<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 September 30, 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--
                   10,325,257 shares as of October 31, 2000
<PAGE>

PART I   FINANCIAL INFORMATION

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

                             ARTIFICIAL LIFE, INC.
               CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>
                                                                December 31,   September 30,
                                                                    1999            2000
                                                                ------------   -------------
<S>                                                             <C>            <C>
                  ASSETS

Current assets:
    Cash and cash equivalents                                    $ 2,592,388    $  1,336,992
    Accounts receivable, trade                                     1,094,430       3,881,662
    Accounts receivable, affiliate                                   346,172              --
    Due from officer/stockholder                                      51,708         165,543
    Prepaid expenses and other current assets                        547,942         835,174
                                                                 -----------    ------------
            Total current assets                                   4,632,640       6,219,371
                                                                 -----------    ------------

Property and equipment:
    Computer equipment                                             1,743,792       3,044,100
    Furniture and fixtures                                           499,211         753,094
    Leasehold improvements                                            95,381         425,627
    Office equipment                                                 166,087         329,672
                                                                 -----------    ------------
                                                                   2,504,471       4,552,493
    Less accumulated depreciation and amortization                   638,749       1,306,287
                                                                 -----------    ------------
                                                                   1,865,722       3,246,206
                                                                 -----------    ------------
Other assets:
    Costs in excess of fair value of net assets acquired, net
     of accumulated amortization of $5,306 and $28,067                99,520          75,294
    Capitalized software development costs, net
     of accumulated amortization of $246,737 and $714,315          1,119,356         734,813
    Investments in unconsolidated subsidiary                         186,186         351,439
    Deposits and other assets                                         84,887       1,081,354
                                                                 -----------    ------------
                                                                   1,489,949       2,242,900
                                                                 -----------    ------------
                                                                 $ 7,988,311    $ 11,708,477
                                                                 ===========    ============

           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                             $   980,979    $  1,985,545
    Note payable - officer/stockholder                               500,000              --
    Unearned maintenance revenue                                          --          86,937
    Accrued expenses and other current liabilities                   586,283         753,119
                                                                 -----------    ------------
            Total current liabilities                              2,067,262       2,825,601
                                                                 -----------    ------------


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 10,325,257 shares issued
      and outstanding in 1999 and 2000, respectively                  98,634         103,253
    Additional paid-in capital                                    15,563,784      25,389,974
    Notes receivable from stockholders                              (749,981)       (353,105)
    Accumulated deficit                                           (8,905,480)    (15,960,677)
    Accumulated other comprehensive loss                             (85,908)       (296,569)
                                                                 -----------    ------------
            Total stockholders' equity                             5,921,049       8,882,876
                                                                 -----------    ------------
                                                                 $ 7,988,311    $ 11,708,477
                                                                 ===========    ============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                       2
<PAGE>

                             ARTIFICIAL LIFE, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF LOSS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                Three-month Period Ended      Nine-month Period Ended
                                                      September 30,                 September 30,
                                                -------------------------     -----------------------
                                                   1999           2000           1999           2000
                                                -----------   -----------     -----------   -----------
<S>                                             <C>           <C>             <C>           <C>
Revenues:
    Software license agreements                 $   955,946   $ 1,945,556     $ 1,307,689   $ 3,831,443
    Application services                            255,542     2,704,792       1,228,350     5,162,223
                                                -----------   -----------     -----------   -----------
                                                  1,211,488     4,650,348       2,536,039     8,993,666
                                                -----------   -----------     -----------   -----------
Operating expenses:
    General and administrative                    1,136,399     2,336,979       2,822,293     5,753,543
    Engineering and cost of sales                   772,659     2,292,016       1,714,334     6,300,190
    Research and development                        205,170       390,172         491,694       902,725
    Sales and marketing                             481,632       679,970         841,868     2,406,153
                                                -----------   -----------     -----------   -----------
                  Total operating expenses        2,595,860     5,699,137       5,870,189    15,362,611
                                                -----------   -----------     -----------   -----------

                  Loss from operations           (1,384,372)   (1,048,789)     (3,334,150)   (6,368,945)

Other income (expenses):
    Foreign exchange gain (loss)                      2,201        15,415         (42,519)      (26,121)
    Equity in loss of joint venture                (111,169)     (188,499)       (142,189)     (754,068)
    Write-down of equity investment                      --            --         (45,965)           --
    Interest income                                  99,380        33,068         279,936       125,904
    Interest expense                                (13,873)         (816)        (39,384)      (31,967)
                                                -----------   -----------     -----------   -----------
Loss before provision for
    income tax                                   (1,407,833)   (1,189,621)     (3,324,271)   (7,055,197)

Provision for income tax                              9,896           ---           9,896            --
                                                -----------   -----------     -----------   -----------
Net loss                                        $(1,417,729)  $(1,189,621)    $(3,334,167)  $(7,055,197)
                                                ===========   ===========     ===========   ===========

Basic and diluted net loss per share            $     (0.14)  $     (0.12)    $     (0.35)  $     (0.69)

Weighted average shares outstanding
    used in per share calculation                 9,808,605    10,293,071       9,514,221    10,186,237

</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                       3
<PAGE>

                             ARTIFICIAL LIFE, INC.

           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                                                      --             --         538,031           5,380

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

Comprehensive income:
 Net loss                                           $  (3,334,167)            --             --              --              --

 Foreign currency translation
  adjustment                                             (103,655)            --             --              --              --
                                                    -------------

          Total comprehensive loss                  $  (3,437,822)
                                                    =============   ------------   ------------   -------------   -------------
Balance at September 30, 1999                                                 --   $         --       9,808,605   $      98,086
                                                                    ============   ============   =============   =============

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

Issuance of common stock                                                      --             --         461,842           4,619

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

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

Comprehensive income:
 Net loss                                           $  (7,055,197)            --             --              --              --

 Foreign currency translation
  adjustment                                             (210,661)            --             --              --              --
                                                    -------------

          Total comprehensive loss                  $  (7,265,858)
                                                    =============   ------------   ------------   -------------   -------------
Balance at September 30, 2000                                                 --   $         --      10,325,257   $     103,253
                                                                    ============   ============   =============   =============

                                                                                                  Accumulated
                                                    Additional                                       Other          Total
                                                      Paid-in          Notes       Accumulated    Comprehensive   Stockholders'
                                                      Capital       Receivable       Deficit          Loss            Equity
                                                    -------------   ------------   ------------   -------------   -------------

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 net of
 increases for accrued interest                                --         26,907             --              --          26,907

Comprehensive income:
 Net loss                                                      --             --     (3,334,167)             --      (3,334,167)

 Foreign currency translation
  adjustment                                                   --             --             --        (103,655)       (103,655)

          Total comprehensive loss
                                                    -------------   ------------   ------------   -------------   -------------
Balance at September 30, 1999                       $  15,539,333    $  (727,515)  $ (5,481,433)  $   (130,204)   $   9,298,267
                                                    =============   ============   ============   ============    =============
Balance at December 31, 1999                        $  15,563,784    $  (749,981)  $ (8,905,480)  $    (85,908)   $   5,921,049

Issuance of common stock                                9,711,905       (337,500)            --             --        9,379,024

Repayment of notes receivable
 from stockholders net of
 increases for accrued interest                                --        734,376             --             --          734,376

Stock options issued for services
 rendered                                                 114,285             --             --             --          114,285

Comprehensive income:
  Net loss                                                     --             --     (7,055,197)            --       (7,055,197)

  Foreign currency translation
   adjustment                                                  --             --             --       (210,661)        (210,661)

    Total comprehensive loss
                                                    -------------   ------------   ------------   ------------    -------------
Balance at June 30, 2000                            $  25,389,974    $  (353,105)  $(15,960,677)  $   (296,569)   $   8,882,876
                                                    =============   ============   ============   ============    =============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements

                                       4
<PAGE>

                             ARTIFICIAL LIFE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                     Nine month period ended September 30,
                                                                    ---------------------------------------
                                                                             1999                 2000
                                                                          -----------          -----------
<S>                                                                 <C>                 <C>
Cash flows from operating activities:
 Net loss                                                                 $(3,334,167)         $(7,055,197)
 Adjustments to reconcile net loss to net cash
  used by operating activities:
   Depreciation and amortization                                              372,794            1,213,765
   Write-down of equity investment                                             45,965                   --
   Equity in loss of joint venture                                            142,189              754,068
   Intercompany profit elimination                                            314,281               (9,421)
   Interest income accrued on notes receivable from stockholders              (40,500)             (15,889)
   Stock options issued for services rendered                                       -              114,285
   Decrease (increase) in due to/from affiliates                               40,000              331,832
   Increase in accounts receivable, trade                                  (1,201,692)          (3,864,543)
   Increase in prepaid expenses and other current assets                     (150,880)            (301,216)
   Decrease (increase) in other assets                                        (51,007)              (2,093)
   Increase in accounts payable and other current liabilities                 282,240            1,364,737
   (Increase) decrease in due to/from officer/stockholder                      80,730             (118,301)
                                                                          -----------          -----------
    Net cash used by operating activities                                  (3,500,047)          (7,587,973)
                                                                          -----------          -----------
Cash flows from investing activities:
   Purchases of property and equipment                                     (1,398,239)          (2,253,449)
   Expenditures for capitalized software development costs                 (1,007,618)            (100,783)
   Net assets acquired in business acquisition                                 21,119                    -
   Investment in joint venture                                             (1,022,269)            (909,900)
                                                                          -----------          -----------
    Net cash used by investing activities                                  (3,407,007)          (3,264,132)
                                                                          -----------          -----------
Cash flows from financing activities:
   Proceeds from notes receivable from stockholders                            67,407              718,487
   Repayment of note payable to officer/stockholder                                --             (500,000)
   Proceeds from issuance of common stock                                     940,096            9,410,802
                                                                          -----------          -----------
    Net cash provided by financing activities                               1,007,503            9,629,289
                                                                          -----------          -----------
Effect of exchange rate changes on cash                                       (83,019)             (32,580)
                                                                          -----------          -----------
Net (decrease) in cash and cash equivalents                                (5,982,570)          (1,255,396)

Cash and cash equivalents at beginning of period                           11,687,829            2,592,388
                                                                          -----------          -----------
Cash and cash equivalents at end of period                                $ 5,705,259          $ 1,336,992
                                                                          ===========          ===========
Supplemental disclosure of cash flow information:
 Interest paid                                                            $    39,384          $    31,967
 Note receivable received upon exercise of stock options                      674,999              337,500

</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                       5
<PAGE>

                             ARTIFICIAL LIFE, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

                THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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.
     Accordingly, they do not include all information and footnotes required by
     generally accepted accounting principles for complete financial statement
     presentation. The consolidated financial statements include the accounts of
     Artificial Life, Inc. and its wholly-owned subsidiaries; Artificial Life
     Schweiz AG ("ALife Schweiz")(formerly Artificial Life Europe AG),
     Artificial Life Deutschland AG, Artificial Life Ventures, Inc., Artificial
     Life USA, Inc. (formed January 26, 2000), Artificial Life Mobile Computing,
     Inc.(formed April 14, 2000), Artificial Life Hong Kong, Ltd.(formed in
     August 2000 and inactive at September 30, 2000) and the wholly-owned
     subsidiaries of ALife Schweiz; Artificial Life Solutions AG, Artificial
     Life Rus Ltd., and IT Partners AG. In the third quarter of this year,
     Artificial Life Solutions AG and IT Partners AG were merged into Artificial
     Life Schweiz AG. Significant intercompany balances and transactions have
     been eliminated in consolidation.

     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 and nine month periods ended
     September 30, 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
     anti-dilutive.

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 net
     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% per annum.

     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 and were received in cash.

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

                                       6
<PAGE>

                             ARTIFICIAL LIFE, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
                                 - CONTINUED -


     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.

     In April 2000, options for 57,884 shares of common stock were exercised
     using a net exercise feature resulting in the issuance of 47,760 shares of
     common stock.

     In April 2000, the Company issued 105 shares of common stock in connection
     with the exercise of outstanding stock options. The total proceeds amounted
     to $1,524 and were received in cash.

     In September 2000, options for 15,000 shares of common stock were exercised
     using a net exercise feature resulting in the issuance of 8,977 shares of
     common stock.

     In September 2000, the Company issued 25,000 shares of common stock in
     connection with the exercise of outstanding stock options. The total
     proceeds amounted to $162,500, in the form of a note receivable due in
     September 2001 with interest at 10% per annum.


4.   RELATED PARTIES

     During the quarter ended September 30, 2000, the Chief Executive Officer of
     Artificial Life Europe AG and a director/stockholder of the Company,
     resigned his position as Chief Executive Officer and received a severance
     payment of 300,000 Swiss Francs (approximately US $180,000). This
     individual's term on the Board of Directors expired on October 31, 2000 and
     he did not stand for re-election.


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 September 30, 2000, the Company had operations located outside the
     United States in Switzerland, Germany and Russia.

                                       7
<PAGE>

                             ARTIFICIAL LIFE, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
                                 - CONTINUED -


     Other financial data for the nine months ended September 30, 2000 is as
     follows:

<TABLE>
<CAPTION>
                              United States      Europe     Eliminations      Total
                              --------------  ------------  -------------  ------------
<S>                           <C>             <C>           <C>            <C>
     Revenue from external
          customers             $ 5,414,896   $ 3,578,770   $         --   $ 8,993,666
     Intersegment revenue         1,091,178     2,855,207     (3,946,385)           --
     Loss from operations        (3,812,559)   (3,221,144)       (21,494)   (7,055,197)
     Identifiable assets         14,649,948     4,402,223     (7,343,694)   11,708,477
 </TABLE>

6.   OTHER

     On September 27, 2000, the Company entered into an agreement for the sale
     of nonexclusive licenses for the unlimited use of Alife-WebGuide Wealth
     Manager & BotMail software in Asia and South America to a newly-formed
     web-based company which will market a suite of insurance products in
     these regions. These licenses were delivered and accepted in September
     2000.  The total sales price for these licenses of $1,925,000 is included
     in third quarter revenue. Of this amount, $925,000 is payable in cash,
     included in accounts receivable at September 30, 2000, and the remainder in
     stock of the purchaser with a fair value of $1,000,000, which is to be
     received subsequent to September 30, 2000 and is included in other
     assets at September 30, 2000.

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 September 30, 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. In 1999, the Company realized
its first significant software license revenues. This trend continued in the
first three quarters 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 through the remainder 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 transition in its primary business
focus from software consulting to product development, marketing and support,
the Company's research and development expenditures (excluding amounts included
in capitalized software development costs) increased, from zero in 1997 to
$446,317 in the year 1998, $666,046 in the year 1999 and $902,725 for the nine
months ended September 30, 2000. 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, beginning in 1998, due to the
Company's shift in business focus, the Company increased the number of 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 three quarters of 2000. This is
consistent with the Company's business strategy as changed to reflect its focus
on product development and license sales.

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999

REVENUES: Revenues for the quarter ended September 30, 2000 were $4,650,348 as
Compared to $1,211,488 for the quarter ended September 30, 1999. The increase of
$3,438,860 or 283.85% was due to additional license and related application
services revenue generated due to the expansion of the Company's client base.

ENGINEERING AND COST OF SALES: These costs generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering (design specifications) of the
products and services from which the Company derives its revenues. Engineering
expenses for the quarter ended September 30, 2000 were $2,292,016 as compared to
$772,659 for the quarter ended September 30, 1999. The increase of $1,519,357 or
196.64% is primarily attributable to support activities related to the Company's
new product installations and expenses related to the continued expansion of the
company infrastructure needed for future growth. Major components of the
increase include payroll and related costs of $720,000,recruiting and other
professional fees of $260,000, the amortization of previously capitalized
software development costs of $180,000 and rent of $100,000.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses are similar
in nature to engineering expenses except that they relate to products in their
initial stage. Research and development expenses for the quarter ended September
30, 2000 were $390,172 as compared to $205,170 for the quarter ended September
30, 1999. The increase of $185,002 or 90.17% is primarily attributable to the
following: payroll and related costs of $80,000 associated with increased
product development activities, recruiting and other professional fee's of
$33,000, and travel related expenses of $57,000. 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 September 30, 2000 were $2,336,979 as compared to $1,136,399 for the
quarter ended September 30, 1999. The increase of $1,200,580 or 105.65% is
primarily attributable to the establishment of our international administrative
infrastructure that occurred in the year 2000. Significant increases include
payroll and related costs of approximately $530,000, recruiting and other
professional fees of $160,000, travel and entertainment expense of $90,000,
communications expense of $50,000, rent expense of $100,000, depreciation
expense of $60,000, legal and accounting fees of $150,000 and other office
expenses of approximately $50,000.

SALES AND MARKETING EXPENSES: Sales and marketing expenses consist of salary and
payroll tax expenses of marketing personnel and costs relating to marketing
materials, trade shows, promotional videos, advertising and public relations
activities. Marketing expenses for the quarter ended September 30, 2000 were
$679,970 as compared to $481,632 for the quarter ended September 30, 1999. The
increase of $198,338 or 41.18% is primarily attributable to the addition of new
sales personnel to promote the Company's products worldwide. Significant
increases include payroll and related costs of $110,000, and recruiting fees of
$50,000.

NET LOSS: Net loss for the quarter ended September 30, 2000 was $1,189,621
compared to a net loss of $1,417,729 for the quarter ended September 30, 1999.
This decrease of $228,108 or 16.09% is primarily due to revenue increases
greater than the costs associated with building the Company's infrastructure
in new markets.

                                      10
<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999

REVENUES: Revenues for the nine months ended September 30, 2000 were $8,993,666
as compared to $2,536,039 for the nine months ended September 30, 1999. The
increase of $6,457,627 or 254.63% was due to the continued expansion of the
company's client base for both license and service related revenues.

ENGINEERING AND COST OF SALES: These costs generally consist of salary and
payroll tax expenses, training, consulting, subcontracting and other expenses
incurred to develop and fulfill the engineering (design specifications) of the
products and services from which the Company derives its revenues. Engineering
expenses for the nine months ended September 30, 2000 were $6,300,190 as
compared to $1,714,334 for the nine months ended September 30, 1999. The
increase of $4,585,856 or 267.50% is primarily attributable to support
activities related to the Company's new product installations and related
consulting expenses. Major components of the increase include payroll and
related costs of $2,045,000, travel and lodging expenses of $320,000, the
amortization of previously capitalized software development costs of
$450,000, depreciation of $270,000, recruiting fees of $350,000 and consulting
fees of $180,000.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses are similar
in nature to engineering expenses except that they relate to products in there
initial stage. Research and development expenses for the nine months ended
September 30, 2000 were $902,725 as compared to $491,694 for the nine months
ended September 30,1999. The increase of $411,031 or 83.59% is primarily
attributable to an increase of payroll and related costs of $330,000,and
professional affiliations of $80,000. These additional costs were incurred
mainly due to the increased products development activities which occurred in
the year 2000. 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 nine
months ended September 30, 2000 were $5,753,543 as compared to $2,822,293 for
the nine months ended September 30, 1999. The increase of $2,931,250 or 103.87%
is primarily attributable to the establishment of our international
administrative infrastructure. Significant increases include payroll and related
costs of approximately $1,350,000, recruiting and other professional fees of
$300,000, travel and entertainment expense of $300,000, communications expense
of $125,000, rent expense of $165,000, depreciation expense of $130,000,
accounting and legal fees of $400,000 and other office expenses of approximately
$150,000.

SALES AND MARKETING EXPENSES: Sales and marketing expenses consist of salary and
payroll tax expenses of marketing personnel and costs relating to marketing
materials, trade shows, promotional videos, advertising and public relations
activities. Marketing expenses for the nine months ended September 30, 2000 were
$2,406,153 as compared to $841,868 for the nine months ended September 30, 1999.
The increase of $1,564,285 or 185.81% 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 $600,000,
trade shows expense of $350,000, advertising expense of $320,000, travel and
entertainment expense of $140,000 and recruiting and other professional fees of
$100,000.

NET LOSS: Net loss for the nine months ended September 30, 2000 was $7,055,197
compared to a net loss of $3,334,167 for the nine months ended
September 30, 1999. This increase of $3,721,030 or 111.60% is primarily due to
the costs associated with our international expansion including the Company's
increase in equity in loss of joint venture of $754,068 and increased marketing
activities to support the Company's release of new products in the year 2000.

                                      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 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 of 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 shares of Common Stock. In March 2000 the Company netted
proceeds of $4,856,250 from the private placement of another 150,000 shares of
Common Stock. 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 additional 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 and a half years through
April 9, 2001 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 President, Chief Executive
Officer and Chairman of the Company. 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. 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 (3,000,000 Swiss Francs) 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 September 30, 2000


                                      12
<PAGE>

the Company had invested $1,932,169 in this joint venture, fulfilling all
commitments.

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 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. At the present time,
revenues have increased to the point where the Company believes it can attain
cash positive operation sometime during fiscal 2001. To that end, the Company is
currently reviewing a variety of alternatives regarding the funding of any cash
shortfall that may arise in the interim period before attaining cash positive
operations. Among the alternatives presently being investigated are the
additional private placement of common shares, bridge loans and convertible debt
instruments. 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.

                                      13
<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 49% of these deposits are denominated in
U.S. dollars. Approximately 25% of these deposits are denominated in Swiss
francs, 13% of these deposits are denominated in Euros and 13% of these deposits
are denominated in Russian Rubles. 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.

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 HOLDERS
         ---------------------------------------------------
         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 September 30, 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)

                                 By:  /s/ Robert E. Pantano
                                      -----------------------
                                      Robert E. Pantano
                                       Chief Financial Officer
                                      (Principal Financial Officer)