<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   Form 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR

[_]  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   0-25075
                         -------

                             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.)


      FOUR COPLEY PLACE, SUITE 102
         Boston, Massachusetts                            02116
----------------------------------------    -----------------------------------
(Address of principal executive offices)               (Zip Code)


                                 (617) 266-5542
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               Yes [X]    No [_]

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

Common Stock, $0.01 par value per share - 9,808,605 shares as of July 31, 1999
<PAGE>

PART I     FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
           ---------------------

                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                   December 31,          June 30,
                                                                                                       1998                1999
                                                                                                  ---------------    -------------
<S>                                                                                            <C>                 <C>
                                    ASSETS
                                    ------
Current assets:
    Cash and cash equivalents                                                                     $    11,687,829    $   8,386,539
    Accounts receivable, trade                                                                                  -          155,769
    Due from officer/stockholder and affiliates                                                           162,728          704,255
    Prepaid expenses and other current assets                                                              99,958          220,996
                                                                                                  ---------------    -------------
                    Total current assets                                                               11,950,515        9,467,559
                                                                                                  ---------------    -------------

Property and equipment:
    Furniture and fixtures                                                                                145,281          296,260
    Computer equipment                                                                                    545,680        1,102,508
    Leasehold improvements                                                                                 45,544           81,400
    Office equipment                                                                                       57,620          129,674
                                                                                                  ---------------    -------------
                                                                                                          794,125        1,609,842
    Less accumulated depreciation and amortization                                                        160,274          330,037
                                                                                                  ---------------    -------------
                                                                                                          633,851        1,279,805
                                                                                                  ---------------    -------------
Other assets:
    Capitalized software development costs, net of accumulated amortization of $44,028 in 1999            215,169          995,831
    Investments in joint venture                                                                                -          662,023
    Deposits and other assets                                                                              85,185          121,717
                                                                                                  ---------------    -------------
                                                                                                          300,354        1,779,571
                                                                                                  ---------------    -------------

                                                                                                  $    12,884,720    $  12,526,935
                                                                                                  ===============    =============

                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------

Current liabilities:
    Accounts payable                                                                              $       444,367    $     732,739
    Due to officer/stockholder  and affiliates                                                                  -           40,854
    Note payable - officer/stockholder                                                                          -          500,000
    Accrued expenses  and other current liabilities                                                       171,267          523,426
                                                                                                  ---------------    -------------
                     Total current liabilities                                                            615,634        1,797,019
                                                                                                  ---------------    -------------
Note payable - officer/stockholder                                                                        500,000                -
                                                                                                  ---------------    -------------
Minority interest in consolidated subsidiary                                                                    -           43,119
                                                                                                  ---------------    -------------

Stockholders' equity:
    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, 9,270,574
        and 9,808,605 shares issued and outstanding in 1998 and 1999, respectively                         92,706           98,086
    Additional paid-in capital                                                                         13,929,618       15,539,333
    Notes receivable from stockholders                                                                    (79,423)        (689,690)
    Accumulated deficit                                                                                (2,147,266)      (4,063,704)
    Accumulated other comprehensive loss                                                                  (26,549)        (197,228)
                                                                                                  ---------------    -------------
                    Total stockholders' equity                                                         11,769,086       10,686,797
                                                                                                  ---------------    -------------
                                                                                                  $    12,884,720    $  12,526,935
                                                                                                  ===============    =============

</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.


                                       2
<PAGE>

                             ARTIFICIAL LIFE, INC.
                    (formerly Neurotec International Corp.)
             CONDENSED CONSOLIDATED STATEMENTS OF LOSS (Unaudited)
<TABLE>
<CAPTION>
                                                          Three-month Period                          Six-month Period
                                                            Ended June 30,                              Ended June 30,
                                                -----------------------------------------    ----------------------------------
                                                        1998                 1999                    1998             1999
                                                --------------------   ------------------    -----------------   --------------
<S>                                             <C>                    <C>                   <C>                <C>
Revenues:
        Software license agreements                 $        -           $   351,743           $  116,667          $   351,743
        Application services                           116,362               784,093              332,713            1,222,816
        Software products                                    -                 1,141                    -                1,841
                                                    ----------           -----------           ----------          -----------
                                                       116,362             1,136,977              449,380            1,576,400
                                                    ----------           -----------           ----------          -----------

Operating expenses:
    Selling, general and administrative                270,352             1,264,093              596,620            2,042,275
    Engineering                                        111,035               829,115              249,789            1,073,094
    Research and development                            83,230               131,673              128,103              286,524
    Depreciation and amortization                       24,540                88,131               54,112              124,285
                                                    ----------           -----------           ----------          -----------
                  Total operating expenses             489,157             2,313,012            1,028,624            3,526,178
                                                    ----------           -----------           ----------          -----------

                  Loss from operations                (372,795)           (1,176,035)            (579,244)          (1,949,778)

Other income (expenses):
    Foreign exchange loss                                    -               (15,596)                   -              (44,720)
    Equity in loss of joint venture                          -               (31,020)                   -              (31,020)
    Write-down of investment                                 -               (45,965)                   -              (45,965)
    Interest income                                          -                72,224                    -              180,556
    Interest expense                                    (1,243)              (12,737)              (6,781)             (25,511)
                                                    ----------           -----------           ----------          -----------
Loss before income
    tax benefit                                       (374,038)           (1,209,129)            (586,025)          (1,916,438)
Income tax benefit                                           -                     -                    -                    -
                                                    ----------           -----------           ----------          -----------
Net loss                                            $ (374,038)          $(1,209,129)          $ (586,025)         $(1,916,438)
                                                    ==========           ===========           ==========          ===========

Basic and diluted net loss per share                    $(0.05)               $(0.13)              $(0.08)              $(0.20)

Weighted average shares outstanding
    used in per share calculation                    6,971,311             9,425,486            6,969,273            9,364,591
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                       3
<PAGE>

                             ARTIFICIAL LIFE, INC.
                    (formerly Neurotec International Corp.)
     CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

<TABLE>
<CAPTION>
                                    Comprehensive                                    Common
                                       Income        Preferred Stock                 Stock
                                       (Loss)            Shares        Amount        Shares       Amount
                                    -------------    ----------------  ------   -------------     ------
<S>                                <C>               <C>              <C>      <C>               <C>
Balance at December 31, 1997                                      -         -       6,967,213     $69,672

Net loss                              $  (586,085)                -         -          53,278         533
                                      ===========     -------------    ------  --------------     -------
Balance at June 30, 1998                                          -         -       7,020,491     $70,205
                                                      =============    ======  ==============     =======



Balance at December 31, 1998                                      -         -       9,270,574     $92,706

Issuance of common stock                                          -         -         538,031       5,380

Repayment of notes receivable
    from stockholders                                             -         -               -           -

Comprehensive income:
    Net loss                          $(1,916,438)                -         -               -           -

    Foreign currency translation
        adjustment                       (170,679)                -         -               -           -
                                      -----------
            Total comprehensive
             loss                     $(2,087,117)
                                      ===========     -------------    ------  --------------     -------
Balance at June 30, 1999                                          -         -       9,808,605      98,086
                                                      =============    ======  ==============     =======



</TABLE>


<TABLE>
<CAPTION>

                                                                                      Accumulated
                                      Additional                      Retained           Other               Total
                                       Paid-in          Notes         Earnings       Comprehensive       Stockholders'
                                       Capital        Receivable     (Deficit)           Loss           Equity (Deficit)
                                    -------------  ----------------  ---------      -------------      --------------------
<S>                                <C>               <C>            <C>               <C>               <C>

Balance at December 31, 1997          $   426,567     $       -      $  (168,047)        $       -         $   328,192

Net loss                                  180,834             -         (586,085)                -            (404,718)
                                      -----------     ---------     ------------        ----------        ------------

Balance at June 30, 1998              $   607,401     $       -      $  (754,132)        $       -         $   (76,526)
                                      ===========     =========      ===========         =========         ===========


Balance at December 31, 1998          $13,929,618     $ (79,423)     $(2,147,266)        $ (26,549)        $11,769,086

Issuance of common stock                1,609,715      (674,999)               -                 -             940,096

Repayment of notes receivable
    from stockholders                           -        64,732                -                 -              64,732

Comprehensive income:
    Net loss                                    -             -       (1,916,438)                -          (1,916,438)

    Foreign currency translation
        adjustment                              -             -                -          (170,679)           (170,679)

            Total comprehensive
             loss

                                      -----------     ---------     ------------        ----------        ------------
Balance at June 30, 1999              $15,539,333     $(689,690)     $(4,063,704)        $(197,228)        $10,686,797
                                      ===========     =========      ===========         =========         ===========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements

                                       4
<PAGE>

                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   Six-month Period
                                                                                     Ended June 30,
                                                                                ------------------------
                                                                                  1998            1999
                                                                                --------        --------
<S>                                                                            <C>           <C>
Cash flows from operating activities:
   Net loss                                                                     $(586,025)     $(1,916,438)
   Adjustments to reconcile net loss to net cash
     used by operating activities:
       Depreciation and amortization                                               54,112          168,313
       Write-down of equity investment                                                  -           45,965
       Equity in loss of joint venture                                                  -           31,020
       Intercompany profit elimination                                                  -          329,227
       (Increase) decrease in due to/from affiliates                              243,499         (627,407)
       (Increase) decrease in deposits and other assets                             3,715          (56,859)
       (Increase) decrease in accounts receivable, trade                          247,125         (155,769)
       (Increase) decrease in prepaid expenses and other current assets            42,215         (112,041)
       Increase in accounts payable and accrued expenses                          143,097          646,126
       Decrease in deferred revenue                                              (116,667)               -
       (Increase) decrease in due to/from officer/stockholders                   (180,931)         113,621
                                                                                ---------      -----------
          Net cash used by operating activities                                  (149,860)      (1,534,242)
                                                                                ---------      -----------

Cash flows from investing activities:
    Purchases of property and equipment                                            (2,298)        (853,195)
    Expenditures for capitalized software development costs                             -         (787,819)
    Net assets acquired in business acquisition                                         -           21,119
    Investment in joint venture                                                         -       (1,022,269)
                                                                                ---------      -----------
          Net cash used by investing activities                                    (2,298)      (2,642,164)
                                                                                ---------      -----------

Cash flows from financing activities:
     Proceeds from notes receivable from stockholders                                   -           64,732
     Proceeds from note payable to officer/stockholders                           500,000                -
     Proceeds from issuance of common stock                                       181,367          940,096
                                                                                ---------      -----------
         Net cash provided by financing activities                                681,367        1,004,828
                                                                                ---------      -----------
Effect of exchange rate changes on cash                                                 -         (129,712)
                                                                                ---------      -----------
Net increase (decrease) in cash and cash equivalents                              529,209       (3,301,290)

Cash and cash equivalents at beginning of period                                   22,382       11,687,829
                                                                                ---------      -----------
Cash and cash equivalents at end of period                                      $ 551,591      $ 8,386,539
                                                                                =========      ===========

Supplemental disclosure of cash flow information:
   Interest paid                                                                $   6,781      $    25,511
   Income taxes paid                                                                2,000                -
   Note receivable received upon exercise of stock options                              -          674,999
</TABLE>

See accompanying notes to unaudited condensed consolidated financial
statements.

                                       5
<PAGE>

                             ARTIFICIAL LIFE, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                   THREE AND SIX MONTHS ENDED JUNE 30, 1999


1.  BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements of
    the Company have been prepared in accordance with generally accepted
    accounting principles for interim financial information and in accordance
    with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and
    include the accounts of Artificial Life, Inc. and its wholly-owned
    subsidiaries; Artificial Life Europe AG and Artificial Life Deutchland AG
    (commenced operations in April 1999), and a 51% owned subsidiary Artificial
    Life Ventures, Inc. (acquired in June 1999). Significant intercompany
    balances and transactions have been eliminated in consolidation.
    Accordingly, they do not include all information and footnotes required by
    generally accepted accounting principles for complete financial statement
    presentation.

    The results of operations for the periods reported are not necessarily
    indicative of those that may be expected for a full year. In the opinion of
    management, all adjustments (consisting only of normal recurring
    adjustments) which are necessary for a fair statement of operating results
    for the interim periods presented have been made.

    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 for
    the year ended December 31, 1998 with the Securities and Exchange
    Commission.

2.  NET LOSS PER SHARE

    Basic net 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, 1998 and 1999. Basic and diluted net loss per share are the same as the
    effect of inclusion of all common stock equivalents would be anti-dilutive.

3.  COMMON STOCK

    In January 1999, the Company issued 40,000 shares of common stock at $8.50
    per share in connection with the underwriter's exercise of its
    over-allotment option. Net proceeds to the Company amounted to $302,600.

    In May 1999, the Company issued 184,426 shares of common stock in connection
    with the exercise of outstanding stock options. The total proceeds in the
    amount of $674,999 were received in the form of a note receivable due May 7,
    2000 with interest at 15%.

    In June 1999, the Company issued 174,179 shares of common stock in
    connection with the exercise of outstanding stock options. The total
    proceeds in the amount of $637,495 were received in cash.

    In June 1999, an officer/stockholder exercised 184,426 stock options using a
    net exercise feature in exchange for 139,426 shares of common stock.

                                       6
<PAGE>

                             ARTIFICIAL LIFE, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 - CONCLUDED -


4.  JOINT VENTURE

    In April 1999, the Company entered into a joint venture with two
    international retailers in the field of e-commerce. The main focus of this
    joint venture is to sell consumer goods over the Internet using deep
    discounts and high volume, both in terms of transactions and web visits. As
    part of the transaction, the Company will license its SmartBot technology to
    the joint venture. In addition, the Company will provide products and
    software development and consulting services to the joint venture and
    receive payments therefor. The partners in the joint venture will be
    responsible for using their purchasing relationships to obtain certain
    consumer products which will be sold on the joint venture's e-commerce
    Website. The Company has allocated up to $2,150,000 of the proceeds from its
    IPO to purchase its 50% interest in this joint venture and to meet its
    obligations to contribute additional capital to the joint venture. As of
    June 30, 1999, the Company had invested $1,022,269 in the joint venture.
    Under the terms of the joint venture agreement, the Company may market any
    e-commerce applications it develops to other e-commerce companies.

5.  SEGMENT INFORMATION

    The Company, whose operations consist of a single line of business,
    develops, markets and supports "intelligent software robots," software
    programs that the Company designs to automate and simplify time-consuming
    and complex business-related Internet functions.

    At June 30, 1999, the Company has operations located outside the United
    States in Switzerland, Germany and Russia. The Company's operations in
    Europe commenced in late 1998 and generated no revenues as of December 31,
    1998.

    Other financial data for the six months ended June 30, 1999 is as follows:

<TABLE>
<CAPTION>
                                 United
                                 States               Europe             Eliminations             Total
                            ----------------     ----------------     -------------------     --------------
<S>                         <C>                  <C>                  <C>                     <C>
Revenue from external
     customers                  $   972,808           $  603,592             $         -        $ 1,576,400
Intersegment revenue                322,050              414,348                (736,398)                 -
Loss from operations             (1,125,050)            (462,161)               (329,227)        (1,916,438)
Identifiable assets              13,539,871            3,229,356              (4,242,292)        12,526,935
</TABLE>


6.  ACQUISITION

    In June 1999, the Company acquired 51% of the outstanding stock of Cybermind
    Ventures, Inc. ("Cybermind") for $75,000 from two of the Company's
    stockholders. Cybermind was inactive with a net loss in 1999 through the
    date of acquisition of $5,520. At the time of the acquisition, Cybermind's
    name was changed to Artificial Life Ventures, Inc.

                                       7
<PAGE>

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


Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
The words "believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. Such statements are based on management's current
assumptions and expectations and are subject to a number of factors and
uncertainties which could cause actual results or business conditions to differ
materially from those anticipated in the forward-looking statements. There can
be no assurance that actual results will not differ materially from those
described in such statements because of various factors, including, but not
limited to: the recent change in the Company's strategy; limited revenues
generated by the Company; the Company's dependence on the growth in demand for
agent-based software products, such as the Company's suite of SmartBot products;
competition with more established software companies; market acceptance of the
Company's software robot products; the Company's ability to minimize design
defects, software errors, misuse of the Company's products, incorrect data from
external sources and other potential problems which may be out of the Company's
control; the Company's ability to remain competitive by enhancing existing
products, developing new products and technologies that address the increasingly
sophisticated and varied needs of its customers and by responding to
technological advances and emerging industry standards and practices on a cost-
effective and timely basis; the ability of the Company to retain its key
employees; the Company's dependence of third party contractors to complete
portions of its development work; certain risks associated with sales in foreign
markets, including political and economic instability, restrictive trade
policies of foreign governments, local economic conditions in foreign markets,
potentially adverse tax consequences and the burdens on customers of complying
with a variety of applicable laws; the Company's dependence on continued growth
of the Internet and online commerce; the Company's ability to protect its
intellectual property and other proprietary rights; the Company's ability to
raise additional financing, as necessary; the Company's ability to establish and
maintain brand identity; the management of the Company's foreign operations; the
success by the Company in identifying and licensing third party voice
recognition software which will be compatible with its products; the impact of
government regulations; the failure by the Company, its clients or suppliers to
be year 2000 compliant; and, general economic conditions.


OVERVIEW

The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec GmbH, a German
multimedia and Internet solutions company owned by Eberhard Schoneburg,
Artificial Life's President, Chief Executive Officer and Chairman, and two
corporate investors: a major German retailer and an industrial conglomerate. In
July 1997, Mr. Schoneburg sold all of his shares of Neurotec GmbH to the two
remaining stockholders and contemporaneously purchased 100% of the shares of
Neurotec International Corp. (the "Management Buyout"). In August 1997, the
Company changed its name to Artificial Life, Inc.

As a result of a change in control of the Company in connection with the
Management Buyout, the Company has presented its assets and liabilities
subsequent to July 3, 1997 to reflect the purchase price paid for the stock of
the Company. This treatment is consistent with "push down" accounting as
promulgated by the Securities and Exchange Commission ("SEC"). In Management's
opinion, the purchase price of the Company's stock in the Management Buyout
reflected the fair value of the Company at such time.
The difference between the Company's net book value at July 4, 1997 and the fair
value has been recorded as a reduction of the Company's net deferred tax asset
and long-term assets, resulting in a new depreciation

                                       8
<PAGE>

basis for financial statement purposes for such assets. As of July 4, 1997, the
stockholder's equity section reflects cumulative earnings prior to the
Management Buyout as paid-in capital. As a result, retained earnings at June 30,
1999 reflects the results of operations of the Company only from the date of the
Management Buyout.

Following the Management Buyout, the Company's management made the strategic
decision to shift the Company's primary business focus from providing software
consulting services to the development, marketing and support of its ALife suite
of SmartBot software products. Management's decision to shift the primary
business focus of the Company has had and will likely continue to have an
adverse effect on the Company's results of operations in the near term. The
Company expects that an increasing percentage of its future revenues will be
derived from sales and services associated with its SmartBot software products
and that revenues from its consulting business, as a percentage of gross
revenues, will significantly decrease over time. To date, the Company's major
source of revenue has been derived from its software consulting services, and it
has generated minimal revenue from the sale of its SmartBot software products.
The Company is currently expanding its research and development, production and
marketing capabilities associated with the anticipated sale of its SmartBot
products, and as a result, operating expenses are expected to increase
significantly going forward. The Company expects to continue to incur increasing
losses and generate negative cash flow from operations until at least the year
2000. To the extent that the Company's product development, marketing and sales
efforts do not result in commercially successful products that generate
significant net revenues, the Company will be materially adversely affected.
There can be no assurance that the Company will ever generate sufficient
revenues from the sale of the Company's products or associated services to
achieve or maintain profitability.

In addition, as a result of the Company's recent transition in its primary
business focus from software consulting to product development, marketing and
support, the Company's research and development expenditures increased to
$446,317 for the year ended December 31, 1998 from zero in 1997 and $286,524 for
the six months ended June 30, 1999 compared to $128,103 for the six months ended
June 30, 1998. This increase is due to the fact that, prior to 1998, all
research and development expenditures were related to consulting services for
which the Company was reimbursed by its customers and thus, such expenditures
are included in engineering expenses in the Company's financial statements
through December 31, 1997. Conversely, during 1998, due to the Company's shift
in business focus, the Company had most of its employees engaged in the research
and development of its SmartBot products.

Because the Company has shifted its primary business focus from software
consulting to product development, marketing and support, results of operations
to date are not reflective of the Company's business prospects going forward.
Moreover, the Company expects to experience significant fluctuations in its
future operating results due to a variety of factors. Factors that may affect
the Company's operating results include the success of product development, the
amount of software consulting undertaken in the future, market acceptance of the
Company's products, frequency and timeliness of new product releases, success of
strategic alliances, the mix of product and service sales, the Company's
response to competitive pressure and its ability to attract and retain qualified
personnel. Gross profit margins will vary from product to product and between
products and services and although the Company may have some ability to affect
its products and services mix, the Company's sales mix may vary from period to
period and its gross margins will fluctuate accordingly.

                                       9
<PAGE>

RESULTS OF OPERATIONS

The Company's principal source of revenue from inception through May 1998 was
from the provision of software consulting services. From inception through July
3, 1997, the preponderance of those revenues were generated by subcontracts
issued from Artificial Life's former parent company and affiliates thereof, all
of which revenues ceased shortly after the Management Buyout. Of the non-related
party revenues, most were derived from the Company's long-term consulting
contract with its major domestic client. This consulting contract started in
late 1996 and concluded in May 1998.

During the fourth quarter of 1997, the Company began evaluating the addition of
software product development to its core business of providing software
consulting services. The Company commenced software development plans while it
continued to provide software consulting services under its existing contracts
and to seek new consulting contracts. In the first quarter of 1998, the Company
began software development activities while continuing to service its one
existing consulting contract. During this time the Company limited its efforts
in seeking new consulting contracts as it began to shift its primary business
focus to software development. During the second quarter of 1998, when the
Company's major domestic consulting contract ended, the Company focused a
substantial portion of its available resources on product development.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

REVENUES: Revenues for the six months ended June 30, 1999 were $1,576,400 as
compared to $449,380 for the six months ended June 30, 1998. The increase of
$1,127,020 or 250.79% is primarily attributable to the Company's entering into a
consulting agreement with a European Trust which generated application services
revenue of $ 970,967 and license revenues related to the Company's joint venture
of $ 351,743. Revenue for the six months ended June 30, 1998 was from
application services and software license agreements.

ENGINEERING EXPENSES: Engineering expenses generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering requirements of the products and
services from which the Company derives its revenues.  Engineering expenses for
the six months ended June 30, 1999 were $1,073,094 as compared to $249,789 for
the six months ended June 30, 1998.  The increase of $823,305 or 329.60% is
attributable to costs incurred in connection with the European Trust consulting
agreement entered into in 1999.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses consist of
expenses similar in nature to engineering expenses except that such expenses
typically relate to new products and activities that will generate revenue at
some future date.  Research and development expenses for the six months ended
June 30, 1999 were $286,524 as compared to $128,103 for the six months ended
June 30, 1998.  The increase of $158,421 or 123.67% is attributable to the
Company's increased product development activities.  Significant increases
include professional affiliation costs of approximately $60,000, travel of
$36,000 and amortization of capitalized software costs of $44,000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling expenses consist of salary
and payroll tax expenses of marketing personnel and costs relating to marketing
materials, promotional videos, advertising and public relations activities.
General and administrative expenses consist of salary and payroll tax expenses
of administrative personnel, rent, legal and accounting fees and costs
associated with employee benefits, supplies, communications and travel. Selling,
general and administrative expenses for the six months ended June 30, 1999 were
$2,042,275 as compared to $596,620 for the six months ended June 30, 1998. The
increase of $1,445,655 or 242.31% is attributable to the establishment of our
U.S. and international sales and development infrastructure. Significant
increases include payroll costs of

                                       10
<PAGE>

approximately $535,000 (461.21%), professional fees of $487,000 (1,106.82%),
marketing and promotion of $230,000 (822.80%) and travel and entertainment of
$225,000 (738.88%).

NET LOSS: Net loss for the six months ended June 30, 1999 was $1,916,438 as
compared to a net loss of $586,025 for six months ended June 30, 1998. This
increase of $1,330,413 or 227.02% was related to the Company's international
expansion of its sales, marketing and developmental infrastructure.

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

REVENUES: Revenues for the quarter ended June 30, 1999 were $1,136,977 as
compared to $116,362  for the quarter ended June 30, 1998. The increase of
$1,020,615 or 877.10% is primarily attributable to the Company's entering into a
consulting agreement with a European Trust that generated application service
revenue of $531,000 and license revenue related to the Company's joint venture
of $ 351,743. Revenue in the second quarter of 1998 was from application
services.

ENGINEERING EXPENSES: Engineering expenses generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering requirements of the products and
services from which the Company derives its revenues.  Engineering expenses for
the quarter ended June 30, 1999 were $829,115 as compared to $111,035 for the
quarter ended June 30, 1998.  The increase of $718,080 or 646.71% is
attributable to costs incurred in connection with the European Trust consulting
agreement entered into in 1999.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses consist of
expenses similar in nature to engineering expenses except that such expenses
typically relate to new products and activities that will generate revenue at
some future date.  Research and development expenses for the quarter ended June
30, 1999 were $131,673 as compared to $83,230 for the quarter ended June 30,
1998.  The increase of $48,443 or 58.20% is attributable to the Company's
increased product development activities.  Significant increases include payroll
costs of approximately $ 12,000 and professional affiliation costs of
approximately $30,000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling expenses consist of salary
and payroll tax expenses of marketing personnel and costs relating to marketing
materials, promotional videos, advertising and public relations activities.
General and administrative expenses consist of salary and payroll tax expenses
of administrative personnel, rent, legal and accounting fees and costs
associated with employee benefits, supplies, communications and travel. Selling,
general and administrative expenses for the quarter ended June 30, 1999 were
$1,264,093 as compared to $270,352 for the quarter ended June 30, 1998. The
increase of $993,741 or 367.57% is attributable to the establishment of our U.S.
and international sales and development infrastructure. Significant increases
include payroll costs of approximately $303,000 (513.56%), professional fees of
$338,800 (1,652.39%), marketing and promotion of $174,000 (1,247.72%) and travel
and entertainment of $132,000 (432.79%).

NET LOSS: Net loss for the quarter ended June 30, 1999 was $1,209,129 as
compared to a net loss of $374,038 for the quarter ended June 30, 1998. This
increase of $835,091 or 223.26% was related to the Company's international
expansion.

                                       11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

From inception through July 3, 1997, the Company funded its operations primarily
through initial equity investments in 1994 and 1995 totaling $500,000 and net
income from operations. Subsequent to July 3, 1997, the Company incurred
operating losses in connection with its transition from software consulting to
product development, marketing and sales. These losses are expected to increase
and have been funded to date by a long-term stockholder loan of $500,000, a
private placement of Common Stock of $181,367, the net proceeds of which the
Company received in June 1998 and a private placement of 824,000 shares of
Common Stock which raised $3,946,481 in net proceeds. In December 1998, the
Company received $9,302,773 net proceeds from its Initial Public Offering (IPO)
in which 1,400,000 shares of common stock were sold. In January 1999, the
Company issued 40,000 shares of common stock at $8.50 per share in connection
with the underwriter's exercise of its over-allotment option. Net proceeds to
the Company amounted to $302,600. In May 1999, the Company issued 184,426 shares
of common stock in connection with the exercise of outstanding stock options.
The total proceeds in the amount of $674,999 were received in the form of a note
receivable due May 7, 2000 with interest at 15%. In June 1999, the Company
issued 174,179 shares of common stock in connection with the exercise of
outstanding stock options. The total proceeds received in connection with such
exercise were $637,495. The Company's requirements for additional capital will
depend on many factors, including but not limited to the progress and costs
associated with its research and development activities, production costs and
sales, marketing and promotional programs, establishment of foreign operations
and the levels of revenues achieved through the sale of its SmartBot suite of
products. The Company has currently placed excess funds in interest bearing
vehicles such as money market accounts and savings accounts.

Effective October 10, 1995, the Company entered into a consortium agreement (the
"MIT Agreement") with the Massachusetts Institute of Technology ("MIT").  Under
the MIT Agreement, MIT will conduct research projects for the "Things That Think
Consortium."  The term of the agreement is for five years through October 9,
2000 but provides for early termination, with one year written notice, as well
as renewal options. The Company is obligated to pay an annual membership fee of
$125,000 under the MIT Agreement.

The Company leases office and other space and various office equipment under
various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 1999, 2000 and 2001
are $359,908, $576,073 and $368,617, respectively. In addition, new lease
agreements are anticipated to be signed during the third-quarter of 1999 for
office space requirements in Switzerland and New York.

The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
base salaries.  These agreements include severance payments under certain
conditions of approximately 50% to 300% of each officer's annual compensation.
In addition the President, Chief Executive Officer and Chairman of the Company
is entitled to receive an annual incentive bonus of 3% of the Company's profits
from operations.

The Company has entered into a joint venture with two international retailers in
the field of e-commerce. The main focus of this joint venture is to sell
consumer goods over the Internet using deep discounts and high volume, both in
terms of transactions and web visits.  As part of the transaction, the Company
will license its SmartBot technology to the joint venture.  In addition, the
Company will provide products and software development and consulting services
to the joint venture and receive payments therefor.  The partners in the joint
venture will be responsible for using their purchasing relationships to obtain
certain consumer products which will be sold on the joint venture's e-commerce
Website.  The Company has allocated up to $2,150,000 of the proceeds from its
IPO to purchase its 50% interest in this joint venture and to meet its
obligations to contribute additional capital to the joint venture.  As of June
30, 1999, the

                                       12
<PAGE>

Company has invested $1,022,269 in this joint venture. License revenue recorded
in the second quarter of 1999 was derived from this relationship.

In addition, the Company has concluded its development and consulting project
with a Europe-based global trust and has submitted its findings to the client.
The project goal was to define and design the trust's future Internet-based
financial services and to use these services to broaden the trust's market
potential.  The Company is currently negotiating a contract for the
implementation of this development project.  As part of the transaction, the
Company would provide products and software consulting services to the trust and
receive payments therefor.

The Company believes that the net proceeds of the IPO, together with its current
cash and cash equivalents, and other cash generated from operations will enable
the Company to maintain its current and planned operations through July 2000,
although there can be no assurance that the Company will not have additional
capital needs prior to such time.  If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements after that time,
the Company may seek to sell additional equity or debt securities or obtain a
credit facility.  The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders.  There can be
no assurance that financing will be available in amounts or on terms acceptable
to the Company, if at all.

The Company has incurred a loss for income tax purposes for fiscal 1998 and the
first two quarters of 1999.  This loss will be available to carry forward and
reduce income taxes, if any, in future periods.


YEAR 2000 ISSUE

The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits, to indicate the year.  Any of the Company's computer
programs or other information systems that have time-sensitive software or
embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the Year 2000.  This could result in a system failure or
miscalculations causing disruptions of operations.

The Company completed a preliminary review of its information and non-
information technology systems as they pertain to both internal operations and
product development. This review, the costs of which are not deemed material,
included its existing and planned computer software and hardware. The Company
believes that these systems are Year 2000 compliant and has made an initial
determination that the costs and/or consequences associated with the Year 2000
issue are not expected to have a material adverse effect on its business
operations or future financial condition. At this time, however, the Company is
developing a specific plan for assessing third party vendor systems, assessing
the readiness of significant suppliers and customers, and taking remedial
action, if necessary. The Company does not know the amount or material nature of
expenditures that it may incur in connection with this assessment, but continues
to believe that the costs associated with the Year 2000 compliance will not have
a material impact on the Company's future operating results. The preliminary
review completed during the second quarter of 1999 revealed no material issues
regarding network hardware and software. In addition, certain other internal
systems and third party development tools are still being evaluated with a final
assessment to be completed by September 30, 1999. The Company, however, will
continue to monitor the Year 2000 readiness of these systems and will take
additional review or remedial action if it deems it necessary to do so. During
the remainder of 1999, but not later than September 30, 1999, the Company will
evaluate its need to complete a final review, which may include soliciting and
obtaining certification of Year 2000 compliance from certain third party
software vendors and determining the readiness of its significant suppliers and
customers. Nevertheless, the Company does not currently expect to experience
Year 2000 problems as its computer hardware is generally no more than two years
old and it has the latest version of computer software programs.

                                       13
<PAGE>

In addition, the Company's products are designed to operate with third party
software and data.  The operation of the Company's existing and proposed
products will be adversely affected if such third party software and data are
not Year 2000 compliant or if such third parties have not used compatible
technology in achieving compliance.  The Company at this time is determining
specific plans for certifying the Year 2000 readiness of third party software
and data as they relate to and interact with the Company's software products and
consulting activities.

To the extent that the Company's assessment is completed without identifying any
non-compliant systems operated by the Company or by third parties, the Year 2000
issue could have a material effect on the operations of the Company.  The
Company could experience delays in the development of its products.  Once its
products are developed and offered for commercial sale, the Company could
experience delays in delivering such products or could deliver products that do
not operate correctly, which could cause the Company to lose business and even
customers and could subject the Company to claims for damages.  Problems with
the Year 2000 issue could also result in delays in the Company invoicing its
customers or in the Company receiving payments from them.  The severity of these
possible problems would depend on the nature of the problem and how quickly it
could be corrected or an alternative implemented, which is unknown at this time.

After completing its assessment in the second quarter of 1999, the Company plans
to develop appropriate contingency plans to address situations in which various
systems of the Company, or of third-parties with which the Company does
business, are not Year 2000 compliant.  Some risks of the Year 2000 issue,
however, are beyond the control of the Company and its suppliers and customers.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

During the six months ended June 30, 1999, the Company has increased the amounts
of cash denominated in foreign currencies in connection with its European
operations. The Company believes these amounts, $1,543,013 at June 30, 1999, are
necessary to meet the operating requirements of its European subsidiaries.

                                       14
<PAGE>

PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
         -----------------

None.

ITEM 2.  CHANGE IN SECURITIES
         --------------------

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         -------------------------------

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
         --------------------------------------------------

None.

ITEM 5.  OTHER INFORMATION
         -----------------

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

  (a)  Exhibits:

       Exhibit 27 - Financial Data Schedule

  (b)  Reports on Form 8-K:

       No Reports on Form 8-K were filed by the Company during the six months
       ended June 30, 1999.

                                       15
<PAGE>

                                  SIGNATURES


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


                                           ARTIFICIAL LIFE, INC.
                                       -------------------------------
                                               (registrant)


                               By: /s/Eberhard Schoneburg
                                  ---------------------------------------------
                                  Eberhard Schoneburg
                                  Chairman, President & Chief Executive Officer
                                  (Principal Executive Officer)



Dated:  August 12, 1999

                                       16