accumulated losses have severely impacted our liquidity and cash position
which, in turn, have significantly impeded our ability to fund our operations.
Consequently, in connection with our Annual Report on Form 10-K for the fiscal
years ended December 31, 2000 and 2001, the opinion of our independent certified
public accountants stated that there was substantial doubt about our ability to
continue as a going concern. As of June 30, 2002, we had total assets of
$2,172,371 and total liabilities of $3,159,920. As of June 30, 2002, current
assets were $1,301,391, which consisted of cash and accounts receivable, and
current liabilities were $3,159,920.

During the first half of 2001, we restructured our operations, implemented a
significant cost reduction program, including a reduction of office facilities,
relocation of our headquarters and termination of a significant number of
employees. We began efforts to sell intellectual property for direct use into
third-party systems. We also reevaluated our business and product lines with
increased emphasis on marketing and sales of our products and now conduct
product development efforts primarily for individual clients that contract for
such development. Consequently, we continue to anticipate devoting fewer
resources to engineering and research and development activities in the future.
As a result, we significantly reduced our engineering and research and
development costs in 2001. We continued to reduce our expenses for engineering
and research and development during the first two quarters of 2002. In the
fourth quarter of 2001, our chief executive officer elected to forgo his salary
earned in 2001 of $319,440. Payment of such salary had been deferred during the
year. During the second quarter of 2002, we relocated our headquarters to Hong
Kong and closed our New York office.

We have continued to reduce our marketing expenses and our website development
and operating infrastructure development budgets. Furthermore, we are continuing
to review plans to consolidate the operations of Artificial Life Mobile
Computing and Artificial Life Ventures and to relocate both entities to Hong
Kong. We are currently seeking a long-term lease for our new headquarters in
Hong Kong. Until we have secured a long-term lease, we will continue to occupy a
temporary office in Hong Kong. Lease obligations for this office are currently
less than $7,000 per month. Effective April 1, 2002, all officers of the Company
have voluntarily agreed to a


                                       8

<PAGE>


salary reduction of 50% to further reduce operating expenses. This resulted in a
reduction of salary expense of $85,000 in the quarter ended June 30, 2002.

In the third quarter of 2001, we started a second business division focusing on
life science applications. We believe that the algorithms and methods that we
have developed over the last several years will allow new and innovative
applications in the health care and life science industries. We do not intend to
develop products in this division, but rather intend to work on a consulting and
project basis with clients and further intend to license our existing
intellectual property for the life science area. However, we cannot guarantee
that we will be successful in this new application of our product line or that
this new business division will generate significant revenues in the future. We
intend to develop partnerships with Asian and global companies in the life
science and bio-computing arena from our Hong Kong location with Japan, Korea,
Singapore and Greater China as the main target markets.

In light of our restructuring, results of operations to date are not indicative
of our future results of operation. 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 recovery of
the global internet markets, the general market acceptance of our products, our
ability to sell and license our intellectual property, 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, our
ability to execute business in the Asian markets and the relocation of our
headquarters to Hong Kong. Gross profit margins will vary from product to
product and between products and services. Our sales mix may vary from period to
period and our gross margins will fluctuate accordingly.

In addition to our restructuring efforts, we are also seeking additional
financing to increase liquidity and capital resources. If we are unable to
obtain additional financing, this will have a material adverse effect on our
business.


RESULTS OF OPERATIONS


THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

REVENUES: Revenues for the quarter ended June 30, 2002 were $872,500 compared to
$258,445 for the quarter ended June 30, 2001. This increase in revenues of
$614,055 was primarily due to considerably stronger license sales in the second
quarter of 2002, and a stronger focus on the Asian markets. Revenues for the
quarter ended June 30, 2002 includes $150,000 resulting from a settlement of
negotiations over an extended use of license rights by a client who purchased
software from the Company in 2000.

GENERAL AND ADMINISTRATIVE: General and administrative expenses consist of
salary and payroll tax expenses of administrative personnel, rent, professional
fees and costs associated with employee benefits, supplies, communications and
travel. General and administrative expenses for the quarter ended June 30, 2002
were $162,350 compared to $1,650,362 for the quarter ended June 30, 2001. This
decrease of $1,488,012 was primarily due to a major reduction of staff and
administrative overhead during 2001.

ENGINEERING AND COST OF SALES: These costs generally consist of salary and
payroll tax expenses, 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 June 30, 2002 were $185,543 compared to $909,910 for the
quarter ended June 30, 2001. This decrease of $724,367 was primarily due to a
reduction of personnel, and a reduction in the design and manufacture of
products.

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 June 30, 2002 were $23,194 compared to $84,356
for the quarter ended June 30, 2001. This decrease of $61,162 was primarily due
to our increased emphasis on the support and sales of our existing products and
decreased development of new products.

SALES AND MARKETING: Sales and marketing expenses consist of salary and payroll
tax expenses of sales and marketing personnel, costs relating to marketing
materials, advertising, trade show related expense and public relations
activities. Sales and marketing expenses for the quarter ended June 30, 2002
were $92,771 compared to $449,592 for the quarter ended June 30, 2001. This
decrease of $356,821 was primarily due to a reduction in sales related salaries,
staffing and marketing expenses.

NET INCOME (LOSS): As a result of the foregoing, net income for the quarter
ended June 30, 2002 was $387,417, or $0.04 per share, compared to a loss of
$3,293,420, or $(0.32) per share, for the quarter ended June 30, 2001.


                                       9

<PAGE>


SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

REVENUES: Revenues for the six months ended June 30, 2002 were $1,677,500
compared to $1,699,488 for the six months ended June 30, 2001. This decrease of
$21,988 was primarily due to reduced sales staff in 2002 and to the relatively
strong sales in the first quarter of 2001 compared to the first quarter of 2002,
which was effected by the global economic downturn. However, license sales in
the second quarter of 2002 improved, and were stronger then license sales in the
second quarter of 2001. Revenues for the quarter ended June 30, 2002 includes
$150,000 resulting from a settlement of negotiations over an extended use of
license rights by a client who purchased software from the Company in 2000.

GENERAL AND ADMINISTRATIVE: General and administrative expenses for the six
months ended June 30, 2002 were $339,017 compared to $3,623,926 for the six
months ended June 30, 2001. This decrease of $3,284,909 was primarily due to a
major reduction of staff and administrative overhead during 2001.

ENGINEERING AND COST OF SALES: Engineering expenses for the six months ended
June 30, 2002 were $387,448 compared to $3,153,057 for the six months ended June
30, 2001. This decrease of $2,765,609 was primarily due to a reduction of
personnel and a reduction in the design and manufacture of products.

RESEARCH & DEVELOPMENT: Research and development expenses for the six months
ended June 30, 2002 were $48,433 compared to $235,639 for the six months ended
June 30, 2001. This decrease of $187,206 was primarily due to our increased
emphasis on the support and sales of our existing products and decreased
development of new products.

SALES AND MARKETING: Sales and marketing expenses for the six months ended June
30, 2002 were $193,723 compared to $1,527,547 for the six months ended June 30,
2001. This decrease of $1,333,824 was primarily due to a reduction in sales
related salaries, staffing, and marketing expenses.

NET INCOME (LOSS): As a result of the foregoing, net income for the six months
ended June 30, 2002 was $664,686, or $0.06 per share, compared to a loss of
$7,357,214, or $(0.71) per share, for the six months ended June 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2002, we had a working capital deficit of $1,858,529 and a
stockholders' deficit of $987,549.

In order to fund our cash needs, from time to time we have borrowed funds from
our chief executive officer, Eberhard Schoeneburg. As of June 30, 2002, we owed
Mr. Schoeneburg an aggregate of $1,179,448. The advanced funds bear interest at
a rate of 10% per year, are unsecured and are due on demand. In addition, as a
result of our current liquidity shortfall and current economic conditions, as of
June 30, 2002 Mr. Schoeneburg has deferred approximately $133,000 in wages
payable to him and has also voluntarily agreed to reduce his monthly salary by
50% effective April 1, 2002.

As a result of the bankruptcy filings for our subsidiaries in Germany and
Switzerland, our bank credit line liabilities in the amount of $1,006,671, as of
June 30, 2001, were dissolved.

During the six months ended June 30, 2002, we used $154,381 in operating
activities, primarily as a result of an increase of $1,374,363 in accounts
receivable, offset in part by our net income of $664,686 and depreciation and
amortization of $211,656. During the six months ended June 30, 2002, we had
$144,297 provided by financing activities, primarily as a result of $126,000 of
borrowings from stockholders.

Without operating on a profitable basis, generating cash from operations and/or
obtaining additional financing or capital, we will not have sufficient resources
to fund our operations. We are continuing to pursue financing opportunities to
meet our anticipated liquidity needs. We cannot be sure that we will be able to
obtain the necessary financing on acceptable terms, or at all, or that any
financing will be adequate to meet our working capital needs.

These factors create a substantial doubt about our ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

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<PAGE>

SUBSEQUENT EVENTS

On July 15, 2002, the Company received proceeds from a private placement of
336,666 shares of common stock at a price of $0.30 per share, resulting in
aggregate gross proceeds of $101,000. In connection with this transaction, the
Company also granted options to purchase 117,810 shares of common stock with an
exercise price of $0.30 per share. These options are exercisable for a period of
36 months.

In July 2002, the Company issued 25,000 shares of common stock to settle, in
full, an account payable in the amount of $20,000 to a financial services
consulting company for fund raising support services rendered to the Company in
2000 and 2001.

                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On September 5, 2001, Copley Place Associates filed suit against the Company
alleging that the Company breached its commercial lease by vacating its 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. The Company has offered Copley Place Associates a complete settlement
of the matter for $50,000. No final settlement has been achieved. The Company
has accrued $100,000 in connection with this matter.

In connection with claims for certain unpaid wages and vacation pay made by
former employees of its former U.S. operations, the Company originally accrued
$150,000 representing the maximum amount of damages claimed by former employees.
Although certain of these former employees of the Company's U.S. operations have
filed claims for unpaid wages and vacation pay with the Office of the Attorney
General of the Commonwealth of Massachusetts, to the Company's knowledge, as of
August 1, 2002, no suits had been filed. On July 23, 2002, a hearing on these
claims was held before an Administrative Law Magistrate. The potential liability
for these asserted claims has been reduced by the Administrative Law Magistrate
to approximately $108,000 and the accrual in our books has been reduced
accordingly. After conducting the hearing, the Administrative Law Magistrate
confirmed the claims. The Company is negotiating individual settlement
agreements with its former employees.

In May 2002, a New York state court issued a summary judgement against the
Company and assessed damages in the amount of $58,187 for services rendered to
the Company by a vendor. The Company had previously accrued the full amount of
this claim.

ITEM 2 - CHANGES IN SECURITIES

On April 1, 2002, the Company granted Bill Lucky warrants to purchase 700,000
shares of the Company's common stock at $1.06 per share. These warrants were
issued pursuant to Section 4(2) of the Securities Act of 1933, as amended. At
the time, Mr. Lucky was employed as President of the Company. The warrants vest
over a one-year period and are exercisable through April 2012, contingent upon
Mr. Lucky's continuous employment by the Company. In June 2002, Mr. Lucky
resigned as President of the Company and is no longer employed by the Company in
any capacity. The exercise rights to any unvested warrants granted to Mr. Lucky
expired upon termination of his employment with the Company.

On June 30, 2002, the Company's Chief Financial Officer, Chin Lim, exercised
warrants to purchase 200,000 shares of common stock at an exercise price of
$0.35 per share. Accrued salary of $70,000 was applied to pay for the shares.
These warrants were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

On June 8, 2001, our subsidiary Artificial Life Deutschland AG filed for
bankruptcy protection in the Insolvenzgericht Frankfurt, Germany. As of the date
of the bankruptcy filing, Artificial Life Deutschland AG owed $543,010 including
funds owed to Dresdner Bank pursuant to a bank overdraft line and funds owed to
other creditors. These proceedings are currently still pending.

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

None.

ITEM 5 - OTHER INFORMATION

On June 30, 2002, the Company's Chief Financial Officer, Chin Lim, exercised
options to purchase 300,000 shares of common stock at an exercise price of $0.35
per share. Accrued salary of $105,000 was applied to pay for these shares.

On June 30, 2002, the Company's Chief Operating Officer, Franck Namyslik,
exercised options to purchase 200,000 shares of common stock at an exercise
price of $0.35 per share. Accrued expenses of $70,000 owed to Mr. Namyslik were
applied to pay for these shares.

On August 10, 2002, Mr. Philip Leung assumed the position of our new managing
director for Asia Pacific.

Effective September 1, 2002, our current Chief Financial Officer, Chin Lim, will
assume new responsibilities as global business development manager for resellers
and partners and resign from her position as Chief Financial Officer. The
Company intends to appoint a new Chief Financial Officer to replace Ms. Lim.

                                       11

<PAGE>


On August, 5, 2002, the Board of Directors dismissed Robert Duggan as company
secretary and appointed our Chief Executive Officer Eberhard Schoeneburg as the
new corporate secretary.


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

           (a) Exhibits:

           None.

           (b) Reports on Form 8-K:

           There were no reports on Form 8-K filed in the three months ended
           June 30, 2002.






















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<PAGE>


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: August 14, 2002          By: /s/ Eberhard Schoeneburg
                                   ------------------------------
                               Name: Eberhard Schoeneburg
                               Title:  Chief Executive Officer




Date: August 14, 2002          By: /s/ Phaik Chin Lim
                                   ------------------------------
                              Name: Phaik Chin Lim
                              Title:  Chief Financial Officer
                              (principal financial officer and principal
                              accounting officer)


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