<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 MARCH 31, 2000

     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--
                    10,291,280 shares as of April 30, 2000

<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,    March 31,
                                                        1999           2000
                                                    ------------   ------------
<S>                                                <C>            <C>
                   ASSETS
Current assets:
    Cash and cash equivalents                       $  2,592,388   $  5,002,238
    Accounts receivable, trade                         1,094,430        919,269
    Accounts receivable, affiliate                       346,172        324,166
    Note receivable, affiliate                              --          120,620
    Due from officer/stockholders                         51,708         77,437
    Prepaid expenses and other current assets            547,942        456,209
                                                    ------------   ------------
                    Total current assets               4,632,640      6,899,939
                                                    ------------   ------------

Property and equipment:
    Computer equipment                                 1,743,792      1,902,703
    Furniture and fixtures                               499,211        528,738
    Leasehold improvements                                95,381        100,382
    Office equipment                                     166,087        168,280
                                                    ------------   ------------
                                                       2,504,471      2,700,103
    Less accumulated depreciation and amortization       638,749        822,421
                                                    ------------   ------------
                                                       1,865,722      1,877,682
                                                    ------------   ------------
Other assets:
    Costs in excess of fair value of net assets
      acquired, net of accumulated amortization of
      $5,306 and $12,908                                  99,520         91,226
    Capitalized software development costs, net
      of accumulated amortization of $246,737
      and $378,610                                     1,119,356      1,055,386
    Investments in unconsolidated subsidiary             186,186           --
    Deposits and other assets                             84,887        226,503
                                                    ------------   ------------
                                                       1,489,949      1,373,115
                                                    ------------   ------------
                                                    $  7,988,311   $ 10,150,736
                                                    ============   ============

        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                $    980,979   $    715,707
    Note payable - officer/stockholder                   500,000        500,000
    Deferred revenue                                        --          136,120
    Accrued expenses and other current liabilities       586,283        631,062
                                                    ------------   ------------
                    Total current liabilities          2,067,262      1,982,889
                                                    ------------   ------------

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, 9,863,415 and 10,243,415 shares
      issued and outstanding in 1999 and 2000,
      respectively                                        98,634        102,434
    Additional paid-in capital                        15,563,784     25,150,579
    Notes receivable and stock subscriptions due
     from stockholders                                  (749,981)    (5,148,986)
    Accumulated deficit                               (8,905,480)   (11,796,815)
    Accumulated other comprehensive loss                 (85,908)      (139,365)
                                                    ------------   ------------
                    Total stockholders' equity         5,921,049      8,167,847
                                                    ------------   ------------

                                                    $  7,988,311   $ 10,150,736
                                                    ============   ============
</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 Ended
                                                         March 31,
                                               -------------------------------
                                                   1999                2000
                                               -----------         -----------
<S>                                           <C>                 <C>
Revenues:
    Software license agreements                $      --            $  793,860
    Application services                           438,723             720,594
    Software products                                  700               6,750
                                               -----------         -----------
                                                   439,423           1,521,204
                                               -----------         -----------
Operating expenses:
    General and administrative                     677,408           1,416,207
    Engineering and cost of sales                  280,244           1,723,412
    Research and development                       154,851             210,008
    Sales and marketing                            100,663             796,009
                                               -----------         -----------
        Total operating expenses                 1,213,166           4,145,636
                                               -----------         -----------

        Loss from operations                      (773,743)         (2,624,432)

Other income (expenses):
    Foreign exchange loss                          (29,124)            (40,350)
    Equity in loss of joint venture                   --              (240,143)
    Interest income                                116,943              28,137
    Interest expense                               (21,385)            (14,547)
                                               -----------         -----------

Loss before provision for income taxes            (707,309)         (2,891,335)

Provision for income taxes                              --                  --
                                               -----------         -----------

Net loss                                       $  (707,309)        $(2,891,335)
                                               ===========         ===========


Basic and diluted net loss per share           $     (0.08)        $     (0.29)

Weighted average shares outstanding
    used in per share calculation                9,302,574           9,978,442
</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              Preferred Stock                       Common Stock
                                             Income          ------------------------------      ------------------------------
                                             (Loss)             Shares            Amount            Shares            Amount
                                          ------------       ------------      ------------      ------------      ------------
<S>                                      <C>                <C>               <C>               <C>               <C>
Balance at December 31, 1998                                          --       $        --          9,270,574      $     92,706

Issuance of common stock                                              --                --             40,000               400

Repayment of notes receivable
    from stockholders net of
    increases for accrued interest                                    --                --                --                --

Comprehensive income:

    Net loss                              $   (707,309)               --                --                --                --

    Foreign currency translation
        adjustment                               8,611                --                --                --                --
                                          ------------
            Total comprehensive loss      $   (698,698)
                                          ============       ------------      ------------      ------------      ------------
Balance at March 31, 1999                                             --       $        --          9,310,574      $     93,106
                                                             ============      ============      ============      ============

Balance at December 31, 1999                                          --       $        --          9,863,415      $     98,634

Issuance of common stock                                              --                --            380,000             3,800

Repayment of notes receivable
    from stockholders net of
    increases for accrued interest                                    --                --                --                --

Stock options issued for
    services rendered                                                 --                --                --                --

Comprehensive income:

    Net loss                              $ (2,891,335)               --                --                --                --

    Foreign currency translation
        adjustment                             (53,457)               --                --                --                --
                                          ------------

            Total comprehensive loss      $ (2,944,792)
                                          ============       ------------      ------------      ------------      ------------

Balance at March 31, 2000                                             --       $        --         10,243,415      $    102,434
                                                             ============      ============      ============      ============
<CAPTION>
                                                                                                  Accumulated
                                         Additional                            Retained              Other             Total
                                           Paid-in             Notes           Earnings          Comprehensive     Stockholders'
                                           Capital          Receivable         (Deficit)             Loss              Equity
                                         ------------      ------------       ------------       ------------       ------------
<S>                                     <C>               <C>                <C>                <C>                <C>
Balance at December 31, 1998             $ 13,929,618      $    (79,423)      $ (2,147,266)      $    (26,549)      $ 11,769,086

Issuance of common stock                      302,200               --                 --                 --             302,600

Repayment of notes receivable
    from stockholders net of
    increases for accrued interest                --             58,532                --                 --              58,532

Comprehensive income:

    Net loss                                      --                --          (  707,309)               --           (707,309)

    Foreign currency translation
        adjustment                                --                --                 --               8,611              8,611

            Total comprehensive loss
                                         ------------      ------------       ------------       ------------       ------------

Balance at March 31, 1999                $ 14,231,818      $   ( 20,891)      $ (2,854,575)      $    (17,938)      $ 11,431,520
                                         ============      ============       ============       ============       ============

Balance at December 31, 1999             $ 15,563,784      $   (749,981)      $ (8,905,480)      $    (85,908)      $  5,921,049

Issuance of common stock                    9,548,700        (5,145,000)               --                 --           4,407,500

Repayment of notes receivable
    from stockholders net of
    increases for accrued interest                --            745,995                --                 --             745,995

Stock options issued for
     services rendered                         38,095                                                                     38,095
Comprehensive income:

    Net loss                                      --                --          (2,891,335)               --          (2,891,335)

    Foreign currency translation
        adjustment                                --                --                 --             (53,457)           (53,457)

            Total comprehensive loss
                                         ------------      ------------       ------------       ------------       ------------
Balance at March 31, 2000                $ 25,150,579      $ (5,148,986)      $(11,796,815)      $   (139,365)      $  8,167,847
                                         ============      ============       ============       ============       ============
</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>
                                                                                Three month period ended March 31,
                                                                              -------------------------------------
                                                                                      1999               2000
                                                                              -----------------     ---------------
<S>                                                                          <C>                   <C>
Cash flows from operating activities:
   Net loss                                                                       $  (707,309)      $ (2,891,335)
   Adjustments to reconcile net loss to net cash
     used by operating activities:
       Depreciation and amortization                                                   36,154            347,669
       Equity in loss of joint venture                                                   --              240,143
       Intercompany profit elimination                                                   --               66,430
       Interest income accrued on notes receivable from stockholder                      --              (11,884)
       Stock options issued for services rendered                                        --               38,095
       Increase in due from affiliate                                                    --              (90,157)
       (Increase) decrease in accounts receivable, trade                             (438,723)           161,975
       (Increase) decrease in prepaid expenses and other current assets              (193,476)            82,813
       Increase in other assets                                                        (8,744)          (136,300)
       Increase (decrease) in accounts payable and other current liabilities          122,365           (193,801)
       Increase in deferred revenue                                                      --               15,970
       Increase in due to/from officer/stockholder                                    (20,913)           (29,309)
                                                                                  -----------       ------------
          Net cash used by operating activities                                    (1,210,646)        (2,399,691)
                                                                                  -----------       ------------

Cash flows from investing activities:
    Purchases of property and equipment                                              (353,762)          (263,256)
    Expenditures for capitalized software development costs                          (296,262)           (76,156)
    Increase in notes and accounts receivable affiliate                                (1,000)              --
                                                                                  -----------       ------------
          Net cash used by investing activities                                      (651,024)          (339,412)
                                                                                  -----------       ------------

Cash flows from financing activities:
     Proceeds from notes receivable from stockholders                                  58,532            757,879
     Proceeds from issuance of common stock and warrants                              302,600          4,407,500
                                                                                  -----------       ------------
          Net cash provided by financing activities                                   361,132          5,165,379
                                                                                  -----------       ------------

Effect of exchange rate changes on cash                                                 9,624            (16,426)
                                                                                  -----------       ------------

Net increase (decrease) in cash and cash equivalents                               (1,490,914)         2,409,850

Cash and cash equivalents at beginning of period                                   11,687,829          2,592,388
                                                                                  -----------       ------------
Cash and cash equivalents at end of period                                        $10,196,915       $  5,002,238
                                                                                  ===========       ============

Supplemental disclosure of cash flow information:
   Interest paid                                                                  $     8,520       $      2,663
   Note receivable received upon exercise of stock options                               --              113,750
   Note receivable received and stock subscriptions from
     issuance of common stock and warrants                                               --            5,031,250
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.

                                       5
<PAGE>

                             ARTIFICIAL LIFE, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

                                MARCH 31, 2000


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 ("ALife Europe"), Artificial Life
     Deutschland AG, Artificial Life Ventures, Inc. and Artificial Life USA,
     Inc. (formed January 26, 2000 and inactive as of March 31, 2000) and the
     wholly-owned subsidiaries of ALife Europe; Artificial Life Solutions AG,
     Artificial Life Rus Ltd., and IT Partners AG. 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 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 month periods ended March 31,
     1999 and 2000. Basic and diluted net loss per share are the same as the
     effect of inclusion of all common stock equivalents would be antidilutive.

3.   COMMON STOCK

     In January 2000, the Company issued 10,000 shares of common stock in
     connection with the exercise of outstanding stock options.  The total
     proceeds to the Company amounted to $145,000.

     In February 2000, the Company issued 50,000 shares of common stock in
     connection with the exercise of outstanding stock options. The total
     proceeds amounted to $325,000 of which, $175,000 is in the form of a note
     receivable due February 10, 2001 with interest at 15%.

     In February 2000, the Company issued 152,500 shares of common stock in
     connection with a private placement. The total proceeds amounted to
     $4,112,500.

     In March 2000, the Company issued 17,500 shares of common stock in
     connection with the exercise of outstanding stock options. The total
     proceeds to the Company amounted to $113,750 which was received subsequent
     to March 31, 2000.

     In March 2000, the Company issued 150,000 shares of common stock in
     connection with a private placement. In addition to the shares issued, the
     Company issued warrants to purchase 75,000 additional shares of stock at
     $32.375 per share. The total proceeds amounted to $4,856,250 and were
     received subsequent to March 31, 2000.

                                       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
     March 31, 2000, $1,022,269 was invested by the Company in the joint
     venture. In April 2000, the Company contributed additional capital of
     $909,900 to 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 March 31, 2000, the Company had operations located outside the
     United States in Switzerland, Germany and Russia.

     Other financial data for the three months ended March 31, 2000 is as
     follows:

<TABLE>
<CAPTION>
                               United States         Europe            Eliminations          Total
                               -------------       -----------        ------------       ------------
<S>                           <C>                 <C>               <C>               <C>
     Revenue from external
          customers             $    414,291       $ 1,106,913       $       --         $  1,521,204
     Intersegment revenue            430,925           602,710         (1,033,635)              --
     Loss from operations         (1,960,026)         (924,144)            (7,165)        (2,891,335)
     Identifiable assets          11,059,763         3,286,243         (4,195,270)        10,150,736
</TABLE>

                                       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: 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 on 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; 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.


                                       8
<PAGE>

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 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 March 31, 2000 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. For the first two quarters of
1999, the Company's major source of revenue was derived from its software
consulting services, and it generated minimal revenue from the sale of its
SmartBot software products. However in 1999, the Company realized its first
significant software license revenues. This trend continued in the first quarter
of 2000. 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 for a
substantial portion of 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, (excluding
amounts included in capitalized software development costs marketing and
support, the Company's research and development expenditures) increased, from
zero in 1997 to $446,317 in the year 1998 and $666,046 in the year 1999. 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

Fiscal 1999 realized the first significant software license revenues in Company
history. This trend continued in the first quarter 2000. This is consistent with
the Company's business strategy as changed to reflect its focus on product
development and license sales.

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. This
change in focus resulted in the Company, in fiscal 1999, realizing its first
significant software license revenue.

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999

REVENUES: Revenues for the quarter ended March 31, 2000 were $1,521,204 as
compared to $439,423 for the quarter ended March 31, 1999. The increase of
$1,081,781 or 246.18% was primarily due to license revenue generated from the
Company's new products released in the latter part of 1999 and the first quarter
2000.

ENGINEERING AND COST OF SALES: These costs generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develope and fulfill the engineering (design specifications) of the
products and services from which the Company derives its revenues. Engineering
expenses for the quarter ended March 31 2000 were $1,723,414 as compared to
$280,244 for the quarter ended March 31,1999. The increase of $1,443,170 or
514.97% is primarily attributable to support activities related to the Company's
product installations and related consulting thereof. Major components of the
increase include payroll and related costs of $700,000 and travel and lodging of
$100,000 and the decrease in the amount of cost capitalized for software
development, of $200,000.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses are similar
in nature to engineering expenses with the exception being that they relate to
product in their initial stage and will generate revenue at a later date.
Research and development expenses for the quarter ended March 31, 2000 were
$210,008 as compared to $154,851 for the quarter ended March 31, 1999. The
increase of $55,157 or 35.62% is primarily attributable to an increase of
payroll and related costs of $50,000 associated with increased product
development activities and $5,000 for costs associated with professional
affiliations. The Research and Development expenses for 1999 and 2000 are net of
Capitalized Software Development Costs.

GENERAL AND ADMINISTRATIVE EXPENSES: 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 March 31, 2000 were $1,416,205 as compared to $677,408 for the quarter
ended March 31,1999. The increase of $738,797 or 109.06% is primarily
attributable to the establishment of our international administrative
infrastructure. Significant increases include payroll costs of approximately
$250,000, professional fees of $160,000, travel and entertainment expense of
$150,000, communications expense of $50,000, rent expense of $50,000,
depreciation expense of $35,000 and other office expenses of approximately
$43,000.

SALES AND MARKETING EXPENSES: Sales and marketing expenses consist of salary
and payroll tax expenses of marketing personnel and costs relating to marketing
materials, tradeshows, promotional videos, advertising and public relations
activities. Marketing expenses for the quarter ended March 31, 2000 were
$796,009 as compared to $100,663 for the quarter ended March 31, 1999. The
increase of $695,346 or 690.77% is primarily attributable to the establishment
of a marketing infrastructure in both the United States and Europe. Significant
increases include payroll and related costs of $260,000, trade shows expense of
$200,000, consultants expense of $80,000, travel expense of $50,000 and
advertising expense of $105,000.


NET LOSS: Net loss for the quarter ended March 31, 2000 was $2,891,335 compared
to a net loss of $707,309 for the quarter ended March 31, 1999. This increase of
$2,184,026 or 308.78% is primarily due to the costs associated with our
international expansion including the Company's equity in loss of joint venture
of $240,143 and increased marketing activities to support the Company's
products.

                                       10
<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 Non-Voting 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. In January 1999, the Company received net proceeds from the exercise
and sale of 240,000 over-allotment shares by the Underwriter. During 1999,
optionholders of the Company exercised options netting the Company approximately
$1,300,000 which was received in 1999 and the first quarter of 2000. In February
2000, the Company concluded two private placements of Common Stock. Both
transactions occurred at purchase prices that were at a premium to the average
closing price for five days prior to the transaction date. The first transaction
netted $2,562,500 to the Company in exchange for 102,500 common shares; the
second transaction netted $1,550,000 to the Company in exchange for 50,000
common shares. In March 2000 the Company netted proceeds of $4,856,250 from the
private placement of another 150,000 Common Stock shares. Costs related to these
transactions were immaterial. 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 certain office equipment under
various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 2000, 2001, 2002
and 2003 are approximately $725,000, $500,000, $480,000 and $480,000
respectively.

The Company has an employment agreement with its Chief Executive Officer. The
agreement is three years in length and provides for a minimum base salary. The
agreement includes severance payments under certain conditions of approximately
300% of 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 an international retailer 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
March 31, 2000,

                                       11
<PAGE>

the Company has invested $1,022,269 in this joint venture. In April 2000, the
Company invested another $909,900 in the joint venture. License revenue
recorded in the first quarter of 2000 amounting to $240,765 was derived from
this relationship.

In addition, the Company completed a contract for the first phase of a
development and consulting project with a European based global trust. The
project goal was to define and design the trust's future Internet-based
financial services. The successful completion of this phase led to a larger
scale implementation of this development project. As part of the transaction,
the Company is providing licensed products and software consulting services to
the trust.

The Company believes that the net proceeds of the IPO and recent private
placements, together with its current cash and cash equivalents, and other cash
generated from operations at least will enable the Company to maintain its
current and planned operations at least through January 2001, 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 years 1998
and 1999. These losses 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. The Company is not aware of any
problems that have arisen from the year 2000 issue and as a result does not
believe its operations have been affected in any material way. All costs
associated with internal and product specific reviews of Year 2000 compliance
that were completed in 1999 were immaterial to the Company's 1999 operating
results.


                                       12
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
        ---------------------------------------------------------

The Company maintains its cash and cash equivalents in checking, savings, and
money market accounts. Approximately 84% of these deposits are denominated in
U.S. dollars. Approximately 16% of these deposits are denominated in Euros and
the remainder is denominated in Swiss Franc. Deposits in both fixed rate and
floating rate interest accounts carry a degree of interest rate risks. Fixed
rate deposits may be adversely impacted due to a rise in interest rates, while
floating rate deposits may produce less income than expected if interest rates
fall. Due in part to these factors, the Company's future interest income may
fall short of expectations due to changes in interest rates. The cash
denominated in non-U.S. currency units is subject to exchange risks as well as
interest rate risks. The Company believes that a hypothetical 10% increase or
decrease in either interest or exchange rates, however, would not have a
material adverse effect on the Company's financial condition.


                                       13
<PAGE>

PART II  OTHER INFORMATION

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

         None.

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

On February 15, 2000, the Company sold 102,500 shares of common stock to an
accredited investor in a private placement exempt from registration pursuant to
Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"), for gross proceeds of $2,562,480.

On February 23, 2000, the Company sold 50,000 shares of common stock to an
accredited investor in a private placement exempt from registration pursuant to
Rule 506 of Regulation D under the Securities Act, for gross proceeds of
$1,550,000.

On March 29, 2000, the Company sold an aggregate of 150,000 shares of common
stock and warrants to purchase 75,000 shares of common stock (the "Warrants") to
two accredited investors in a private placement exempt from registration
pursuant to Rule 506 of Regulation D under the Securities Act, for gross
proceeds of $4,856,250. The Warrants have an exercise price of $32.375 per share
and are exercisable during the period commencing on April 6, 2001 and ending on
April, 5, 2003.


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 three
               months ended March 31, 2000.


                                       14
<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:  May 15, 2000

                                       15