<PAGE>   1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
 
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                            ------------------------
 
                             ARTIFICIAL LIFE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                      <C>                                      <C>
                DELAWARE                                   7372                                  04-3253298
    (STATE OR OTHER JURISDICTION OF            (PRIMARY STANDARD INDUSTRIAL                   (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)            CLASSIFICATION CODE NUMBER)                 IDENTIFICATION NUMBER)
</TABLE>
 
                          FOUR COPLEY PLACE, SUITE 102
                          BOSTON, MASSACHUSETTS 02116
                                 (617) 266-5542
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
                              EBERHARD SCHONEBURG
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             ARTIFICIAL LIFE, INC.
                          FOUR COPLEY PLACE, SUITE 102
                          BOSTON, MASSACHUSETTS 02116
                                 (617) 266-5542
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                            ------------------------
 
                                   COPIES TO:
 
<TABLE>
<S>                                                          <C>
                    ROBERT DUGGAN, ESQ.                                          PAUL BERKOWITZ, ESQ.
                  PETER S. LAWRENCE, ESQ.                                       LISA CARSTARPHEN, ESQ.
    MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.                        GREENBERG TRAURIG, P.A.
                    ONE FINANCIAL CENTER                                         1221 BRICKELL AVENUE
                BOSTON, MASSACHUSETTS 02111                                      MIAMI, FLORIDA 33131
                       (617) 542-6000                                               (305) 579-0500
</TABLE>
 
                            ------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
 
    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [X]
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.  [ ]
                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
                                                                          PROPOSED MAXIMUM       PROPOSED MAXIMUM
                                                      AMOUNT TO BE       OFFERING PRICE PER     AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED     REGISTERED             SHARE(2)               PRICE(2)
--------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                 <C>                    <C>
Common Stock, $.01 par value per share...             1,840,000(1)             $7.00               $12,880,000
--------------------------------------------------------------------------------------------------------------------
Warrant to be issued to the Representatives of the
  Underwriters upon consummation of the
  Offering................                                  1                    --                    $100
--------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share(3)...             184,000               $8.40                $1,545,600
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
 
<CAPTION>
--------------------------------------------------  -------------------
--------------------------------------------------  -------------------
 
                                                         AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED   REGISTRATION FEE
--------------------------------------------------  -------------------
<S>                                                 <C>
Common Stock, $.01 par value per share...                $3,799.60
-------------------------------------------------------------------------------------------
Warrant to be issued to the Representatives of the
  Underwriters upon consummation of the
  Offering................                                 $.03
---------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share(3)...              $455.95
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Includes 240,000 shares that the Underwriters may purchase to cover
    over-allotments, if any.
 
(2) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457 under the Securities Act of 1933.
 
(3) Represents total number of shares of Common Stock issuable upon exercise of
    the Warrant to be issued to the Representatives of the Underwriters.
                            ------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
                SUBJECT TO COMPLETION, DATED             , 1998
 
PROSPECTUS
 
                                1,600,000 SHARES
 
                             [ARTIFICIAL LIFE LOGO]
 
                             ARTIFICIAL LIFE, INC.
                                  COMMON STOCK
 
     Of the 1,600,000 shares of Common Stock offered hereby, 1,200,000 shares
are being sold by Artificial Life, Inc. ("Artificial Life" or the "Company") and
400,000 shares are being sold by the Selling Stockholder. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholder.
 
     Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $6.00 and $7.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
 
     The Company has applied for listing of the Common Stock on the Nasdaq
SmallCap Market under the symbol "ALIF."
                            ------------------------
 
     THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
                            ------------------------
 
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
 COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
                                                                  UNDERWRITING                               PROCEEDS TO
                                               PRICE TO           DISCOUNTS AND         PROCEEDS TO            SELLING
                                                PUBLIC           COMMISSIONS(1)         COMPANY(2)           STOCKHOLDER
----------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                  <C>                  <C>                  <C>
Per Share...............................           $                    $                    $                    $
----------------------------------------------------------------------------------------------------------------------------
Total(3)................................           $                    $                    $                    $
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Does not include additional compensation to New York Broker, Inc. and New
    York Broker Deutschland AG (the "Representatives") of (a) a non-accountable
    expense allowance equal to 3% of the gross proceeds of the Offering and (b)
    warrants entitling the Representatives to purchase up to 160,000 shares of
    Common Stock (the "Representatives' Warrants") for a period of four years
    commencing one year from the date of this Prospectus at 120% of the initial
    public offering price. In addition, the Company and the Selling Stockholder
    have agreed to indemnify the Underwriter against certain liabilities,
    including liabilities under the Securities Act of 1933, as amended. See
    "Underwriting."
 
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
 
(3) The Company has granted to the Underwriters a 30-day option to purchase up
    to 240,000 additional shares of Common Stock solely to cover
    over-allotments, if any. To the extent the option is exercised, the
    Underwriters will offer the shares at the Price to Public shown above. If
    all such shares are purchased, the total Price to Public, Underwriting
    Discount, and Proceeds to Company will be $            , $            and
    $            , respectively. See "Underwriting."
                            ------------------------
 
     The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about             , 1998, at the office of New York Broker,
Inc. in Fairfax, Virginia.
 
NEW YORK BROKER, INC.                             NEW YORK BROKER DEUTSCHLAND AG
                                                         (International Manager)
 
               The date of this Prospectus is             , 1998
<PAGE>   3
 
GRAPHIC DESCRIPTION:
 
 [Graphical representation of Artificial Life, Inc.'s products, applications and
user interfaces. Graph shows in a circular manner the core software technology
in the center with the software robot products (SmartBots) emanating from the
center. On the outer edge of the circle are the primary applications of the
Company's software robot products. Outside of the circle are pictures of the
Avatars, the life-like three-dimensional graphical interfaces through which most
of the SmartBots communicate with the user.]
 
 Artificial Life, Inc. is developing software robots. The Company designs
intelligent software robots for commercial use on the Internet. These robots are
each based on the Company's Alife-SmartEngine technology.
 
 The Alife-SmartEngine provides the bots with language understanding
capabilities. The Alife family of intelligent bots currently developed consists
of seven basic software robots.
 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
 
     The Company claims a trademark on Artificial Life(TM) ALife(TM),
ALife-WebGuide(TM), ALife-SalesRep(TM), ALife-Messenger(TM),
ALife-Portfolio-Manager(TM), ALife-Call-Center-Agent(TM),
ALife-Knowledge-Manager(TM), ALife-Personal-Tutor(TM), ALife-SmartEngine(TM),
SmartEngine(TM), SmartBot(TM), and the Company's logo. All other trade names,
trademarks or servicemarks appearing in this prospectus are the property of
their respective owners and are not the property of the Company.
                                        2
<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise noted herein, all information in this Prospectus (i) reflects the
adoption of the Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), to be effected upon consummation of the
Offering, removing the Company's existing class of Non-Voting Common Stock,
increasing the authorized Common Stock to 30,000,000 shares and creating and
authorizing 5,000,000 shares of undesignated Preferred Stock, (ii) reflects the
amendment of the Company's Bylaws effective upon consummation of the Offering,
(iii) reflects a 1-for-2.44 reverse stock split of the Common Stock of the
Company effected on September 22, 1998, and (iv) assumes no exercise of the
Underwriters' over-allotment option.
 
                                  THE COMPANY
 
     Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing applications in data mining, Web-page
analysis, statistical analysis and direct marketing to support the functionality
of the SmartBot products. While each Artificial Life SmartBot can function
independently and is programmed for a particular application, customers can
combine the SmartBots to create what the Company believes is the industry's
first integrated commercial, robot-based electronic commerce ("e-commerce")
solution.
 
     The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
 
     The Company's SmartBot products are designed to communicate in natural
language and to respond "intelligently" to a user's command or inquiry, and in
some cases, to act autonomously. All of the Company's SmartBot products are
based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine is
the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The Company
believes that its products will allow people to interact with computers in a
more natural way -- similar to a conversation with a human being.
 
     The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
                                        3
<PAGE>   5
 
     The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the commercial versions of the
Alife-WebGuide in the fourth quarter of 1998. The Company is presently
developing the initial versions of seven SmartBot products listed below:
 
     - ALIFE-WEBGUIDE:  This SmartBot is designed to reside on a Web site and
       help users navigate the site by accepting and processing questions, such
       as search queries, from users in natural language, and responding to
       users in natural language. The bot engages the user in a "conversation"
       through questions and answers and, upon learning of the user's interests,
       is designed to display Web pages that match the content of the
       "conversation" or to suggest links to other locations on the Web site.
 
     - ALIFE-SALESREP:  The Alife-SalesRep is being designed for e-commerce
       retailers to use for one-to-one marketing on the Internet. Retailers will
       input user profile information and product information into this
       SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
       information via the Internet.
 
     - ALIFE-MESSENGER:  The Alife-Messenger is being designed to act as a
       natural language-based automated e-mail reply and answering service. By
       customizing the Alife-Messenger, a company can automate replies to
       incoming e-mail queries and customer requests, thereby reducing the need
       for human intermediaries.
 
     - ALIFE-PORTFOLIO-MANAGER:  This SmartBot is being developed to monitor, in
       real-time, an individual's investment portfolio using criteria
       established by the individual and, when such criteria have been met, or
       failed to have been met, to autonomously in real-time contact the
       individual by telephone, pager, e-mail or some other mode of
       communication and let the individual know that trading action might be
       warranted.
 
     - ALIFE-CALL-CENTER-AGENT:  The Alife-Call-Center-Agent is being designed
       for call centers and help desks to be integrated with existing call
       center server software to provide an automated first response to incoming
       voice telephone calls or e-mail requests and to handle call center
       requirements with virtually no aid from human operators.
 
     - ALIFE-KNOWLEDGE-MANAGER:  This SmartBot is being designed to extract
       information contained in a company's Intranet documents, organize it and
       make it more easily accessible for retrieval in order to enable companies
       to more efficiently and intelligently manage the large amount of data and
       documents that companies are making available on their Intranets.
 
     - ALIFE-PERSONAL-TUTOR:  The Alife-Personal-Tutor is a tutoring program
       being designed to extract profile information from natural language
       conversation between the bot and the student user and to automatically
       adapt the difficulty and content of the lessons to the skill level of the
       student based on this information.
 
     The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee and, with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and Macintosh computers in the
 
                                        4
<PAGE>   6
 
future. The Company intends to release the commercial versions of the
Alife-WebGuide in the fourth quarter of 1998 and a number of its other SmartBot
products in 1999. See "Business -- Products."
 
     The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("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. from Neurotec GmbH. In August 1997,
the Company's name was changed to Artificial Life, Inc. The Company's principal
executive offices are located at Four Copley Place, Suite 102, Boston,
Massachusetts, 02116 and its telephone number is (617) 266-5542. The Company's
World Wide Web address is http://www.artificial-life.com. Information contained
on the Company's Web site shall not be deemed to be a part of this Prospectus.
 
                                  RISK FACTORS
 
     Through July 1997, the date on which Eberhard Schoneburg, the Company's
President, Chief Executive Officer and Chairman, purchased the Company from its
former German parent, the Company had engaged primarily in the provision of
software consulting services to such parent. Thereafter, the Company changed its
primary business focus from software consulting to the development, marketing
and sale of its Alife suite of SmartBot software products. Accordingly, the
Company is at an early stage of development in its new business strategy and is
therefore subject to a number of the risks inherent in establishing a new
business. Moreover, the market for "intelligent" agent-based software products
for Internet-related use is new and emerging, is rapidly evolving, has an
increasing number of entrants and will be subject to frequent and continuing
changes in technology and customer preference. To date, the Company has not sold
any of its SmartBot software products. For these reasons, the Company has no
basis to predict whether its products will perform as intended or whether
customers will accept and adopt its products in commercially significant
numbers. The Company may never sell sufficient numbers of its products to
achieve or maintain profitability. Therefore, an investment in the Company's
stock is highly speculative and subject to risk of loss. See "Risk Factors"
beginning on page 7.
 
                                        5
<PAGE>   7
 
                                  THE OFFERING
 
Common Stock offered by the Company...     1,200,000 shares
 
Common Stock offered by the Selling
  Stockholder.........................     400,000 shares
 
Common Stock to be outstanding after
the Offering..........................     9,070,574 shares(1)
 
Use of proceeds.......................     The Company intends to use the net
                                           proceeds of the Offering to fund
                                           research and product development, to
                                           expand its sales and marketing
                                           capabilities, to establish strategic
                                           alliances, to expand its employee
                                           base and infrastructure and for
                                           general corporate and working capital
                                           purposes.
 
Proposed Nasdaq SmallCap Market
symbol................................     ALIF
---------------
(1) Excludes 590,569 shares of Common Stock reserved for issuance upon the
    exercise of stock options outstanding as of September 29, 1998 at a weighted
    average exercise price of $3.73 per share and 160,000 shares of Common Stock
    reserved for issuance upon the exercise of warrants to be sold to the
    Representatives upon the consummation of the Offering at an exercise price
    per share equal to 120% of the initial public offering price (the
    "Representatives' Warrant").
 
                             SUMMARY FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                              YEARS ENDED            SIX MONTHS ENDED
                                                              DECEMBER 31,               JUNE 30,
                                                       --------------------------    ----------------
                                                        1995      1996      1997      1997      1998
                                                       ------    ------    ------    ------    ------
<S>                                                    <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Revenue............................................  $1,217    $2,790    $1,770    $1,031    $  449
  Income (loss) from operations......................    (618)      895        41        23      (579)
  Net Income (loss)..................................    (396)      543        21        16      (495)
  Net income (loss) per share(1).....................  $ (.07)   $  .08    $  .00    $  .00    $ (.07)
  Shares used in computing net income (loss) per
    share(1).........................................   5,574     6,967     6,967     6,967     6,970
</TABLE>
 
<TABLE>
<CAPTION>
                                                                  AS OF JUNE 30, 1998
                                                              ---------------------------
                                                                            PRO FORMA
                                                              ACTUAL     AS ADJUSTED(2)
                                                              ------    -----------------
<S>                                                           <C>       <C>
BALANCE SHEET DATA:
  Cash......................................................  $  552         $10,659
  Working capital...........................................     409          10,516
  Total assets..............................................   1,270          11,377
  Total stockholders' equity................................  $  333         $10,440
</TABLE>
 
---------------
(1) Net income (loss) per share is determined by dividing the net income (loss)
    attributable to common stockholders by the weighted average number of Common
    Stock and Common Stock equivalents outstanding during the period. See Note 2
    of Notes to Financial Statements.
 
(2) As adjusted to give effect to the sale of 1,200,000 shares of Common Stock
    offered by the Company, after deducting the underwriting discount and the
    offering expenses, at an assumed initial public price of $6.50 per share and
    the application of the estimated net proceeds therefrom as set forth in "Use
    of Proceeds." Also gives pro forma effect to the issuance by the Company of
    26,083 shares of Common Stock upon the exercise of stock options on July 31,
    1998 at $3.66 per share and the sale and issuance by the Company of 824,000
    shares of Common Stock on September 23, 1998 at $5.00 per share and the
    receipt of $4,035,632 of net proceeds therefrom.
 
                                        6
<PAGE>   8
 
                                  RISK FACTORS
 
     An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby. Certain statements
in this Prospectus, including statements regarding the intent, belief or current
expectations of the Company or its management with respect to, among other
things, (i) the Company's goals and operating strategies, (ii) the anticipated
release of the Company's products and (iii) the Company's plans to distribute
and market its products, as well as other statements contained herein regarding
matters that are not historical facts, constitute "forward-looking statements."
Such forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance and achievement of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the following risk
factors.
 
     RECENT CHANGE IN STRATEGY.  The Company has recently changed its primary
business focus from software consulting to the development, marketing and sale
of its Alife product suite of "intelligent" software robots (also known as
software agents). Accordingly, the Company is at an early stage of development
in its new business strategy and is subject to certain of the risks inherent in
the establishment of a new business enterprise. To address these risks, the
Company must, among other things, complete development of its software robot
products, enter into strategic partnerships, marketing and distribution
arrangements, respond to competitive developments, and attract, retain and
motivate qualified personnel. In addition, because the Company has adopted this
new business strategy, results of operations to date are not reflective of the
Company's future results of operations. The Company's decision to become a
provider of software robot products is predicated on the assumption that the
demand for such products will be large enough to permit the Company to operate
profitably. There can be no assurance that the Company's assumption will be
correct or that the Company will be able to successfully compete as a provider
of such products. If the Company's assumption is not accurate, or if the Company
is unable to compete as a provider of agent-based software products, the
Company's business, prospects, financial condition and results of operations
will be materially adversely affected.
 
     MINIMAL REVENUES AND RECENT LOSSES; PERIOD TO PERIOD COMPARISONS; LIMITED
OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES.  Since its incorporation in
November 1994, the Company has been engaged primarily in the provision of
software consulting services and to date has generated limited revenues. Through
1997, the Company has recorded cumulative net income of $146,480 primarily
through its software consulting business. As a consequence of the Company's
recent change in business strategy, the Company expects that the substantial
majority of its future revenues will be derived from sales of its software robot
products and that revenues from its consulting business will significantly
decrease. Accordingly, past financial results do not reflect the results of the
Company's current business activities. In the six month period ended June 30,
1998, the Company incurred a net loss of $495,025. Furthermore, its limited
operating history leads the Company to believe that period-to-period comparisons
of its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. The Company
faces the risks and problems associated with pursuing a new business strategy
and has a limited operating history on which to evaluate its future prospects.
Such prospects should be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a business in a new
and emerging industry characterized by rapid technological change, a number of
potential market entrants and intense competition. The Company expects to incur
significant losses until at least the year 2000. There can be no assurance that
the Company will achieve or sustain significant revenues or become cash flow
positive or profitable in the near future or ever.
 
                                        7
<PAGE>   9
 
     DEPENDENCE ON EMERGING MARKETS; ACCEPTANCE OF THE COMPANY'S PRODUCTS.  The
Company's future financial performance will depend in large part on the growth
in demand for agent-based software products, such as the Company's suite of
SmartBot products. This market is new and emerging, is rapidly evolving, is
characterized by an increasing number of market entrants and will be subject to
frequent and continuing changes in customer preferences and technology. As is
typical in new and evolving markets, demand and market acceptance for the
Company's technologies is subject to a high level of uncertainty. Because the
market for the Company's products is evolving, it is difficult to assess or
predict with any assurance the size or growth rate, if any, of this market.
There can be no assurance that a significant market for the Company's products
will develop, or that it will develop at an acceptable rate or that new
competitors will not enter the market. In addition, even if a significant market
develops for such products, there can be no assurance that the Company's
products will be successful in such market. If a significant market fails to
develop, develops more slowly than expected or attracts new competitors, or if
the Company's products do not achieve market acceptance, the Company's business,
prospects, financial condition and results of operations will be materially
adversely affected.
 
     COMPETITION.  The market for the Company's products and services is new,
evolving and growing rapidly. Competition can be expected to intensify
significantly as the market matures and the more established software companies,
such as Microsoft Corporation, become increasingly involved. Barriers to entry
are relatively insubstantial. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Brightware, Inc.;
Broadvision, Inc.; Extempo, Inc.; Haptek, Inc.; Nearlife, Inc.; Netsage Corp.;
Neuromedia, Inc. and Virtual Personalities, Inc. This list may not be complete
and may change and substantially increase over time. The Company believes that
the principal competitive factors affecting the market for the Company's
products include core technology, delivery methods, brand recognition, ease of
use and interfaces. The relative importance of each of these factors depends
upon the specific customer involved. There can be no assurance that the Company
will be able to compete effectively with respect to any of these factors.
 
     The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing products and product
enhancements that it believes address customer requirements, there can be no
assurance that the Company will successfully complete the development or
introduction of these products and product enhancements on a timely basis or
that these products and product enhancements will achieve market acceptance.
Accordingly, there can be no assurance that the Company will be able to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See
"Business -- Competition."
 
     PRODUCT CONCENTRATION.  The Company expects to derive substantially all of
its revenues from sales of its SmartBot software robot products and associated
services. Broad market acceptance of these products is critical to the Company's
future success. As a result, failure to achieve broad market acceptance, or, if
achieved, future declines in demand of these products as a result of
competition, technological change, ease of use or otherwise would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, the Company's future financial
performance may depend in part on the successful development, introduction and
customer acceptance of future versions of the Company's software robot products,
and there can be no assurance that any such future products will achieve market
acceptance. See "Business -- Products and Services."
 
                                        8
<PAGE>   10
 
     PRODUCT DEFECTS AND PRODUCT LIABILITY.  The Company's software robot
products are complex and could from time to time contain design defects or
software errors that could be difficult to detect and correct. The Company's
products have not yet been released for commercial use. Thus, there can be no
assurance that, despite testing by the Company, errors will not be found in the
Company's products once they are commercially released which could result in
delay in or inability to achieve market acceptance and thus could have a
material adverse impact upon the Company's business, prospects, financial
condition and results of operations.
 
     Because the Company's software robot products can be used by its clients to
perform mission critical functions, design defects, software errors, misuse of
the Company's products, incorrect data from external sources or other potential
problems within or out of the Company's control that may arise from the use of
the Company's products could result in financial or other damages to the
Company's clients. The Company maintains limited product liability insurance.
The Company anticipates that its sales and licensing agreements with its clients
will typically contain provisions designed to limit the Company's exposure to
potential claims. Such provisions, however, may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, prospects, financial condition and results of operations.
 
     RAPID TECHNOLOGICAL CHANGE.  To remain competitive, the Company must
continue to enhance and improve the ease of use, responsiveness, functionality
and features of its family of SmartBot software robot products. The industry in
which the Company operates is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new products
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing
products and proprietary technology and software obsolete. The Company's success
will depend, in part, on its ability to enhance its existing products, develop
new products and technology that address the increasingly sophisticated and
varied needs of its customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
There can be no assurance that the Company will successfully use new
technologies or adapt its proprietary technology and products to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
 
     DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL.  The Company's
performance is substantially dependent on the continued services and performance
of its senior management and other key personnel, particularly Eberhard
Schoneburg, the Company's President, Chief Executive Officer and Chairman. The
Company has entered into an employment agreement with Mr. Schoneburg, as well as
with the Company's Chief Financial Officer and Chief Technology Officer. The
Company's performance also depends upon the Company's ability to retain and
motivate its other officers and key employees. The loss of the services of any
of its executive officers or other key employees could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. The Company's future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
software engineers and managerial and marketing personnel. There is currently a
shortage of qualified software engineers and programmers. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to successfully attract, integrate or retain sufficiently qualified
personnel. The failure to attract and retain the necessary personnel could have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Employees" and
"Management."
 
     DEPENDENCE ON THIRD PARTY CONTRACTORS.  The Company intends to use
consultants to complete portions of the development work on its Alife product
suite of SmartBot software products and to assist customers in the installation
of the Company's SmartBot software products. Competition
                                        9
<PAGE>   11
 
for such personnel is intense. There can be no assurance that the Company will
be successful in attracting or retaining such consultants. In addition, the
Company's ability to provide its software consulting services and introduce its
products is dependent, in part, on the ability of these independent consultants
to complete their engagements in a timely and cost-effective manner. In
particular, consulting resources will be required to install, support and
customize the Company's software products, including creating the content of the
Knowledge Bases. Therefore, the availability of such resources will directly
impact sales of such products. Some of these consultants will be employees of
other companies who will only be able to work on the Company's products on a
part-time basis. If the Company is not successful in attracting the necessary
consultants or if such consultants cannot complete the necessary tasks in a
timely and cost-effective manner, the Company's business, prospects, financial
condition and results of operations could be materially adversely effected.
 
     RISKS ASSOCIATED WITH INTERNATIONAL SALES.  A key component of the
Company's strategy is to expand its sales in foreign markets, especially in
Europe. The Company anticipates that it will expend significant financial and
management resources to develop programs of partnering and strategic investments
internationally. If the revenues generated by these marketing programs are
insufficient to offset the expense of establishing and maintaining such
programs, the Company's business, prospects, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the Company will be able to expand its sales in foreign markets.
 
     The Company's international sales are subject to certain risks not inherent
in its domestic sales, including political and economic instability in foreign
markets, 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. All of such
factors may suppress demand for the Company's services and products. The impact
of such factors on the Company's business is inherently unpredictable. There can
be no assurance that such factors will not have a material adverse effect upon
the Company's revenues from international sales and, consequently, the Company's
business, prospects, financial condition and results of operations. See
"Business -- Strategy."
 
     DEPENDENCE ON CONTINUED GROWTH OF INTERNET AND ONLINE COMMERCE.  The
Company's future revenues and any future profits are in a large part dependent
upon the willingness of consumers to accept the Internet as an effective medium
of commerce and for obtaining information. The Company is especially dependent
upon the long-term acceptance and growth of online commerce. Rapid growth in the
use of and interest in online services is a recent phenomenon, and there can be
no assurance that such acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the Internet
and other online services as a medium of commerce. Demand and market acceptance
for recently introduced services and products over the Internet are subject to a
high level of uncertainty. For the Company to be successful, consumers must
accept and utilize this novel way of conducting business and obtaining
information.
 
     The Internet may not be accepted by consumers as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that online
services continue to experience significant growth in the number of users, their
frequency of use or an increase in their bandwidth requirements, there can be no
assurance that the infrastructure of the Internet and other online services will
be able to support the demands placed upon them. In addition, Internet services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of online activity
or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support Internet services also
could result in slower response times and adversely affect usage of the Internet
and other online services generally. If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for
                                       10
<PAGE>   12
 
Internet services does not effectively support the growth that may occur, or if
the Internet does not become a viable commercial marketplace, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
 
     INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS.  The Company will be
relying upon trade secrets, know-how, copyrights and continuing technological
innovations to develop and maintain its competitive position. The Company seeks
to protect such information, in part, by confidentiality agreements with its
corporate partners, collaborators, employees and consultants. These agreements
provide that all confidential information developed or made known during the
course of the individual's or entity's relationship with the Company is to be
kept confidential and not be disclosed to third parties except in specific
circumstances. The Company has caused each of its employees to execute forms of
Confidentiality and Inventions Agreements which provide that, to the extent
permitted by applicable law, all inventions conceived by the individual during
the individual's employment are the exclusive property of the Company. There can
be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
Further, there can be no assurance that the Company will be able to protect its
trade secrets and copyrights, or that others will not independently develop
substantially equivalent proprietary information and techniques.
 
     The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. The occurrence of any such event may
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Intellectual Property and
Other Proprietary Rights."
 
     NEED FOR ADDITIONAL CAPITAL.  The Company currently believes the net
proceeds of the Offering, together with the Company's existing cash, cash
equivalents, short-term investments and other cash generated from operations,
will enable the Company to maintain its current and planned operations at least
through July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. Delays in the completion of
software development programs are common in the industry. If the Company
experiences delays in the scheduled development of its initial SmartBot software
robot products, it may require substantial additional funds until such time as
products are completed and cash generated from sales of products and services is
sufficient to fund continued growth of the business. In the event that such
additional financing is necessary, the Company may seek to raise such funds
through public or private equity or debt financing or other means. No assurance
can be given that additional financing will be available when needed, or that,
if available, such financing will be obtained on terms acceptable to the
Company. To the extent that the Company raises additional capital by issuing
equity securities, ownership dilution will result to existing stockholders. In
the event that adequate funds are not available, the Company's business,
prospects, financial condition and results of operations may be materially
adversely affected. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results and Operations -- Liquidity and
Capital Resources."
 
     RISKS ASSOCIATED WITH BRAND DEVELOPMENT.  The Company believes that
establishing and maintaining brand identity is a critical aspect of its
strategy. Furthermore, the Company believes that brand recognition will become
increasingly important as low barriers to entry encourage competition in the
software robot industry. In order to attract and retain customers and strategic
partners, and in response to competitive pressures, the Company intends to
increase substantially its financial commitment to the creation and maintenance
of brand development. The Company plans to accomplish this, although not
exclusively, through advertising campaigns in several forms of media,
                                       11
<PAGE>   13
 
including radio, television, print and trade shows, with a particular emphasis
on the Internet channels. If the Company does not generate a corresponding
increase in revenue as a result of its branding efforts or otherwise fails to
promote its brand successfully, or if the Company incurs excessive expenses in
an attempt to promote and maintain its brand, the Company's business, prospects,
financial condition and results of operations would be materially adversely
affected.
 
     RISKS OF DOING BUSINESS ABROAD.  The Company anticipates that some of the
consultants it may hire to complete portions of the development work on its
products may be located in foreign countries. In addition, the Company intends
to organize subsidiaries in foreign countries. As a result, the Company may be
subject to a number of risks, including, among other things, difficulties
relating to administering its business globally, managing foreign operations,
currency fluctuations, restrictions against the repatriation of earnings, export
requirements and restrictions, and multiple and possibly overlapping tax
structures. The realization of any of the foregoing could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
 
     On January 1, 1999, a new currency called the "euro" is scheduled to be
adopted as the common legal currency in eleven of the fifteen member countries
of the European Union. During 2002, all European Union countries are expected to
be operating with the euro as their single currency. Uncertainty exists as to
the effect the euro will have on the marketplace. Additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. The Company cannot yet predict the
anticipated impact of the euro conversion on the Company.
 
     DEPENDENCE ON THIRD PARTY LICENSES.  The Company is designing its SmartBot
software products to recognize voice input as well as text-based input. The
voice recognition capabilities of these products will depend to a large extent
on the availability of highly accurate voice recognition software packages,
which the Company intends to license from third parties rather than develop
itself. The Company believes that the success of its products will depend to a
large extent on its ability to allow users to interact in a natural
conversational manner. There can be no assurance that the Company will be
successful in identifying third party voice recognition software which will
successfully interact with its products or that the Company will be able to
license such software products on commercially reasonable terms, or at all.
Failure by the Company to successfully identify viable voice recognition
software or enter into license agreements could materially adversely affect the
Company's business, prospects, financial condition and results of operations.
 
     GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES.  The Company believes that
it is not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of domestic and foreign laws and regulations covering
issues such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services are being considered and
may be enacted. The European Community has already adopted a directive
restricting the use of personal data. The adoption of such laws or regulations
may decrease the growth in use of the Internet, which would, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business. Moreover, the applicability to online services of
existing domestic and foreign laws in various jurisdictions governing issues
such as intellectual property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to online services could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
 
     Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject the Company to additional state sales and income
taxes. As some of the Company's products will be available over
 
                                       12
<PAGE>   14
 
the Internet in multiple states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in each such state and foreign country. The failure by the Company
to qualify as a foreign corporation in a jurisdiction where it is required to do
so could subject the Company to taxes and penalties for the failure to do so. It
is possible that the governments of other states and foreign countries also
might attempt to regulate the Company's transmissions of content on its Web
sites or prosecute the Company for violations of their laws. There can be no
assurance that violations of local laws will not be alleged or charged by state
or foreign governments, that the Company might not unintentionally violate such
law or that such laws will not be modified, or new laws enacted, in the future.
 
     In addition, several telecommunications carriers are petitioning to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
In addition, because the growing popularity and use of the Internet has burdened
the existing telecommunications infrastructure and many areas with high Internet
use have begun to experience interruptions in phone service, local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate Internet
service providers ("ISPs") and online service providers ("OSPs") in a manner
similar to long distance telephone carriers and to impose access fees on the
ISPs and OSPs. If either of these petitions is granted, or the relief sought
therein is otherwise obtained, the costs of communicating on the Internet could
increase substantially, potentially slowing the growth in use of the Internet.
Any such new legislation or regulation or application or interpretation of
existing laws could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
 
     INTERNET COMMERCE SECURITY RISKS.  A significant barrier to electronic
commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the algorithms used by the Company
to protect data. If any such compromise of the Company's security were to occur
it could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. The Company may be required to
expend significant capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of Internet transactions and the privacy of users may
also inhibit the growth of the Internet generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third party contractors involve the storage and
transmission of proprietary information, security breaches could expose the
Company to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such security breaches would not have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
 
     YEAR 2000 COMPLIANCE.  The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
Year 2000 and lead to significant business delays and disruptions. The Company
has analyzed the software applications that it uses or has developed and
believes that they are Year 2000 compliant. However, until the Year 2000
arrives, the Company cannot be absolutely certain that its analysis is correct.
The costs of any Year 2000 remedial modifications must be expensed in the year
incurred, and thus will impact the Company's earnings. The Company is currently
unable to predict the extent to which it would be vulnerable to any failure by
its clients or suppliers to remediate any Year 2000 issues on a timely basis.
The failure of a client or supplier subject to the Year 2000 to convert its
systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
 
                                       13
<PAGE>   15
 
business, prospects, financial condition and results of operations. In addition,
the Company's products are designed to operate with third party software and
data. The operation of the Company's existing and proposed products will be
adversely affected if such third party software and data are not Year 2000
compliant or if such third parties have not used compatible technology in
achieving compliance.
 
     BROAD DISCRETION OF MANAGEMENT AS TO USE OF PROCEEDS.  The Company intends
to use the net proceeds from this Offering (i) to fund research and product
development, (ii) to increase its sales and marketing capabilities, both
domestically and internationally, by expanding its marketing and promotional
programs, (iii) to establish strategic alliances, (iv) to make strategic
acquisitions and investments, (v) to increase its employee base and expand the
Company's infrastructure and (vi) for general corporate purposes, including
working capital. The Company may use a portion of such net proceeds to acquire
or invest in businesses, technologies, services or products that are
complementary to those of the Company. While the Company may from time to time
evaluate such potential acquisitions, investments or other transactions, the
Company currently has no understandings, commitments or agreements with respect
to any acquisitions. The Company has not determined the amounts it plans to
expend with respect to each of the expected uses or the timing of such
expenditures. Accordingly, management will have broad discretion with respect to
the expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
 
     CONTROL BY PRINCIPAL STOCKHOLDER.  Upon completion of the Offering,
Eberhard Schoneburg, the Company's President, Chief Executive Officer and
Chairman, will beneficially own approximately 61.4% of the outstanding shares of
Common Stock (approximately 59.8% if the Underwriters' over-allotment option is
exercised in full). Accordingly, Mr. Schoneburg will retain the voting power to
exercise control over the election of members of the Board of Directors as well
as any decision whether to merge or sell the assets of the Company, adopt, amend
or repeal the Company's Certificate of Incorporation and Bylaws, or take other
actions requiring the vote or consent of the Company's stockholders. In
addition, such a concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, and may also impede or preclude
transactions in which stockholders might otherwise receive a premium for their
shares over current market prices. See "Management -- Directors and Executive
Officers" and "Principal and Selling Stockholders."
 
     POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS.  Upon consummation of
the Offering, the Company's Certificate of Incorporation will authorize the
Board of Directors to issue, without stockholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 70% of the
voting power of all of the then outstanding shares of the capital stock of the
Company, voting together as a single class, shall be required for the
stockholders to adopt, amend or repeal any provisions of the Bylaws of the
Company; (ii) stockholders of the Company may not take any action by written
consent without a meeting; (iii) the Board of Directors will be classified into
three classes with staggered terms of three years each; and (iv) members of the
Board of Directors may be removed only for cause and after reasonable notice and
an opportunity to be heard before the body proposing to remove such director.
The Company's Bylaws provide that, for nominations to the Board of Directors or
for other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder
 
                                       14
<PAGE>   16
 
must first have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a stockholder's notice generally must be delivered not
less than 60 days nor more than 90 days prior to the annual meeting. If the
meeting is not an annual meeting, the notice must generally be delivered not
more than 90 days prior to the special meeting and not later than the later of
60 days prior to the special meeting or ten days following the day on which
public announcement of the meeting is first made by the Company. The foregoing
provisions of the Company's Certificate of Incorporation and Bylaws could have
the effect of delaying, deterring or preventing a change in control of the
Company. Delaware law also contains provisions that may have the effect of
delaying, deterring or preventing a non-negotiated merger or other business
combination involving the Company. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with and obtain the
approval of its Board of Directors in connection with the transaction. Certain
of these provisions may, however, discourage a future acquisition of the Company
not approved by the Board of Directors in which stockholders might receive an
attractive value for their shares or that a substantial number or even a
majority of the Company's stockholders might believe to be in their best
interest. As a result, stockholders who desire to participate in such a
transaction may not have the opportunity to do so. See "Description of Capital
Stock -- Delaware Law and Certain Charter and Bylaw Provisions."
 
     SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE.  Sales of Common Stock (including Common Stock issued upon the exercise
of outstanding options) in the public market after this Offering could
materially adversely affect the market price of the Common Stock. These sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company's
management deems acceptable, or at all. Upon the completion of this Offering,
the Company will have 9,070,574 shares of Common Stock outstanding, assuming no
exercise of options or the Representatives' Warrant and assuming no exercise of
the Underwriters' over-allotment option. Of these outstanding shares of Common
Stock, the 1,600,000 shares sold in this Offering will be freely tradeable,
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act. The remaining 7,470,574 shares
of Common Stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 and were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act.
These shares may be resold in the public market only if registered or pursuant
to an exemption from registration, such as Rule 144. All officers, directors and
certain holders of Common Stock beneficially owning, in the aggregate,
               shares of Common Stock and holders of options to purchase
               shares of Common Stock, have agreed, pursuant to certain lock-up
agreements, that they will not offer, sell, contract to sell, grant any option
to sell, pledge, hypothecate or otherwise dispose of, directly or indirectly,
any shares of Common Stock owned by them, or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company, for a
period of one year after the date of this Prospectus without the prior written
consent of New York Broker, Inc., and, with respect to certain other
stockholders owning, in the aggregate,           shares of Common Stock, for a
period of six months after the date of this Prospectus without the prior written
consent of New York Broker, Inc. Upon expiration of the lock-up agreements, all
shares of Common Stock currently outstanding will be immediately eligible for
resale, subject to the requirements of Rule 144. Immediately following the
completion of this Offering, holders of 1,287,114 shares of Common Stock will be
entitled to certain registration rights. However, pursuant to the lockup
agreements,                of these shares of Common Stock may not be sold for
one year after the date of this Prospectus without the prior written consent of
New York Broker, Inc. If such holders, by exercising their rights, cause a large
number of shares to be registered and sold on the public market, such sales
could have a material adverse effect on the market price of the Company's Common
Stock. The Company intends to file a registration statement covering the
1,173,917 shares of Common Stock issuable or reserved for issuance under the
1998 Equity Incentive Plan and, upon filing, any shares subsequently issued
under such plans will be eligible for sale in the public market,
 
                                       15
<PAGE>   17
 
subject to compliance with Rule 144 in the case of affiliates of the Company.
The Company is unable to predict the effect such sales may have on the then
prevailing market price of the Common Stock. See "Management -- Stock Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
 
     NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY.  Prior
to the Offering there has been no public market for the Company's Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial offering price will
be determined by negotiation between the Company and the representatives of the
Underwriters based upon several factors. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The market price of the Company's Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products
introduced by the Company or its competitors, or changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market price of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, prospects
financial condition and results of operations. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. See
"Underwriting".
 
     If shares of the Company's Common Stock are traded, they may trade at a
discount from the price paid for such shares, depending upon the market for
similar securities and other factors. No assurance can be given that a holder of
Common Stock will be able to sell the Common Stock in the future or that such
sale will be at a price equal to or higher than the price paid for such Common
Stock. No assurance can be given as to the liquidity of any trading market for
the Common Stock. The liquidity of any market for the Common Stock will depend
upon the number of holders of Common Stock, the interest of securities dealers
in making a market in the Common Stock, if any, and other factors.
 
     COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS.  The Company's Common Stock
will be quoted on the Nasdaq SmallCap Market (the "SmallCap Market"). In order
to continue to be included in the SmallCap Market, a company must meet certain
maintenance criteria. Effective February 1998, the SmallCap Market maintenance
criteria require that a company must have (i) $2,000,000 in net tangible assets
or a $35,000,000 market capitalization or $500,000 of net income in two of the
last three years, (ii) a minimum bid price of $1.00 per share and (iii) a public
float of 1,000,000 shares. Failure to meet the SmallCap Market maintenance
criteria may result in the delisting of the Company's Common Stock. Trading, if
any, in the Company's Common Stock would thereafter be conducted in the
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's Common Stock.
 
     IMMEDIATE AND SUBSTANTIAL DILUTION.  Purchasers of shares of Common Stock
in this Offering will suffer an immediate and substantial dilution in the net
tangible book value of the Common Stock from the initial public offering price.
See "Dilution."
 
     ABSENCE OF DIVIDENDS.  No cash dividends have been paid on the Common Stock
to date and the Company does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
 
                                       16
<PAGE>   18
 
                                USE OF PROCEEDS
 
     The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered by the Company, after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be $5,976,000 ($7,411,200 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $6.50 per share. The Company will not receive
any proceeds from the sale of the 400,000 shares of Common Stock offered by the
Selling Stockholder. See "Principal and Selling Stockholders."
 
     The Company intends to use the net proceeds from the Offering (i) to fund
research and product development, (ii) to increase its sales and marketing
capabilities, both domestically and internationally, by expanding its marketing
and promotional programs and establishing overseas sales offices, (iii) to
establish strategic alliances, (iv) to make strategic acquisitions and
investments, (v) to increase its employee base and expand the Company's
infrastructure and (vi) for general corporate purposes, including working
capital. The Company may use a portion of such net proceeds to acquire or invest
in businesses, technologies, services or products that are complementary to
those of the Company. While the Company may from time to time evaluate such
potential acquisitions, investments, or other transactions, the Company
currently has no understandings, commitments or agreements with respect to any
acquisitions. The Company has not determined the amounts it plans to expend with
respect to each of the expected uses or the timing of such expenditures. As a
consequence, management will have the discretion to allocate the net proceeds
from this Offering. The amounts actually expended for each use may vary
significantly depending on a number of factors, including the amount of future
revenue, the amount of cash generated or used by the Company's operations, the
progress of the Company's sales and marketing efforts, the ability of the
Company to enter into collaborative arrangements, the success of the Company's
recruiting efforts, the status of competitive products and acquisition
opportunities presented to the Company. Pending such uses, the net proceeds to
the Company from this Offering will be invested in short-term, investment-grade,
interest-bearing instruments. See "Risk Factors -- Broad Discretion of
Management as to Use of Proceeds."
 
     The Company currently believes the net proceeds of the Offering, together
with the Company's existing cash, cash equivalents, short-term investments and
other cash generated from operations, will enable the Company to maintain its
current and planned operations at least through July 2000. There can be no
assurance, however, that this will be the case. See "Risk Factors -- Need for
Additional Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                DIVIDEND POLICY
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
its business. See "Risk Factors -- Absence of Dividends."
 
                                       17
<PAGE>   19
 
                                 CAPITALIZATION
 
     The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company as
adjusted to reflect the sale of the 1,200,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $6.50 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds therefrom as set
forth in "Use of Proceeds." This table should be read in conjunction with the
Company's Financial Statements, including the Notes thereto, and other financial
information included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                   JUNE 30, 1998
                                                              ------------------------
                                                                          PRO FORMA
                                                              ACTUAL    AS ADJUSTED(1)
                                                              -------   --------------
                                                                   (IN THOUSANDS)
<S>                                                           <C>       <C>
Long-term debt..............................................  $   500     $     500
Stockholders' equity:
Preferred Stock, $0.01 par value, no shares authorized,
  issued or outstanding, actual; 5,000,000 shares
  authorized, no shares issued and outstanding as
  adjusted..................................................       --            --
Common Stock, $0.01 par value, 19,000,000 shares authorized,
  6,967,213 shares issued and outstanding actual; 30,000,000
  shares authorized, 9,070,574 shares issued and outstanding
  as adjusted(2)............................................     69.7          90.7
Non-Voting Common Stock, $0.01 par value, 1,000,000 shares
  authorized, 53,278 shares issued and outstanding actual;
  no shares authorized, issued and outstanding
  as adjusted...............................................       .5            --
Additional paid-in capital..................................    611.1      10,697.7
Representatives' Warrant....................................       --            .1
Accumulated deficit.........................................   (348.5)       (348.5)
                                                              -------     ---------
          Total stockholders' equity........................  $ 332.8     $10,440.0
                                                              =======     =========
</TABLE>
 
---------------
(1) Also gives pro forma effect to (i) the issuance by the Company of 26,083
    shares of Common Stock upon the exercise of stock options on July 31, 1998
    at $3.66 per share, (ii) the sale and issuance by the Company of 824,000
    shares of Common Stock on September 23, 1998 and the receipt of $4,035,632
    of net proceeds therefrom, (iii) the conversion of all Non-Voting Common
    Stock into shares of Common Stock on a 1-for-1 basis upon consummation of
    the Offering, (iv) the adoption of the Certificate of Incorporation, to be
    effective upon closing of the Offering, removing the Company's existing
    class of Non-Voting Common Stock and creating a class of undesignated
    Preferred Stock, and (v) the sale and issuance of the Representatives'
    Warrant upon consummation of the Offering.
 
(2) Excludes 590,569 shares of Common Stock reserved for issuance upon the
    exercise of stock options outstanding as of September 29, 1998 at a weighted
    average exercise price of $3.73 per share and 160,000 shares of Common Stock
    reserved for issuance upon the exercise of the Representatives' Warrant.
 
                                       18
<PAGE>   20
 
                                    DILUTION
 
     The net tangible book value of the Company as of June 30, 1998, on a pro
forma basis to give effect to (i) the sale on September 23, 1998 of 824,000
shares of Common Stock and the receipt of $4,035,632 of net proceeds therefrom
and (ii) the exercise of options on July 31, 1998 to purchase 26,083 shares of
Common Stock at an exercise price of $3.66 per share, was $4,463,918 or
approximately $.57 per share. "Net tangible book value" per share represents the
total tangible assets of the Company, less total liabilities, divided by the
number of shares of Common Stock outstanding. Assuming the receipt by the
Company of the net proceeds from the sale of the Representatives' Warrant and
the 1,200,000 shares of Common Stock offered by the Company at an assumed public
offering price of $6.50 per share after deducting underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value of the Company as of June 30, 1998 would have been $10,440,018, or $1.15
per share. This represents an immediate increase in the pro forma net tangible
book value of $.58 per share to existing stockholders of the Company and an
immediate dilution of $5.35 per share to new investors purchasing Common Stock
in this Offering. The following table illustrates the per share dilution to be
incurred by new investors as of June 30, 1998:
 
<TABLE>
<CAPTION>
 
<S>                                                           <C>     <C>
Assumed initial public offering price.......................          $6.50
  Pro forma net tangible book value per share at June 30,
     1998...................................................  $.57
  Increase per share attributable to new investors..........   .58
                                                              ----
Pro forma net tangible book value per share after the
  Offering..................................................           1.15
                                                                      -----
Dilution per share to new investors.........................          $5.35
                                                                      =====
</TABLE>
 
     The following table sets forth, on a pro forma basis as set forth above, as
of June 30, 1998, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing stockholders and by the investors purchasing shares of
Common Stock offered hereby (assuming a public offering price of $6.50 per
share):
 
<TABLE>
<CAPTION>
                                   SHARES PURCHASED       TOTAL CONSIDERATION
                                 --------------------    ----------------------    AVERAGE PRICE
                                  NUMBER      PERCENT      AMOUNT       PERCENT      PER SHARE
                                 ---------    -------    -----------    -------    -------------
<S>                              <C>          <C>        <C>            <C>        <C>
Existing stockholders..........  7,870,574     86.8%     $ 4,812,463     38.2%         $ .61
New investors..................  1,200,000     13.2%       7,800,000     61.8%         $6.50
                                 ---------     ----      -----------     ----
          Total................  9,070,574      100%     $12,612,463      100%
                                 =========     ====      ===========     ====
</TABLE>
 
     The above information excludes 590,569 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options as of September 29, 1998
at a weighted average exercise price of $3.73 per share and 160,000 shares of
Common Stock reserved for issuance upon the exercise of the Representatives'
Warrant. To the extent that such options and warrant are exercised, there will
be further dilution to new investors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 7 of Notes to the
Financial Statements.
 
                                       19
<PAGE>   21
 
                            SELECTED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following data, insofar as it relates to the years 1994 through 1997,
has been derived from annual Financial Statements and Notes thereto, some of
which appear elsewhere herein. The selected balance sheet data as of December
31, 1996 and 1997, and the selected statement of operations data for the three
fiscal years ended December 31, 1997, are derived from the Company's Financial
Statements which have been audited by Wolf & Company, P.C., independent
certified public accountants, whose report appears elsewhere herein. The
selected financial data presented below at June 30, 1998 and for the six months
ended June 30, 1997 and June 30, 1998 have been derived from, and are qualified
by reference to, the Company's unaudited Financial Statements also appearing
herein. Such unaudited Financial Statements, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results for the unaudited interim periods. The
data should be read in conjunction with the Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. In 1998, the
Company shifted its primary business focus from software consulting to product
development, marketing and sales. As a consequence, the Company expects that the
substantial majority of its future revenues will be derived from sales of its
software robot products and that revenues from its consulting business will
significantly decrease. Accordingly, past financial results do not reflect the
results of the Company's current business activities. Furthermore, its limited
operating history leads the Company to believe that period-to-period comparisons
of its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. See "Risk
Factors-Minimal Revenues; Period to Period Comparisons; Limited Operating
History; Anticipation of Continued Losses."
 
<TABLE>
<CAPTION>
                                                                                           SIX MONTHS ENDED
                                                         YEAR ENDED DECEMBER 31,               JUNE 30,
                                                  -------------------------------------    ----------------
                                                  1994(1)     1995      1996      1997      1997      1998
                                                  -------    ------    ------    ------    ------    ------
                                                                                             (UNAUDITED)
<S>                                               <C>        <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
  Application services..........................  $   --     $1,217    $2,790    $1,347    $  914    $  332
  Other.........................................      --         --        --       423       117       117
                                                  ------     ------    ------    ------    ------    ------
         Total revenues.........................      --      1,217     2,790     1,770     1,031       449
                                                  ------     ------    ------    ------    ------    ------
Operating expenses:
  Selling, general and administrative...........      22        967     1,101     1,049       624       596
  Engineering...................................      --        828       656       512       301       250
  Research and development......................      --         --        --        --        --       128
  Depreciation and amortization.................      --         40       138       168        83        54
                                                  ------     ------    ------    ------    ------    ------
         Total operating expenses...............      22      1,835     1,895     1,729     1,008     1,028
                                                  ------     ------    ------    ------    ------    ------
         Income (loss) from operations..........     (22)      (618)      895        41        23      (579)
  Other income(expense).........................      --        (35)      (15)      (11)       --        (7)
                                                  ------     ------    ------    ------    ------    ------
         Income (loss) before tax...............     (22)      (653)      880        30        23      (586)
  Provision (benefit) for income taxes..........      --       (257)      337         9         7       (91)
                                                  ------     ------    ------    ------    ------    ------
         Net income (loss)......................  $  (22)    $ (396)   $  543    $   21    $   16    $ (495)
                                                  ======     ======    ======    ======    ======    ======
Net income (loss) per share(2)..................  $ (.02)    $ (.07)   $  .08    $  .00    $  .00    $ (.07)
Shares used in computing net income (loss) per
  share(2)......................................   1,393      5,574     6,967     6,967     6,967     6,970
</TABLE>
 
                                       20
<PAGE>   22
 
<TABLE>
<CAPTION>
                                                        AS OF DECEMBER 31,             AS OF JUNE 30, 1998
                                                ----------------------------------   -----------------------
                                                                                                PRO FORMA
                                                1994(1)    1995     1996     1997    ACTUAL   AS ADJUSTED(3)
                                                -------   ------   ------   ------   ------   --------------
                                                                                           (UNAUDITED)
<S>                                             <C>       <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:
Cash..........................................     $43     $  23     $ 30    $  22    $ 552      $10,659
Working capital (deficit).....................      28      (565)      74      167      409       10,516
Total assets..................................      43       760      885     1085    1,270       11,377
Long-term debt................................      --        --       --       --      500          500
Total stockholders' equity....................      28        82      625      646      333       10,440
</TABLE>
 
---------------
(1) Initial period of operations from November 15, 1994 to December 31, 1994.
 
(2) Net income (loss) per share is determined by dividing the net income (loss)
    attributable to common stockholders by the weighted average number of Common
    Stock and Common Stock equivalents outstanding during the period. See Note 2
    of Notes to Financial Statements.
 
(3) As adjusted to give effect to the sale of 1,200,000 shares of Common Stock
    offered hereby, after deducting the underwriting discount and the offering
    expenses, at an assumed initial public price of $6.50 per share and the
    application of the estimated net proceeds therefrom as set forth in "Use of
    Proceeds." Also gives pro forma effect to the issuance by the Company of
    26,083 shares of Common Stock upon the exercise of stock options on July 31,
    1998 at $3.66 per share and the sale and issuance by the Company of 824,000
    shares of Common Stock on September 23, 1998 at $5.00 per share and the
    receipt of $4,035,632 of net proceeds therefrom.
 
                                       21
<PAGE>   23
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements, including the Notes thereto, of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including the matters
set forth in "Risk Factors."
 
OVERVIEW
 
     The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("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. 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 designing, developing and marketing its Alife suite of SmartBot software
products.
 
     Management's decision to shift the primary focus of the Company's business
from software consulting to product development and commercialization will
adversely affect the Company's results of operations in the near term. To date,
the Company's only source of revenue has been derived from its software
consulting services, and it has generated no revenue from the sale of its
SmartBot software products. The Company is currently expanding its research and
development, production and marketing capabilities associated with the
anticipated sale of its SmartBot products, and as a result, operating expenses
are expected to increase significantly going forward. The Company expects to
continue to incur increasing losses and generate negative cash flow from
operations until at least the year 2000. To the extent that the Company's
product development, marketing and sales efforts do not result in commercially
successful products that generate significant net sales, 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 to
achieve or maintain profitability.
 
     In addition, as a result of the Company's recent transition from software
consulting to product development, marketing and sales, the Company's research
and development expenditures increased significantly during the six months ended
June 30, 1998. Due to the early stage of such research and development efforts,
no software development costs were capitalized during that period. Prior to
December 31, 1997, substantially all research and development was performed by
the Company in connection with contractual software consulting services with
customers for which the Company was reimbursed. Such costs are included in
engineering expenses in the Company's financial statements through December 31,
1997.
 
     Because the Company has shifted its business focus from software consulting
to product development, marketing and sales, 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, 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
 
                                       22
<PAGE>   24
 
and its ability to attract and retain qualified personnel. Gross profit margins
will vary from product to product and although the Company may have some ability
to affect its product mix through effective selling of high margin products, the
Company's sales mix may vary from period to period and its gross margins will
fluctuate accordingly.
 
RESULTS OF OPERATIONS
 
     The Company's principal source of revenue from inception through May 1998
has been software consulting services. From inception through June 1997, the
preponderance of those revenues were generated by subcontracts issued from
Artificial Life's former parent company. 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. Thereafter, the Company focused essentially all available resources on
product development. To date, the Company has not released any commercial
versions of its SmartBot products for sale.
 
  SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
 
     Revenues:  Revenues for the six months ended June 30, 1998 were $449,380 as
compared to $1,031,128 for the same period of the prior year. The decrease of
$581,748, or 56.4%, resulted from the Company's decision to transition its
primary business focus from software consulting to product development and
sales.
 
     Engineering Expenses:  Engineering expenses for the six months ended June
30, 1998 were $249,789 as compared to $301,518 for the same period of the prior
year. The decrease of $51,729, or 17.2%, was directly attributable to the
reallocation of resources to research and development as a result of the
Company's change of its primary business focus from software consulting to
product development, marketing and sales.
 
     Research and Development Expenses:  Research and development expenses for
the six months ended June 30, 1998 were $128,103. Prior to 1998, substantially
all research and development was performed by the Company in connection with
contractual consulting arrangements with its customers, for which it was
reimbursed. Such costs were included in engineering expenses. Upon conclusion of
its long-term consulting contract in May 1998, the Company focused essentially
all available resources on product development. Accordingly, the Company expects
that research and development expenditures will continue to rise significantly
in the foreseeable future as the Company expands its research and development
capabilities relating to such product development.
 
     Selling, General and Administrative Expenses:  Selling, general and
administrative expenses for the six months ended June 30, 1998 were $596,620 as
compared to $623,693 for the same period of the prior year. The decrease of
$27,073, or 4.3%, was directly attributable to reduced administrative, sales and
marketing staff during the Company's transition from software consulting to
product development, marketing and sales. Selling expenses (sales and marketing)
and public relations have begun, and are anticipated to continue, to increase in
anticipation of product releases and commercialization efforts.
 
     Net Loss:  The net loss for the six months ended June 30, 1998 was $495,025
as compared to net income of $16,070 for the same period of the prior year. This
decrease was directly related to the decrease in software consulting revenues
related to the Company's transition to product development, marketing and sales.
 
  YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
     Revenues:  Revenues for the year ended December 31, 1997 were $1,770,360 as
compared to $2,789,878 for the year ended December 31, 1996. The decrease of
$1,019,518, or 36.5%, is directly
 
                                       23
<PAGE>   25
 
attributable to the Company's discontinuing software consulting work for its
former parent after the Management Buyout.
 
     Engineering Expenses:  Engineering expenses for the year ended December 31,
1997 were $512,267 as compared to $656,086 for the year ended December 31, 1996.
The decrease of $143,819, or 21.9%, resulted primarily from the Company's
discontinuing software consulting work for its former parent after the
Management Buyout and the shift in its primary business focus away from software
consulting.
 
     Research and Development Expenses:  Research and development expenses for
the year ended December 31, 1997 were related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
 
     Selling, General and Administrative Expenses:  Selling, general and
administrative expenses for the year ended December 31, 1997 were $1,048,897 as
compared to $1,101,109 for the year ended December 31, 1996. The decrease of
$52,212, or 4.7%, is attributable to reduced sales and marketing overhead
associated with the Company's reduction in contractual software consulting
services.
 
     Net Income:  Net income for the year ended December 31, 1997 was $21,065 as
compared to $543,344 for the year ended December 31, 1996. The decrease of
$522,279, or 96.1%, is attributable to the Company's discontinuing contractual
consulting services for its former parent and transitioning its primary business
focus away from software consulting.
 
  YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Revenues:  Revenues for the year ended December 31, 1996 were $2,789,878 as
compared to $1,216,716 for the year ended December 31, 1995. The increase of
$1,573,162, or 129.3%, was principally attributable to the performance of
software consulting services for its former parent and other affiliates, and the
initial revenues realized from the Company's major domestic software consulting
contract.
 
     Engineering Expenses:  Engineering expenses for the year ended December 31,
1996 were $656,086 as compared to $827,471 for the year ended December 31, 1995.
The decrease of $171,385, or 20.7%, was directly attributable to reduced
engineering charges from the Company's former parent as the Company's in-house
engineering staff was in place and operational.
 
     Research and Development Expenses:  Research and development expenses for
the year ended December 31, 1996 related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
 
     Selling, General and Administrative Expenses:  Selling, general and
administrative expenses for the year ended December 31, 1996 were $1,101,109 as
compared to $967,271 for the year ended December 31, 1995. The increase of
$133,838, or 13.8%, represented the addition of a Director of Sales and
Marketing along with related staff, additional administrative support staff,
increased office overhead and increased travel and consulting costs. These
increases were offset in part by the elimination of one-time start up costs
incurred in 1995.
 
     Net Income:  Net income for the year ended December 31, 1996 was $543,344
as compared to a net loss of $395,856 for the year ended December 31, 1995. The
increase in earnings of $939,200, or 237.3%, was related to several factors.
First, approximately $282,000, or 71.2%, of the 1995 net loss was related to
start-up costs that were expensed in that period. Second, charges for
engineering expenses from the Company's former parent were reduced significantly
in 1996 as the Company's engineering team was in place and operational. Finally,
because the administrative infrastructure was already established in 1995, there
were limited additional costs required to manage the Company's business in 1996.
 
                                       24
<PAGE>   26
 
  LIQUIDITY AND CAPITAL RESOURCES
 
     From inception through the year ended December 31, 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 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 and a private placement of Non-Voting Common Stock of $181,367,
the net proceeds of which the Company received in June 1998. In September 1998,
the Company raised $4,035,632 in net proceeds from a private placement of
824,000 shares of Voting Common Stock. 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, 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 certificates of deposit.
 
     As of June 30, 1998, the Company had cash and cash equivalents of $551,591.
After giving effect to the issuance by the Company of 26,083 shares of Common
Stock upon the exercise of stock options on July 31, 1998 at $3.66 per share and
the receipt of $95,464 in net proceeds therefrom and the sale and issuance by
the Company of 824,000 shares of Common Stock on September 23, 1998 for $5.00
per share and receipt of $4,035,632 in net proceeds therefrom, the Company would
have had cash and cash equivalents as of June 30, 1998 of $4,682,687.
 
     Effective October 10, 1995, the Company entered into a consortium agreement
(the "MIT Agreement") with the Massachusetts Institute of Technology ("MIT").
Under the MIT Agreement, MIT will conduct research projects for the "Things That
Think Consortium." The term of the agreement is for five years through October
9, 2000 but provides for early termination, with one year written notice, as
well as renewal options. The Company is obligated to pay an annual membership
fee of $125,000 under the MIT Agreement.
 
     The Company leases office and other space and various office equipment
under various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 1998, 1999, 2000
and 2001 are $221,372, $205,725, $205,352 and $17,113, respectively.
 
     The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
base salaries. These agreements include severance payments under certain
conditions of approximately 50% to 300% of each officer's annual compensation.
In addition the President, Chief Executive Officer and Chairman of the Company
is entitled to receive an annual incentive bonus of 3% of the Company's profits
from operations.
 
     The Company plans to establish in the near term subsidiaries in Germany,
the Czech Republic and the Russian Republic for which it will incur start-up
expenses.
 
     The Company believes that the net proceeds of this Offering, 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 July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements after
that time, the Company may seek to sell additional equity or debt securities or
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or terms
acceptable to the Company, if at all. See "Risk Factors-Need for Additional
Capital."
 
                                       25
<PAGE>   27
 
     The Company has incurred interim losses through June 1998, and the Company
anticipates a loss for income tax purposes for fiscal 1998. A portion of this
loss will be available to carry forward and reduce income taxes, if any, in
future periods.
 
YEAR 2000
 
     The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Any of the Company's
computer programs or other information systems that have time-sensitive software
or embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
 
     The Company has completed an initial review of its information and
non-information technology systems. This review included its existing and
planned computer software and hardware. The Company believes that these systems
are Year 2000 compliant and has made an initial determination that the costs
and/or consequences associated with the Year 2000 issue are not expected to have
a material adverse effect on its business operations or future financial
condition. The Company, however, will continue to monitor the Year 2000
readiness of these systems. The Company will evaluate the need to complete a
further review, which may include soliciting and obtaining certification of Year
2000 compliance from certain third party software vendors and determining the
readiness of its significant suppliers and customers.
 
     In addition, the Company's products are designed to operate with third
party software and data. The operations of the Company's existing and proposed
products will be adversely affected if such third party software and data are
not Year 2000 compliant or if such third parties have not used compatible
technology in achieving compliance.
 
     To the extent that the Company's assessment is finalized without
identifying any non-compliant systems operated by the Company or by third
parties, the Year 2000 issue could have a material effect on the operations of
the Company. The Company could experience delays in the development of its
products. Once its products are developed and offered for commercial sale, the
Company could experience delays in delivering such products or could deliver
products that do not operate correctly, which could cause the Company to lose
business and even customers and could subject the Company to claims for damages.
Problems with the Year 2000 issue could also result in delays in the Company
invoicing its customers or in the Company receiving payments from them. The
severity of these possible problems would depend on the nature of the problem
and how quickly it could be corrected or an alternative implemented, which is
unknown at this time.
 
     After completing its assessment, the Company will develop appropriate
contingency plans to address situations in which various systems of the Company,
or of third-parties with which the Company does business, are not Year 2000
compliant. Some risks of the Year 2000 issue, however, are beyond the control of
the Company and its suppliers and customers. For example, no preparations or
contingency plan will protect the Company from a downturn in economic activity
caused by the Year 2000 issue.
 
EURO CONVERSION
 
     On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt a new currency called the "euro" as their common
legal currency (the "Euro Conversion"). The Company is currently unsure of the
potential impact that the Euro Conversion will have on its business, financial
condition and results of operations.
 
RECENT PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This
 
                                       26
<PAGE>   28
 
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in stockholders' equity
during the period except those resulting from investments by, or distributions
to, stockholders. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. SFAS
No. 130 had no impact on the Company's financial statements.
 
     In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
 
     In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
 
                                       27
<PAGE>   29
 
                                    BUSINESS
 
OVERVIEW
 
     Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing products for applications in data
mining, Web-page analysis, statistical analysis and direct marketing to support
the functionality of the SmartBot products. While each Artificial Life SmartBot
can function independently and is programmed for a particular application,
customers can combine the SmartBots to create what the Company believes is the
industry's first integrated commercial, robot-based electronic commerce
("e-commerce") solution.
 
     The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
 
     The Company's SmartBot products are designed to communicate in natural
language and to respond "intelligently" to a user's command or inquiry, and in
some cases, to act autonomously. All of the Company's SmartBot products are
based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine is
the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The
Alife-SmartEngine contains several "intelligent" modules that process and
interpret manually input or verbal natural language. These modules work together
to break down the essential components of human conversation -- detailed
knowledge of certain topics, casual talk about topics of interest ("small
talk"), short and long term memory of previously discussed topics, and some
emotional content and intentions that drive the conversation -- and use these
components to "understand" and respond to the user in a manner that is more
human-like and less machine-like than current "query-based" software. The
Company believes that its products will allow people to interact with computers
in a more natural way -- similar to a conversation with a human being.
 
     The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
 
     The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the commercial versions of the
Alife-WebGuide in the fourth quarter of
 
                                       28
<PAGE>   30
 
1998. The Company is presently developing the initial versions of the seven
SmartBot products listed below:
 
     - ALIFE-WEBGUIDE:  This SmartBot is designed to reside on a Web site and
       help users navigate the site by accepting and processing questions, such
       as search queries, from users in natural language and responding to users
       in natural language. The bot engages the user in a "conversation" through
       questions and answers and, upon learning of the user's interests, is
       designed to display Web pages that match the content of the
       "conversation" or to suggest links to other locations on the Web site.
 
     - ALIFE-SALESREP:  The Alife-SalesRep is being designed for e-commerce
       retailers to use for one-to-one marketing on the Internet. Retailers will
       input user profile information and product information into this
       SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
       information via the Internet.
 
     - ALIFE-MESSENGER:  The Alife-Messenger is being designed to act as a
       natural language-based automated e-mail reply and answering service. By
       customizing the Alife-Messenger, a company can automate replies to
       incoming e-mail queries and customer requests, thereby reducing the need
       for human intermediaries.
 
     - ALIFE-PORTFOLIO-MANAGER:  This SmartBot is being developed to monitor, in
       real-time, an individual's investment portfolio using criteria
       established by the individual and, when such criteria have been met, or
       failed to have been met, to autonomously in real-time contact the
       individual by telephone, pager, e-mail or some other mode of
       communication and let the individual know that trading action might be
       warranted.
 
     - ALIFE-CALL-CENTER-AGENT:  The Alife-Call-Center-Agent is being designed
       for call centers and help desks to be integrated with existing call
       center server software to provide an automated first response to incoming
       voice telephone calls or e-mail requests and to handle call center
       requirements with virtually no aid from human operators.
 
     - ALIFE-KNOWLEDGE-MANAGER:  This SmartBot is being designed to extract
       information contained in a company's Intranet documents, organize it and
       make it more easily accessible for retrieval in order to enable companies
       to more efficiently and intelligently manage the large amount of data and
       documents that companies are making available on their Intranets.
 
     - ALIFE-PERSONAL-TUTOR:  The Alife-Personal-Tutor is a tutoring program
       being designed to extract profile information from natural language
       conversation between the bot and the student user and to automatically
       adapt the difficulty and content of the lessons to the skill level of the
       student based on this information.
 
     The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee, and with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and MacIntosh computers in the future.
 
                                       29
<PAGE>   31
 
INDUSTRY BACKGROUND
 
     Computer users and businesses have rapidly adopted the Internet as a means
to gather information, communicate, transact business, interact and be
entertained, making it an important new mass medium. International Data
Corporation ("IDC"), a market research firm, estimates that the number of
Internet users exceeded 69 million in 1997, and will grow to over 320 million by
2002. The Internet enables advertisers to target advertising campaigns utilizing
sophisticated databases of information about the users of various sites and to
directly generate revenues from these users through online transactions. As a
result, the Internet has become a compelling means to advertise and market
products and services. IDC estimates that the total value of goods and services
purchased over the Internet will grow from $12 billion in 1997 to approximately
$425 billion per year by the end of 2002.
 
     Consequently, the amount of information available on the Internet has grown
dramatically. Web sites have proliferated along with the data available on such
sites, making it more difficult and time consuming for users to find the
information they want. Users are spending a substantial portion of their on-line
time searching for the specific information, products or services they desire.
Furthermore, once an Internet user locates a desired site or sites, the user
often finds it difficult to navigate such sites. As Web technology has improved,
many Web sites have become more complex by adding new features, products,
services, chat rooms, games, and other services. It is not uncommon for one Web
site to have dozens of different options and links to other associated sites.
While it is generally true that this increase in information and choices
benefits Web users, more effective tools are needed to find information,
products and services efficiently.
 
     For corporations offering products and services on the Internet, the
rapidly increasing number of Internet users offers benefits but also presents
challenges. For example, a company may place a description of a new product on
its Web site and then find that within a few hours, thousands of Internet users
have sent e-mail messages to learn more about the product. While the volume of
inquiries suggests that the company might ultimately generate significant
revenues from selling its new product online, responding to each of these
inquiries in a timely manner can require an expensive customer service force. A
second problem facing e-commerce companies is the dramatic increase in
competition among e-commerce sites. Numerous e-commerce sites are launched
worldwide on the Internet daily. Accordingly, e-commerce retailers must find
increasingly efficient and cost-effective ways to market their products and
services to new customers and maintain or enhance existing customer
relationships.
 
THE ARTIFICIAL LIFE SOLUTION
 
     Artificial Life is developing its Alife suite of SmartBot products to
assist in solving problems relating to information retrieval, Web navigation,
sales and service support and direct marketing on the Internet. These software
robots are designed to communicate in natural language and to respond
"intelligently" to the user's command or inquiry, and in some cases, to act
autonomously.
 
     All of the Company's SmartBot products are based on the Company's
Alife-SmartEngine technology. The Alife-SmartEngine is the core component that
gives the Company's products the ability to converse with its users in natural
language, either by text or speech, and also to process and respond to natural
language commands or questions. The Alife-SmartEngine contains several
"intelligent" modules that process and interpret manual input or verbal natural
language. These modules work together to break down the essential components of
human conversation -- detailed knowledge of certain topics, casual talk about
topics of interest ("small talk"), short and long term memory of previously
discussed topics, and some emotional content and intentions that drive the
conversation -- and use these components to "understand" and respond to the user
in a manner that is more human-like and less machine-like than current
"query-based" software. The Company believes that its products will allow people
to interact with computers in a more natural way -- similar to a conversation
with a human being.
 
                                       30
<PAGE>   32
 
     Historically, general natural language understanding and processing
software programs (often classified under the category "artificial
intelligence") have focused on understanding the meaning of a sentence in the
same way as a human would, so that the software program can react appropriately
to a spoken sentence or a sentence typed in at the keyboard. These programs have
had only limited success. The Alife-SmartEngine instead attempts to mimic
comprehension of a sentence by using complex pattern matching techniques to
determine the actual goals and intentions of the user. By "understanding" the
user's goals and intentions, Alife-SmartEngine-based products are being designed
to possess the ability to actively drive and maintain a conversation about
certain topics, and not merely react to the user.
 
     The Alife-SmartEngine stores information in "Knowledge Bases," databases
which can be combined or exchanged to give the derived products differing sets
of expertise. Customers can add information to a Knowledge Base using a special
"Knowledge Capture Editor." The Alife-SmartEngine has several linked stages that
read spoken or text-based input and produce spoken or text-based output. When a
user types in text or speaks to the Alife-SmartEngine via standard voice
recognition software packages, the pre-processed speech input is routed to a
parser. The parser then converts the input from a stream of text to a series of
words and phrases. An analysis module draws on the topic information in the
memory section of the Alife-SmartEngine as well as the syntactic structure of
the sentence derived from the Knowledge Base. The major control module of the
Alife-SmartEngine is a meta-control module (the "Meta Controller") that is
essential for switching between the different speech processing modules to
process the input and prepare the appropriate response corresponding to a given
input. The Meta Controller picks a reply appropriate to the perceived intention
of the user by applying a set of rules that define the conversational strategy
of the bot. All modules communicate through the Meta Controller, which also
coordinates and balances the weighting of each of the separate modules as the
bot prepares its composite action.
 
     Most of the Company's SmartBots communicate with the user through a
life-like three-dimensional graphical interface known as an "Avatar." Each
product comes with a standard human-like Avatar. However, the Avatar may be
customized by the customer, including using pre-existing branded icons or
displays. For instance, an e-commerce retailer of computer equipment might
customize its Avatar so that visitors to its Web site converse with a talking
computer. The Company believes that the use of an animated "talking partner"
allows people to interact with computers in a more natural and personal manner,
and that the ability of the Company's customers to customize the Avatars allows
such customers to develop or maintain brand or name recognition among visitors
to a customer's Web site.
 
PRODUCTS
 
     The Company is currently developing seven basic software robots for use
individually or in various combinations. The Company presently intends to
develop three different product versions of most of its SmartBots: (i) a
"Personal" version intended for use by individual users on their personal Web
pages; (ii) a "Professional" version intended for use by professionals and small
businesses on their Web sites; and (iii) a transaction and client/server based
"Enterprise" version intended for use by large companies, institutions and
government agencies that want to integrate the bots into their existing
computing environment with enhanced and special customizable product features.
 
                                       31
<PAGE>   33
 
     The overall Alife product suite of SmartBots is represented by the diagram
below.
 
                             [SmartBots Flow Chart]
 
     ALIFE-WEBGUIDE:  The Company released the Personal version of this SmartBot
in September 1998. It is designed to reside on a Web site and help users
navigate the site by accepting and processing questions, such as search queries,
from users in natural language and responding to users in natural language. This
SmartBot engages the user in a "conversation" through questions and answers and,
upon learning of the user's interests, is designed to display Web pages that
match the content of the "conversation" or to suggest links to other locations
on the Web site. In an e-commerce application, the Alife-WebGuide can be
designed by the Web site host to function like a human sales associate at a
retail store, greeting customers coming through the door of the virtual store
and assisting them with advice and background information about products and
prices. This bot allows the use of a customizable animated Avatar interface.
 
     Alife-WebGuide runs on both Netscape Navigator or Communicator 3.0 or
higher and Microsoft Internet Explorer 3.0 or higher. The Enterprise version of
the Alife-WebGuide is being designed with a client/server architecture,
requiring a Java virtual machine 1.02 or higher. The Knowledge Capture Tool and
the Statistical Tools of the Alife-WebGuide Professional and Enterprise version
are being designed to run on Microsoft Windows 95, 98 or NT. The Company
released the Personal version 1.0 of the Alife-WebGuide in September 1998 and
intends to release the Professional version 1.0 and Enterprise version 1.0 in
the fourth quarter of 1998 or the first quarter of 1999. The Company believes
that the potential market for this product includes Internet Web sites which
need or desire a more user-friendly natural language interface.
 
     ALIFE-SALESREP:  The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will be
able to input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific targeted sales
information on the Internet via e-mail. For example, the Alife-SalesRep can be
configured by a corporate user to utilize customer profile information to
deliver information about a specific sale or promotion to an existing or
potential customer. In this type of application, the user will typically have
the option of downloading the Alife-SalesRep Avatar to his or her computer. Once
the Avatar is resident on the user's computer, the user can access the
e-commerce retailer's Web site simply by clicking on the Avatar, which will
appear as an icon on the user's computer screen and which in many cases will
maintain a link to the host Web site.
 
                                       32
<PAGE>   34
 
     The Company is also designing Alife-SalesRep to engage in autonomous
action. For example, a user will download an Avatar, and the Avatar will
continue to appear on the user's start-up screen. Each time the user turns on
his computer, the Avatar, through its link to the host Web site, will
automatically download new information that the program has determined may be of
interest to the user, based upon the information in its Knowledge Bases. For
example, the user could learn from the Avatar resident on the computer that the
host company is having a sale on modems which run at faster speeds than the one
the user currently owns. The host company will have determined which modem the
user currently owns because the user had a "conversation" with the
ALife-SalesRep about the user's computer hardware. Later, the user might be
offered discounted tickets by the Avatar to an upcoming computer industry trade
show in the user's hometown at which the host will be exhibiting its products.
 
     Alife-SalesRep is being designed to run on personal computers with
Microsoft Windows 95, 98 or NT. The Company intends to release the 1.0
Professional and Enterprise versions of Alife-SalesRep in 1999. The initial
target market for this product consists of advertising companies, companies with
direct Internet marketing activities and more generally all companies with
extensive Internet sales and marketing strategies and activities.
 
     Although Alife-WebGuide and Alife-SalesRep are independent products, the
Company believes that potential customers will be best served by combining the
Alife-WebGuide and the Alife-SalesRep into an integrated one-to-one marketing
solution. The two products can be customized so that when a user communicates
with the Alife-WebGuide, a customer profile of the user containing the user's
interests and expectations would be generated by analyzing the natural language
communication log files generated by the Alife-WebGuide. This information would
then be used by Alife-SalesRep to initiate targeted marketing via e-mail to
contact the customer about specific product or service offerings. This
integrated one-to-one marketing solution is graphically depicted below:
 
                          [Alife-WebGuide Flow Chart]
 
     ALIFE-MESSENGER:  The Alife-Messenger is being designed to serve as a
natural language-based automated e-mail reply and answering service. By
customizing the Knowledge Bases of the Alife-Messenger, a company can automate
replies to incoming e-mail queries and customer requests. The Alife-Messenger is
being designed to work like an off-line Alife-WebGuide by selecting appropriate
answers to input queries in an "intelligent" way. However, instead of displaying
Web pages, the Alife-Messenger is being designed to automatically scan an
incoming e-mail for certain keywords and phrases, prepare a reply e-mail and
attach, as appropriate, additional information that matches what this SmartBot
determines might be useful to the user, such as relevant documents, price-lists,
and links to other Web sites. For an individual who purchases Alife-Messenger
for his Web page, it could be used as a customized e-mail "answering machine" on
the Internet. For a corporate purchaser already using Alife-SalesRep, the
Alife-Messenger could be configured to select the appropriate Alife-SalesRep to
be attached to the reply e-mails, with the goal of improving and supporting the
direct marketing channel.
 
     The Alife-Messenger is being designed to support standard e-mail systems.
The Company intends to release the 1.0 version of the Alife-Messenger in the
first quarter of 1999. The Company
 
                                       33
<PAGE>   35
 
intends to market this product to companies and institutions which need to
extensively interact with clients via e-mail or which have extensive
customer/client service programs using the Internet.
 
     ALIFE-PORTFOLIO-MANAGER:  The Alife-Portfolio-Manager is being developed to
monitor an individual's investment portfolio. The user can specify the desired
characteristics of his or her portfolio, such as particular stocks to own,
specific buy and sell thresholds for individual stocks, and desired ratios of
types of stocks. Once the user's portfolio guidelines are established, the
Alife-Portfolio-Manager will monitor the portfolio 24 hours per day and
autonomously notify the user when the user's price or ratio guidelines are not
being met through one of a variety of predefined media such as e-mail, telephone
or pager. In addition to monitoring existing investment portfolios, the Alife-
Portfolio-Manager is being designed to find other potential investments fitting
the user's specified criteria and notify the investor about any such investment
opportunities once found.
 
     The Alife-Portfolio-Manager is being designed to run on personal computers
with Microsoft Windows 95, 98 or NT. The Company plans to release the 1.0
version of the Alife-Portfolio-Manager in the second quarter of 1999. The
Company believes that the market for this product will consist of individuals
and companies in the financial services industry, including Internet brokers, as
well as individual investors.
 
     ALIFE-CALL-CENTER-AGENT:  The Alife-Call-Center-Agent is being designed for
call centers and help desks to be integrated with existing call center server
software to provide an automated first response to incoming voice telephone
calls or e-mail requests and to handle the call center requirements virtually
unaided by human operators. The Alife-Call-Center-Agent is being designed to be
able to recognize voice input as well as text-based input such as e-mail.
However, the voice recognition capabilities of Alife-Call-Center-Agent will
depend to a large extent on the availability of highly accurate voice
recognition systems for telephones, which the Company does not develop or sell.
The Alife-Call-Center-Agent, like the Alife-Messenger, will analyze incoming
requests and prepare relevant responses, but will also interact and interface
with call center management, routing and accounting systems.
 
     The Alife-Call-Center-Agent will require an operating platform with a Java
virtual machine. Additional software and hardware enhancements may be necessary
depending on the specific interfaces to call center operating systems. The
Company plans to release the 1.0 version of Alife-Call-Center-Agent by the end
of 1999. The Company intends to market this product directly to customers with
call centers and to call center software vendors. The following diagram
graphically depicts the operation of the ALife-Call-Center-Agent.
 
                      [Alife-Call Center Agent Flow Chart]
 
     ALIFE-KNOWLEDGE-MANAGER:  This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and make it
more easily accessible for retrieval to enable companies to more efficiently and
intelligently manage the large amount of data and documents that companies are
making available on their Intranets. Alife-Knowledge-Manager can be configured
to allow each Intranet user to describe his own profile, background and
interests in addition to other information contained on the Intranet. Once so
configured, users can make natural language search queries about topics of
interest through the ALife-Knowledge-Manager, and the program will respond by
providing relevant information contained on the company's Intranet, including
information about other users with similar interests or areas of expertise.
                                       34
<PAGE>   36
 
     The Alife-Knowledge-Manager is being designed to run on standard OS
platforms and to provide for interfaces to standard databases and third party
document retrieval and management systems. The Company intends to release the
first versions of Alife-Knowledge-Manager in late 1999 or early 2000. The
Company plans to market this product primarily to large corporations with an
existing Intranet infrastructure.
 
     ALIFE-PERSONAL-TUTOR:  The Company is developing this SmartBot to address
certain limitations of traditional Computer-based Training ("CBT") and
Internet-based Training ("IBT") products that are currently available. Whereas
conventional CBT and IBT programs follow a pre-defined path of learning, the
Alife-Personal-Tutor is being designed to use student profile information
extracted from natural language conversation between the SmartBot and the
student user to automatically adapt the difficulty and content of the lessons to
the skill level of the student. Using the natural language capabilities of the
Alife-SmartEngine, students will be able to ask numerous questions about any
topic at any time in plain English. In addition, the Alife-Personal-Tutor is
being designed to respond to questions with additional explanatory multimedia
data (video and audio) depending on the context of the ongoing lecture between
the student and the Alife-Personal-Tutor. It will also formulate questions and
tests depending on the flow of the conversation and lesson.
 
     The Alife-Personal-Tutor is being designed in two components and is
currently planned to be sold in two ways: (i) in several application packages
with specific content (such as science, history etc.), called "tutorials," and
(ii) as a generic tool for developing such tutorials. Both modules of the
Alife-Personal-Tutor are being designed to run on Windows 98 and NT (stand alone
versions) or on standard Internet browsers for on-line applications. The Company
intends to release the first tutorials in the first quarter of 1999 and the
generic version by the second quarter of 1999. The Company's target market for
this product is expected to be the CBT and IBT market and the general education
market.
 
SERVICES
 
     The Company expects to provide consulting, maintenance, technical hotline
and support services for most or all of its products. The Company anticipates
that customers will require support for, and customized versions of, the
Company's SmartBot products or additional developments in order to tailor the
product to the customers' needs. In addition, the Company plans to provide
support for the creation and maintenance of the Knowledge Bases of its bots and
customer specific back-office tools for analyzing client profiles gathered by
its bots.
 
     The Company anticipates that it will continue to derive a portion of its
revenues from software consulting projects. In particular, the Company expects
that it will provide custom solutions for companies seeking consulting expertise
with agent-based software programs.
 
COMPANY STRATEGY
 
     The Company's objective is to become a leader in the development and
implementation of commercial software robot-based solutions to solve various
issues confronting today's Internet use. To achieve this objective, the
Company's strategy includes the following key elements:
 
     BUILD BRAND NAME RECOGNITION.  The Company is seeking to achieve rapid and
broad adoption of its products and strong brand recognition. The Company will
seek to achieve this strategy by offering "Personal" versions of its products
for non-commercial use free of charge or at a low price. The Company also
intends to embark on an aggressive promotional campaign to increase awareness of
the Artificial Life brand and the Alife family of products. The promotional
campaign is expected to involve all common media (i.e. radio, television, print
and trade shows) with a particular emphasis on Internet channels.
 
     CREATE MULTIPLE REVENUE STREAMS.  The Company believes that its growing
product line, corporate customization, product Web sites and an installed user
base will present a significant
 
                                       35
<PAGE>   37
 
opportunity to develop and maintain multiple revenue streams resulting from
product sales, customization and consulting, licensing fees and potentially in
the future, advertising revenues. As these different revenue streams mature,
decisions will be made as to the expansion and contraction of existing programs
based on their success as well as the introduction of new programs.
 
     ESTABLISH STRATEGIC ALLIANCES.  The Company intends to aggressively pursue
strategic alliances to gain access to complementary technologies and
distribution channels. The Company continually evaluates relationships with
companies that offer technologies complementary to the Company's SmartBot
products (such as speech integration and high-end graphics providers). The
Company intends to use alliances wherever possible to gain economies of scale
and to allow it to focus on its core strengths while using those of its partners
to add the complementary functionality necessary to increase value to users.
 
     EXPAND GLOBALLY.  The Company believes that significant opportunities exist
to capitalize on the growth of the Internet internationally. Because the Company
was once a subsidiary of a large and well-known German multimedia and Internet
solutions company, it already has significant contacts with a number of European
businesses. The Company believes that its products can be used worldwide, and
accordingly the Company intends to initiate an international program of
partnering and strategic investment to exploit cross-marketing, co-branding and
promotional opportunities.
 
     LEVERAGE EXISTING CUSTOMER BASE.  The Company intends to cultivate its
future installed user base to gather feedback, test new product releases and
create customer loyalty. The Company plans to collect customer profile data
(through the use of a User Profile Form) for use in development of companion
products and services with the ultimate goal of developing a "community" of
loyal users who are familiar and comfortable with the Company's products. The
Company plans to allow individual users who fill out the User Profile Form to
participate in beta testing of products, information sessions, product and
corporate announcements and product focus chat forums. The Company believes that
such communication, participation and interaction will foster long-term customer
loyalty. Several types of incentives are planned to foster both the sharing of
profile information and the return of value for participation. These may take
the form of reduced user fees, if applicable, free software, contests and other
participatory programs.
 
     EXPAND AND ENHANCE PRODUCT BASE AND TECHNOLOGY.  The Company believes that
it must regularly provide new products and technologies and improve existing
ones to be successful. The Company's products utilize proprietary technologies,
including the Alife-SmartEngine. The Company's strategy is to continue to
enhance its existing technologies and develop new technologies that it can
incorporate into future product offerings. Because the Company's product lines
are being centered around core concepts and technology, the Company believes
many complementary products will be able to be developed by leveraging the
Company's existing competencies and experience into new ideas. Furthermore, the
Company believes that its overall strategy will allow it to address issues
regarding products and services in a dynamic, almost real-time basis, thereby
allowing rapid response to market feedback and developments.
 
MARKETING AND SALES
 
     The Company plans to offer an initial fully-functional "Personal" version
of most of its products to individual, non-commercial users either free of
charge or at a low price. The Company believes that this approach, which has
been used successfully by other Internet companies, will result in more rapid
acceptance and sale of the Company's products to commercial users: a
"Professional" version for professional and small corporate users and/or a
transaction and client/server based "Enterprise" version for networked corporate
users. For the commercial versions of its SmartBot products, the Company intends
to charge a one-time licensing fee and, with respect to the "Enterprise"
version, intends to also charge a transactional fee based upon the number of
users which interact with its bots. This strategy has been successful in the
past for companies such as
 
                                       36
<PAGE>   38
 
Netscape, which distributed free versions of its browser software, and
RealNetworks, Inc., which has brought streaming audio and video to the Internet.
 
     The Company intends to sell the Alife-WebGuide, the Alife-Messenger and the
Alife-SalesRep via Company Web sites and through additional distribution
partners. The Company may decide to license the Professional and/or Enterprise
versions of these products for a certain period for free in order to generate
market penetration and increase demand for these commercial versions of the
Company's products.
 
     The Company intends to enter into a strategic relationship with an
international partner already established in the call center market to market
and sell the Alife-Call-Center-Agent. The Company believes this will be
necessary because the call center software market is already highly competitive.
 
     The Company intends to market and sell the Alife-Portfolio-Manager in
cooperation with one or more established companies in the financial services
industry and/or the online banking and trading community.
 
     The Alife-Personal-Tutor and the Alife-Knowledge-Manager target the IBT,
CBT market and the Intranet and corporate market. Accordingly, the Company
intends to distribute and market these products in cooperation with partners
with established experience and sales channels in these growing business
segments.
 
     The Company has not entered into any such distribution or marketing
relationship, and there can be no assurance that it will be able to do so on
terms acceptable to it, or at all.
 
     In addition to the marketing efforts for the individual products in the
Alife product suite, the Company intends to initiate aggressive marketing
campaigns beginning in the first half of 1999 to establish recognition of the
Artificial Life brand. The marketing activities are expected to involve all
common media (radio, TV, magazines, newspapers, trade shows) with a particular
emphasis on the Internet channels. The Company will use its own products like
the Alife-SalesRep and the Alife-WebGuide to promote its products and services.
 
     The Company will also generate marketing material using its in-house
capabilities and multi-media know-how to produce video spots and innovative
interactive advertisement techniques for the Internet.
 
STRATEGIC ALLIANCES
 
     The Company is currently evaluating several strategic alliances with
companies in the United States and Europe for marketing and selling products as
well as for collaborations in product development. The closing of collaboration
agreements may influence future product development, the market direction of
certain products and the success of certain product marketing efforts. To date,
however, the Company has not entered into any such strategic alliance or
collaboration agreement, and there can be no assurance that it will be able to
enter into such strategic agreements on terms acceptable to the Company, or at
all. See "-- Marketing and Sales."
 
PRODUCT DEVELOPMENT
 
     The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. The Company is exploring the opportunity to extend the functionality
of its Alife-SmartEngine-derived products through the inclusion of third party
software and applications in the development of such products.
 
     The Company's development organization is arranged in four groups: the Core
Technology Group, which does research and designs and develops the technologies;
the Production Group, which specifies, produces and maintains product releases;
the Quality Assurance Group, which verifies that products meet their
specifications and the Company's quality standards; and the
                                       37
<PAGE>   39
 
Competence Group, which focuses on rapid prototyping of new ideas, consulting
and adapting customer specific versions of the products. The Company allocates
responsibilities among the groups to optimize the time, cost and quality control
issues associated with product development.
 
     As of September 29, 1998, there were 18 employees on the Company's
development staff. The Company estimates that its total product development
expenses for its Alife-SmartEngine product suite will significantly increase
through 1998 and thereafter as it expects to allocate substantial resources to
future research and development. Through June 30, 1998, the Company had not
incurred any capitalized software development costs from its development
efforts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
     To the extent one or more of the Company's competitors introduce products
that more fully address customer requirements, the Company's business could be
materially adversely affected. There can be no assurance that the Company will
be successful in developing and marketing enhancements to its existing products
or new products, incorporating new technology on a timely basis, or that its new
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, prospects, financial condition
and results of operations will be materially adversely affected. See "Risk
Factors -- Rapid Technological Change."
 
COMPETITION
 
     The market for the Company's products and services is new, evolving and
growing rapidly. Competition can be expected to intensify significantly as the
market matures and the more established software companies, such as Microsoft
Corporation, become increasingly involved. Barriers to entry are relatively
insubstantial. The Company believes that the principal competitive factors for
companies seeking to become involved in the software robot industry are core
technology, delivery methods, brand recognition, ease of use and interfaces.
 
     The Company uses its core technology, the Alife-SmartEngine, in a wide
variety of business areas. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Brightware, Inc.,
Broadvision, Inc., Extempo, Inc., Haptek, Inc., Nearlife, Inc., Netsage Corp.,
Neuromedia, Inc. and Virtual Personalities, Inc. This list may not be complete
and may change and substantially increase over time.
 
     Some of the Company's existing and potential competitors have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. Such competitors are able to engage in more thorough marketing
campaigns for their products and services, be more aggressive from a pricing
standpoint and make more attractive offers to potential employees and partners.
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
     The Company will be relying upon trade secrets, know-how, copyrights and
continuing technological innovations to develop and maintain its competitive
position. The Company seeks to protect such information, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. These agreements provide that all confidential information
developed or made known during the course of the individual's or entity's
relationship with the Company is to be kept confidential and not be disclosed to
third parties except in specific circumstances. The Company has caused each of
its employees to execute forms of Confidentiality and Inventions Agreements
which provide that, to the extent permitted by applicable law, all inventions
conceived by the individual during the individual's employment will remain the
exclusive property of the Company. There can be no assurance that these
agreements will not be breached,
                                       38
<PAGE>   40
 
that the Company would have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. Further, there can be no assurance that the Company
will be able to protect its copyrights, trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques.
 
     The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. See "Risk Factors -- Intellectual
Property and Other Proprietary Rights."
 
EMPLOYEES
 
     As of September 29, 1998, the Company had 24 full-time employees and three
part-time interns. The Company will need to hire additional staff to accomplish
its business development goals. There can be no assurance that the Company will
be able to find, attract or retain such additional staff. See "Risk
Factors -- Dependence on Key Personnel; Need for Additional Personnel."
 
SUB-CONTRACTORS AND EXTERNAL HUMAN RESOURCES
 
     To fulfill timely delivery of products, the Company is currently using
external human resources and sub-contractors to develop its products. There can
be no assurance that these external resources and sub-contractors will be
available in the future, or that the current conditions and agreements with
these contractors or resources will remain reasonable. See "Risk Factors --
Dependence on Third Party Contractors."
 
FACILITIES
 
     The Company rents 7,334 square feet of office space at Four Copley Place,
Suite 102, Boston, Massachusetts 02116, USA. The 36 month lease commenced
February 1, 1998, at an annual rental of $205,332. The management of the Company
is aware of the fact that additional office space will be required in fiscal
1999 due to the planned expansion of the Company. The Company believes, however,
that it will be able to obtain any additional space in a timely manner and on
commercially reasonable terms.
 
LEGAL PROCEEDINGS
 
     There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
 
                                       39
<PAGE>   41
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table sets forth certain information regarding the executive
officers and directors of the Company as of September 29, 1998:
 
<TABLE>
<CAPTION>
NAME                                     AGE    POSITION
----                                     ---    --------
<S>                                      <C>    <C>
Eberhard Schoneburg....................  41     President, Chief Executive Officer and
                                                  Chairman of the Board
Bruno Gabriel..........................  52     Director
Elmar Wohlgensinger(1)(2)..............  59     Director
Hartmut Bergmann(1)(2).................  48     Director
Robert Pantano.........................  37     Chief Financial Officer
Klaus Kater............................  31     Chief Technology Officer
</TABLE>
 
---------------
(1) Member of the Audit Committee.
 
(2) Member of the Compensation Committee.
 
     Eberhard Schoneburg has been President and a member of the Board of
Directors of the Company since November 1994. He was Chief Executive Officer
from November 1994 to May 1996 and from October 1997 to the present. Mr.
Schoneburg has been the Chairman of the Board of Directors of the Company since
the founding of the Company. The Company was founded in November 1994 as
Neurotec International Corp., a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH ("Neurotec GmbH"), a German multimedia and Internet
solutions company owned by Mr. Schoneburg and two corporate investors: a major
German retailer and an industrial conglomerate. Neurotec GmbH was part of the
Neurotec Group, a group of high tech companies founded in Germany by Mr.
Schoneburg in 1993. In 1997 he sold all of his shares in Neurotec GmbH to the
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company from Neurotec GmbH. From 1989 to 1994 Mr. Schoneburg was a professor for
industrial applications of artificial intelligence at Fachhochschule Furtwangen,
Germany. From 1988 to 1993, he was the Chairman of the BIT Group, a group of
five German high tech companies which he founded in 1988.
 
     Mr. Schoneburg was awarded the First Prize of the Berlin Innovation Award
in 1990 for the development of the First European Neural Compiler and again in
1992 for the development of an expert system for detecting chemical hazards for
Procter and Gamble. He has published five course books on a wide variety of
topics such as computer viruses, neural networks, evolution strategies and
genetic programming and over 60 research papers on related topics. He is also a
member of the jury of the Golden Award of Montreux.
 
     Bruno Gabriel joined the Company's Board of Directors in September 1998.
Since 1989, Mr. Gabriel has been a management consultant to several European
companies. From 1984 to 1989, he was the Chief Executive Officer and President
of the ALSO Group, a European distributor of personal computers and computer
equipment which he founded in 1984. From 1978 to 1984, Mr. Gabriel was the Chief
Executive Officer of ADV/ORGA, a major German software and consulting company.
From 1976 until 1978, he was manager for new media at Tagesanzeiger Zurich, a
Swiss newspaper company. Mr. Gabriel began his career in 1971 as a manager for
software development at the Telekurs AG, a Swiss telecommunications company.
 
     Elmar Wohlgensinger joined the Company's Board of Directors in September
1998. He has worked for the IHA Institute, a Swiss market research company,
since 1961 where he has been a member of the board since 1970 and President
since 1980. Mr. Wohlgensinger is a Vice President of ATAG Holding, an accounting
firm, and has been a member of ATAG Ernst & Young management, an accounting
firm, since 1991. Mr. Wohlgensinger also serves on the boards of German GFK, EKN
 
                                       40
<PAGE>   42
 
Bank Nidwalden, Schweizerische Gesellschaft Fuer Marketing and the Chamber of
Commerce of Central Switzerland.
 
     Hartmut Bergmann has been appointed to join the Board of Directors upon
completion of the Offering pursuant to an agreement between the Company and the
Representatives. See "Underwriting." Mr. Bergmann has been Chairman of the
Management Board of New York Broker Deutschland AG since 1990. From 1976 until
he joined New York Broker Deutschland AG, he was with Hornblower Fischer AG, a
regional German brokerage firm where he was a Member of the Management Board
from 1976 through 1989. Previously he was a financial consultant with Merrill
Lynch in Germany.
 
     Robert Pantano, the Company's Chief Financial Officer, joined the Company
in April 1995 as an accountant, was appointed Controller and Director of Human
Resources in 1996 and was promoted to his present position in September 1997.
From 1993 until joining the Company, Mr. Pantano worked as the Controller and
General Manager of Intertech International Corp., an international engineering
firm. From 1990 to 1993, he was a Principal with Global Vision International, an
international export trade consulting firm specializing in central and eastern
Europe. Mr. Pantano holds a B.A. in accounting from Bentley College.
 
     Klaus Kater joined the Company as Chief Technology Officer in May 1998.
From December 1997 through April 1998, Mr. Kater provided consulting services to
the Company. Prior to that time, from June 1997 to December 1997, he was
Managing Director for the mediaCenter Research Institute GmbH, a German
multimedia research center and a subsidiary of Neurotec GmbH. From March 1996 to
July 1997, Mr. Kater worked as a freelance consultant, coordinating the
activities of the Wirtschaftsforderungsgesellschaft Business Development
Institute in the context of multimedia initiatives, and concurrently from 1993
to 1996, he worked for Neurotec GmbH, where he served as project manager for
chemical expert systems. From 1992 to 1993, Mr. Kater was a project manager at
Expert Informatik GmbH, where he managed a team that developed an expert system
for Procter & Gamble. From 1990 to 1992, he ran his own company Kater & Stirm
Softwareentwicklung GbR which produced and sold software for the hotel
management market. Mr. Kater holds a degree in computer science and artificial
intelligence from Fachhochschule of Furtwangen in Germany.
 
BOARD OF DIRECTORS
 
     The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of this Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Mr. Wohlgensinger will serve in the class whose term
expires in 1999; Mr. Gabriel will serve in the class whose term expires in 2000;
and Mr. Schoneburg will serve in the class whose term expires in 2001. Upon
consummation of the Offering, the Representatives will have the right to appoint
one member of the Board of Directors of the Company for a period of five years.
The Representatives have named Hartmut Bergmann as their appointee and he will
be elected to the class whose term expires in 2000 effective upon consummation
of the Offering.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has a Compensation Committee which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company, including salaries and incentive compensation
for executive officers. Initially, the whole Board will take action on the
recommendations of the Compensation Committee and will administer the 1998
Equity Incentive Plan. The Board also has an Audit Committee, which reviews the
results and scope of audits and other services provided by the Company's
independent public accountants and matters relating to the Company's internal
control system.
 
                                       41
<PAGE>   43
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Messrs. Wohlgensinger and Bergmann, both non-employee directors, will
constitute the Company's Compensation Committee. No executive officer of the
Company will serve as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
 
COMPENSATION OF DIRECTORS
 
     Directors who are not employees of the Company receive $3,000 for each
meeting of the Board of Directors attended and are reimbursed for reasonable
out-of-pocket expenses incurred in attending such meetings. Non-employee
directors are also eligible for participation in the Company's 1998 Equity
Incentive Plan, and the Company may in the future grant non-qualified stock
options to non-employee directors as an incentive to join or remain on the Board
of Directors.
 
ADVISORY BOARD
 
     The Company's Advisory Board consists of individuals with demonstrated
expertise in fields related to the Company's business who advise the Company
concerning long-term planning, research and development. Members also evaluate
the Company's research program, recommend personnel to the Company and advise
the Company on technology matters. The Advisory Board has advised the Company on
specific marketing, management and artistic technical issues. Advisory Board
members are compensated on a time and expenses basis and have received options
to purchase shares of Common Stock of the Company.
 
     No member of the Advisory Board is employed by the Company, and members may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a small
portion of their time to the Company. The members of the Company's Advisory
Board are:
 
<TABLE>
<CAPTION>
            ADVISOR                     AFFILIATION                 EXPERTISE
--------------------------------  -----------------------    -----------------------
<S>                               <C>                        <C>
Hermann Wolf Richter............  HWR Strategic Marketing    Internet and Multimedia
Prof. Petr Vrana................  Universitat of Kassel      Media Arts
Prof. Paulo Gaudino, Ph.D.......  Boston University          Neural Science and
                                                             Cognitive Computing
</TABLE>
 
EXECUTIVE COMPENSATION
 
     SUMMARY COMPENSATION.  The following table sets forth certain information
with respect to compensation paid or accrued for services rendered to the
Company in all capacities for the fiscal year ended December 31, 1997 by its
present and former Chief Executive Officer (the "Named Executive Officers"). No
other executive officer of the Company earned greater than $100,000 in the
fiscal year ended December 31, 1997(1).
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                     ANNUAL COMPENSATION
                                        ---------------------------------------------
                                                                         OTHER ANNUAL
NAME AND PRINCIPAL POSITION(1)          YEAR    SALARY($)    BONUS($)    COMPENSATION
------------------------------          ----    ---------    --------    ------------
<S>                                     <C>     <C>          <C>         <C>
Eberhard Schoneburg
  President and Chief
  Executive Officer(2)................  1997    $ 54,254       --          $22,500(3)
Pamela A. Tomkinson
  Former Chief Executive
  Officer(4)..........................  1997    $113,861       --           --
</TABLE>
 
---------------
(1) Neither Robert Pantano, who became the Company's Chief Financial Officer in
    September 1997, nor Klaus Kater, who became the Company's Chief Technology
    Officer in May 1998,
 
                                       42
<PAGE>   44
 
    had total compensation which exceeded $100,000 in the fiscal year ended
    December 31, 1997. However, both Mr. Pantano and Mr. Kater entered into
    employment agreements with the Company on May 1, 1998, under which each will
    receive an annual base salary of $100,000. See "-- Executive Employment
    Agreements."
 
(2) Mr. Schoneburg assumed the position of Chief Executive Officer in October
    1997.
 
(3) Consists of rent paid by the Company for an apartment occupied by Mr.
    Schoneburg. The Company ceased making such payments in January 1998.
 
(4) Ms. Tomkinson resigned as Chief Executive Officer on October 20, 1997.
 
     OPTION GRANTS.  There were no options granted by the Company during the
fiscal year ended December 31, 1997 to any of the Named Executive Officers.
 
     OPTION EXERCISES AND YEAR-END OPTION VALUES.  The Named Executive Officers
did not exercise any options during the fiscal year ended December 31, 1997 and
did not hold any stock options at December 31, 1997.
 
EXECUTIVE EMPLOYMENT AGREEMENTS
 
     Under an Executive Employment Agreement dated July 1, 1998, and amended and
restated as of September 1, 1998, the Company has agreed to employ Eberhard
Schoneburg as President, Chief Executive Officer and Chairman of the Board of
Directors for a period of three years at an initial annual base salary of
$240,000 plus an incentive bonus equal to 3% of the Company's income from
operations. The agreement also provides that the annual base salary will
increase as determined by the Board but at not less than 10% per year. If Mr.
Schoneburg is terminated without cause (including a failure to renew the
agreement) or if he terminates his employment for "good reason" (as defined in
the agreement), he will be entitled to receive a lump sum payment of one to
three times (depending upon whether such termination occurs before or after a
change of control of the Company) the sum of (i) his base salary plus (ii) the
greater of the average of his two most recent annual bonuses or his annual bonus
payable in the year of termination. The agreement also contains a non-compete
and non-solicitation provision which covers the longer of the term of his
employment or any time period during which he serves as a director of the
Company, plus a period of one year thereafter.
 
     Pursuant to Employment Agreements dated May 1, 1998, the Company has agreed
to employ Robert Pantano as Chief Financial Officer and Klaus Kater as Chief
Technology Officer (each an "Officer" and collectively, the "Officers") for at
least eighteen months at initial annual base salaries of $100,000. The
agreements also provide that the Officers are entitled to participate in any
bonus and incentive programs that may be in effect for employees of the Company
and that the Officers' base salaries will be reviewed at least annually by the
Company's Chief Executive Officer and may be adjusted upward at such time at the
sole discretion of the Chief Executive Officer. On May 1, 1999 the Officers will
each be entitled to receive stock options with a fair market value of $25,000.
If either Officer is terminated by the Company without "cause" (as defined in
the agreements) or if he terminates his employment for "good reason" (as defined
in the agreements) he is entitled to severance pay, at the rate in effect on the
termination date, for a period of six months. The agreements also contain
non-compete and non-solicitation provisions which cover the term of the
Officer's employment plus any additional time during which the Officer is
receiving any severance benefits from the Company, as well as confidentiality
and assignment of invention and intellectual property provisions.
 
EMPLOYEE BENEFIT PLANS
 
     1998 EQUITY INCENTIVE PLAN.  The Company's 1998 Equity Incentive Plan (the
"Incentive Plan") was approved by the Company's Board of Directors and its
stockholders in April 1998. The Incentive Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal
 
                                       43
<PAGE>   45
 
Revenue Code of 1986, as amended (the "Code"), non-qualified stock options,
stock grants and certain stock equivalents (including, but not limited to,
phantom stock, performance units, dividend equivalents and stock appreciation
rights) (collectively "stock awards"). A total of 1,200,000 shares of Common
Stock (subject to adjustment for stock splits and similar capital changes) have
been reserved for issuance under the Incentive Plan, and 26,083 shares had been
issued pursuant to stock awards granted under the Incentive Plan, 590,569 shares
were subject to outstanding options and 583,348 shares were available for future
grant. Grants of stock awards under the Incentive Plan and all questions of
interpretations with respect to the Incentive Plan are determined by the
Compensation Committee of the Board of Directors of the Company or the whole
Board of Directors, if applicable.
 
     In the event of a change of control of the Company, the Compensation
Committee in its discretion may, at the time a stock award is made or at any
time thereafter, take one or more of the following actions: (i) provide for the
acceleration of any time period relating to the exercise or payment of a stock
award; (ii) provide for payment of cash or other property with a fair market
value equal to the amount that would have been received upon the exercise or
payment of a stock award had the stock award been exercised or paid upon the
change in control; (iii) adjust the terms of a stock award in a manner
determined by the Compensation Committee to reflect the change in control; (iv)
cause a stock award to be assumed, or new rights substituted therefor, by
another entity; or (v) make such other provision as the Compensation Committee
may consider equitable and in the best interests of the Company.
 
     401(K) PLAN.  The Company's 401(k) Profit Sharing Plan (the "401(k) Plan")
covers substantially all employees of the Company. Each year, participants may
contribute from 2% to 15% of pretax annual compensation, subject to the
statutory limit (a maximum of $10,000 in 1998). In addition, the Company makes a
matching contribution equal to 50% of each participant's elective contribution
up to a maximum of 1.5% of the participant's annual compensation. Participants
are immediately vested in their contributions plus actual earnings thereon. A
participant is 100% vested in the Company's matching contributions after five
"years of service" (as defined in the 401(k) Plan).
 
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
 
     The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors' fiduciary duty
of care. The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. See "Description of Capital Stock -- Delaware
Law and Certain Charter and Bylaw Provisions."
 
     The Certificate of Incorporation of the Company provides mandatory
indemnification rights to any officer or director of the Company who, by reason
of the fact that he or she is an officer or director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Such limitation of liability and indemnification may not
apply to liabilities arising under the Federal securities laws and does not
affect the availability of equitable remedies.
 
     There is no pending litigation or proceeding involving a director, officer,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
 
                                       44
<PAGE>   46
 
                              CERTAIN TRANSACTIONS
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The Company was founded in November 1994 as Neurotec International Corp., a
wholly-owned subsidiary of Neurotec Hochtechnologie GmbH ("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
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company (Neurotec International Corp.) from Neurotec GmbH for approximately
$500,000.
 
     On June 29, 1998, Mr. Schoneburg loaned the Company $500,000 at an annual
interest rate of 10%. The full amount of the loan, including principal and all
accumulated interest thereon, is due and payable on January 1, 2000.
 
     In April 1997, Mr. Schoneburg agreed to forego the majority of his $240,000
annual salary as President and Chief Executive Officer until such time as
sufficient funds were available for reinstatement. During 1997, Mr. Schoneburg
was paid a total of $76,754 in salary and other compensation. See
"Management -- Executive Compensation." Beginning January 1, 1998, Mr.
Schoneburg's salary was deferred. During the time that his salary was deferred,
the Company advanced Mr. Schoneburg approximately $153,916 for living expenses.
On September 25, 1998 the Company paid Mr. Schoneburg a total of $175,385
representing 38 weeks of deferred salary. Mr. Schoneburg used the after tax
proceeds of this payment to repay the majority of the advances made to him
during the deferral period.
 
     During 1998, the Company has paid approximately $35,200 in total cash
consideration to Bruno Gabriel, a director of the Company, for consulting
services rendered to the Company.
 
     On June 30, 1998, Mr. Gabriel and Elmar Wohlgensinger, directors of the
Company were granted options to purchase 184,426 and 163,934 shares of Common
Stock, respectively. These options were granted in consideration of advisory
services rendered to the Company.
 
                                       45
<PAGE>   47
 
                       PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of September 29, 1998,
and as adjusted to reflect the sale of the shares offered by the Company and the
Selling Stockholder in this Offering, by (i) persons known by the Company to be
beneficial owners of more than 5% of the outstanding shares of Common Stock,
(ii) the Selling Stockholder, (iii) the Named Executive Officers and other
executive officers, (iv) each director of the Company and (v) all current
executive officers and directors as a group:
 
<TABLE>
<CAPTION>
                                        SHARES OF                             SHARES OF
                                      COMMON STOCK                          COMMON STOCK
                                      BENEFICIALLY                          BENEFICIALLY
                                     OWNED PRIOR TO                          OWNED AFTER
                                     THE OFFERING(1)                       THE OFFERING(1)
NAME AND ADDRESS(2) OF           -----------------------    SHARES     -----------------------
BENEFICIAL OWNER                  NUMBER      PERCENT(3)    OFFERED     NUMBER      PERCENT(3)
----------------------           ---------    ----------    -------    ---------    ----------
<S>                              <C>          <C>           <C>        <C>          <C>
Eberhard Schoneburg............  5,967,377      75.8%       400,000    5,567,377      61.4%
Cybermind Interactive Europe
  AG...........................    409,836       5.2%            --      409,836       4.5%
  Am Borsigturm 48
  13507 Berlin
  Germany
Pamela A. Tomkinson(4).........          0          *            --            0          *
Robert Pantano(5)..............     16,442          *            --       16,442          *
Klaus Kater(5).................     16,442          *            --       16,442          *
Bruno Gabriel(6)...............    774,426       9.6%            --      774,426       8.4%
Elmar Wohlgensinger(5).........    163,934       2.0%            --      163,934       1.8%
Hartmut Bergmann(7)............          0          *            --            0          *
All current executive officers
  and directors as a group (6
  persons)(8)..................  6,938,621      84.1%       400,000    6,538,621      69.2%
</TABLE>
 
---------------
 *  Less than 1%
 
(1) Shares of Common Stock that an individual or group has the right to acquire
    within 60 days of September 29, 1998, pursuant to the exercise of options or
    warrants are deemed to be outstanding for the purposes of computing the
    percentage ownership of such individual or group, but are not deemed to be
    outstanding for the purpose of computing the percentage ownership of any
    other person shown in the table. Except as indicated in footnotes to this
    table, the Company believes that the stockholders named in this table have
    sole voting and investment power with respect to all shares of Common Stock
    shown to be beneficially owned by them based on information provided to the
    Company by such stockholders.
 
(2) The address of all persons who are executive officers or directors of the
    Company is: c/o Artificial Life, Inc., Four Copley Place, Suite 102, Boston,
    Massachusetts, 02116.
 
(3) Percentage of ownership is based on 7,870,574 shares of Common Stock
    outstanding on September 29, 1998 and 9,070,574 shares of Common Stock
    outstanding after the completion of this Offering.
 
(4) Ms. Tomkinson resigned as Chief Executive Officer of the Company on October
    20, 1997.
 
(5) Consists solely of shares subject to stock options which are currently
    exercisable.
 
(6) Includes 184,426 shares subject to stock options which are currently
    exercisable.
 
(7) Mr. Bergmann will become a director upon consummation of the Offering. See
    "Underwriting."
 
(8) Includes 381,244 shares subject to stock options which are currently
    exercisable.
 
                                       46
<PAGE>   48
 
                          DESCRIPTION OF CAPITAL STOCK
 
     Effective upon consummation of the Offering, the Company's authorized
capital stock will consist of 30,000,000 shares of Common Stock, par value $.01
per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"). Upon completion of this Offering, there will
be 9,070,574 shares of Common Stock and no shares of Preferred Stock
outstanding. As of September 29, 1998, there were 7,870,574 shares of Common
Stock outstanding, held of record by 35 stockholders. In addition, as of
September 29, 1998 there were outstanding options to purchase 590,569 shares of
Common Stock. Upon consummation of the Offering, there will be outstanding
warrants to purchase 160,000 shares of Common Stock.
 
COMMON STOCK
 
     Upon consummation of the Offering, the 53,278 outstanding shares of
Non-Voting Common Stock will be automatically converted into 53,278 shares of
Voting Common Stock and the Company's Certificate of Incorporation will not
authorize the issuance of any shares of Non-Voting Common Stock in the future.
 
     The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the rights
and preferences of the holders of any outstanding Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends as are declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock have the right to a ratable portion of assets remaining after the payment
of all debts and other liabilities of the Company, subject to the liquidation
preferences of the holders of any outstanding Preferred Stock. Holders of Common
Stock have neither pre-emptive rights nor rights to convert their Common Stock
into any other securities and are not subject to future calls or assessments by
the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
offered hereby upon issuance and sale will be, fully paid and non-assessable.
The rights, preferences and privileges of the holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock that the Company may designate and issue in the future.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to certain limitations
prescribed by Delaware law, without further action by the stockholders, to issue
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms, the number of shares constituting any series and the
designation of such series. The Company believes that the Board of Directors'
power to set the terms of, and the Company's ability to issue, Preferred Stock
will provide flexibility in connection with possible financing transactions in
the future. The issuance of Preferred Stock, however, could adversely affect the
voting power of holders of Common Stock and decrease the amount of any
liquidation distribution to such holders. The presence of outstanding Preferred
Stock could also have the effect of delaying, deterring or preventing a change
in control of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
 
REPRESENTATIVES' WARRANTS
 
     Upon consummation of the Offering, the Representatives will be granted a
warrant to purchase 160,000 shares of Common Stock at an exercise price equal to
120% of the initial public offering price. This warrant is exercisable for a
four year period beginning on the first anniversary of the date on which this
Prospectus is declared effective by the Commission and expires on the fifth
anniversary of such date. The number of shares for which the warrant is
exercisable is subject to
 
                                       47
<PAGE>   49
 
adjustment for stock splits, combinations or dividends and reclassifications,
exchanges or substitutions.
 
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
 
     The provisions of the Certificate of Incorporation and Restated Bylaws
("the Bylaws") of the Company discussed below could make more difficult or
discourage a proxy contest or other change in the Company's management or the
acquisition or attempted acquisition of control by a holder of a substantial
amount of the Company's voting stock. It is possible that such provisions could
make it more difficult to accomplish, or could deter, transactions that
stockholders may otherwise consider to be in their best interests or those of
the Company.
 
     The Company is subject to the anti-takeover provisions of Section 203 of
the DGCL. In general, Section 203 prohibits a Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is, or the transaction
in which the person became an interested stockholder was, approved in a
prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
 
     The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of the Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Upon consummation of the Offering, Mr. Wohlgensinger
will serve in the class whose term expires in 1999; Messrs. Gabriel and Bergmann
will serve in the class whose term expires in 2000; and Mr. Schoneburg will
serve in the class whose term expires in 2001. All directors elected to the
Company's classified Board of Directors will serve until the election and
qualification of their respective successors or their earlier resignation or
removal. The Board of Directors is authorized to create new directorships and to
fill such positions so created and is permitted to specify the class to which
any such new position is assigned. The person filling such position would serve
for the term applicable to that class. The Board of Directors (or its remaining
members, even if less than a quorum) is also empowered to fill vacancies on the
Board of Directors occurring for any reason for the remainder of the term of the
class of directors in which the vacancy occurred. Members of the Board of
Directors may only be removed for cause. These provisions are likely to increase
the time required for stockholders to change the composition of the Board of
Directors. For example, in general, at least two annual meetings will be
necessary for stockholders to effect a change in a majority of the members of
the Board of Directors.
 
     The Company's Bylaws provide that, for nominations to the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. If the meeting is not an annual
meeting, the notice must generally be delivered not more than 90 days prior to
the special meeting and not later than the later of 60 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made by the Company. Only such business may be conducted at a
special meeting of stockholders as is brought before the meeting pursuant to the
Company's notice of meeting. The notice by a stockholder must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about the nominee or a description of
the proposed business to be brought before the meeting.
 
                                       48
<PAGE>   50
 
     The Certificate of Incorporation also requires that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by a
consent in writing. Special meetings of the stockholders may be called only by
the Board of Directors of the Company pursuant to a resolution adopted by a
majority of the total number of directors authorized.
 
     The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. The
Certificate of Incorporation of the Company requires the affirmative vote of the
holders of at least 70% of the outstanding voting stock of the Company, voting
together as a single class, to amend or repeal any of the provisions discussed
in this section entitled "Delaware Law and Certain Charter and Bylaw Provisions"
or to reduce the number of authorized shares of Common Stock or Preferred Stock.
Such 70% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. Such 70% vote is also required for any amendment
to, or repeal of, the Company's Bylaws by the stockholders. The Bylaws may also
be amended or repealed by a simple majority vote of the Board of Directors.
 
     As permitted by the DGCL, the Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for beach of the director's fiduciary duties
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or successor provisions of the DGCL, or
(iv) for any transaction from which the director derives an improper personal
benefit.
 
     The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law (except, in some circumstances, with respect to suits
initiated by the director or officer) and advance expenses to such directors or
officers to defend any action for which rights of indemnification are provided.
In addition, the Certificate of Incorporation and Bylaws of the Company also
permit the Company to grant such rights to its employees and agents. The Bylaws
also provide that the Company may enter into indemnification agreements with its
directors and officers and purchase insurance on behalf of any person whom it is
required or permitted to indemnify. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors, officers and employees.
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. The transfer agent's telephone number is (212)
936-5100.
 
                                       49
<PAGE>   51
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this Offering, there has been no market for the Common Stock of
the Company. The Company can make no prediction as the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the perception
that such sales may occur, could adversely affect prevailing market prices. See
"Risk Factors -- Shares Eligible for Future Sale."
 
     Upon completion of this Offering, the Company expects to have 9,070,574
shares of Common Stock outstanding (excluding 590,569 and 160,000 shares
reserved for issuance upon the exercise of outstanding stock options and the
Representatives' Warrant, respectively) (9,310,574 shares of Common Stock
outstanding if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 1,600,000 shares offered hereby will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act ("Rule 144"), which shares will be subject
to the resale limitations imposed by Rule 144, as described below.
 
     All of the remaining 7,470,574 shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold in
the absence of registration under the Securities Act, except pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144. Of the restricted securities, no shares are eligible for
sale in the public market immediately after this Offering pursuant to Rule
144(k) under the Securities Act ("Rule 144(k)"). A total of 5,567,377 restricted
securities will be eligible for sale in the public market in accordance with
Rule 144 beginning 90 days after the date of this Prospectus. Taking into
consideration the effect of the lock-up agreements described below and the
provisions of Rules 144 and 144(k), no restricted shares will be eligible for
sale until the expiration of the lock-up agreements one year after the date of
this Prospectus, subject to the provisions of Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately 90,705 shares after this Offering) or (ii)
the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two years
is entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
 
     Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act ("Rule 701"). In general, Rule 701
permits resales of shares issued pursuant to certain compensatory benefit plans
and contracts, commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities and Exchange Act of 1934, as amended,
in reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. As of September 29, 1998,
the Company has granted options covering 590,569 shares of Common Stock that
have not yet been exercised and which become exercisable at various times in the
future. Any shares of Common Stock issued upon the exercise of options, in
addition to the 701 Shares, will be eligible for sale pursuant to Rule 701.
 
     As of September 29, 1998, the Company has also issued 26,083 shares of
Common Stock pursuant to the exercise of stock options (the "701 Shares").
                                       50
<PAGE>   52
 
     The executive officers and directors and certain other existing
stockholders of the Company, who beneficially own in the aggregate
shares of Common Stock and holders of options to purchase             shares of
Common Stock, have agreed that they will not, without the prior written consent
of New York Broker, Inc., offer, pledge, sell, contract to sell, grant any
option to purchase or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of one year after the date of this
Prospectus, and, with respect to           Registrable Shares to be registered
by certain holders in this Offering, for a period of six months after the date
of this Prospectus.
 
REGISTRATION RIGHTS
 
     The holders of 1,287,114 shares of Common Stock (the "Registrable Shares")
issued in Private Placements in June 1998 and September 1998 have "piggyback"
registration rights to request that the Company register any of such shares in
the event that the Company proposes to register any of its securities under the
Securities Act (other than in connection with an acquisition or issuance of
stock options or pursuant to a Form S-8 (for use with certain Company employee
benefit plans), Form S-4 (for use in connection with certain business
combinations involving the Company) or comparable registration statement).
However, if such piggyback registration rights are exercised in connection with
an underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to reduce the number of such
shares to be included in such public offering. In addition, holders of Common
Stock representing 824,000 of the shares of the Registrable Shares have the
right, without limitation, to include up to an aggregate of 20% of such shares
for registration in the Offering. Holders of      shares have requested the
registration of such shares in the Offering. Except for these shares, no other
Registrable Shares will form a part of the shares of Common Stock registered in
this Offering. The holders of the
Registrable Shares to be registered in this Offering have entered into six-month
lock-up agreements and the holders of             of the Registrable Shares have
entered into one year lock-up agreements as described above.
 
     All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions and stock transfer fees and expenses)
and the fees and expenses of legal counsel to the selling stockholders will be
borne by the Company.
 
                                       51
<PAGE>   53
 
                                  UNDERWRITING
 
     Subject to the terms and conditions set out in the underwriting agreement,
dated                , 1998, among the Company, the Selling Stockholder and the
Underwriters (the "Underwriting Agreement"), the Underwriters, acting through
New York Broker, Inc. (the "Representative") and New York Broker Deutschland AG
(the "International Manager" and together with New York Broker, Inc., the
"Representatives"), have severally agreed to purchase from the Company and from
the Selling Stockholder, the number of shares of Common Stock set forth opposite
their respective names below:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
                            NAME                               SHARES
                            ----                              ---------
<S>                                                           <C>
New York Broker, Inc. ......................................
New York Broker Deutschland AG..............................
 
                                                              ---------
          Total.............................................  1,600,000
                                                              =========
</TABLE>
 
     Pursuant to the Underwriting Agreement, the shares of Common Stock are
being offered and sold through two selling groups. New York Broker, Inc. is
acting as Representative for the U.S. Selling Group which is offering and
selling shares of Common Stock only in the United States. New York Broker
Deutschland AG is acting as International Manager with respect to the
International Selling Group which is offering and selling shares of Common Stock
in all countries outside of the United States.
 
     The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below), if any
are purchased. The Company and the Selling Stockholder have been advised that
the Underwriters propose initially to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not in excess of
$     per share. The public offering price and other selling terms may be
changed by the Representative after the initial offering to the public.
 
     The Underwriting Agreement provides for indemnification among the Company,
the Selling Stockholder and the Underwriters against certain liabilities in
connection with this Offering, including liabilities under the Securities Act.
 
     The Company has granted the Underwriters an option exercisable during the
30 day period after the date of this prospectus to purchase up to an aggregate
of 240,000 additional shares of Common Stock at the public offering price, less
the Underwriting discounts and commissions, for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will become obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the table above bears to the
total number of shares in such table, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
 
     Upon consummation of the Offering, the Representatives will have the right
to appoint one member to the Board of Directors of the Company for a period of
five years. The Representatives have named Hartmut Bergmann as their appointee
and he will be elected to the class whose term expires in 2000. Mr. Bergmann is
Chairman of the Management Board of New York Broker Deutschland AG.
 
     The Company has agreed to pay the Underwriters a non-accountable expense
allowance of three percent of the gross proceeds derived from the sale of the
shares of Common Stock, of which
 
                                       52
<PAGE>   54
 
$30,000 has been paid to date. The Company has also agreed to pay all expenses
in connection with qualifying the shares of Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters. The Company
has also agreed to pay the expenses of the Selling Stockholder. In addition, the
Company has agreed to pay the fees of German and United States counsel for the
Underwriters which includes the cost of preparation of all filings with the
Securities and Exchange Commission and the Nasdaq Stock Market which fees are
customarily incurred by issuers.
 
     The Company has agreed to sell to the Representatives and their designees
for $100 a warrant (the "Representatives' Warrant") to purchase up to 160,000
shares of Common Stock (184,000 shares if the Underwriters' over-allotment
option is exercised in full) for a period of four years commencing one year from
the date of this Prospectus at a price equal to 120% of the initial public
offering price. During the Warrant exercise term, the holders of the
Representatives' Warrant are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock with a resulting
dilution in the interest of other stockholders. In addition, during that period,
the terms on which the Company will be able to obtain additional capital may be
adversely affected, because the Representatives are likely to exercise the
Representatives' Warrant at a time when the Company would, in all likelihood, be
able to obtain capital by a new offering of securities on terms more favorable
than those provided in the Representatives' Warrant. Any profit realized by the
Representatives on the sale of the Representatives' Warrant or the underlying
shares of Common Stock may be deemed additional underwriting compensation. See
"Description of Capital Stock -- Representatives' Warrant."
 
     The Company, and its officers, directors and certain other stockholders who
beneficially own           shares in the aggregate, have agreed not to offer,
pledge, sell, contract to sell, grant any option to purchase or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, shares for a period of one year following the date of this
Prospectus without the prior written consent of the Representative which may, in
its sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements.
 
     The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
 
     Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the liability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
 
     If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
 
     The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.
 
     In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of a security to be higher than it
might be in the absence of such purchases.
 
                                       53
<PAGE>   55
 
The imposition of a penalty bid might also have an effect on the price of a
security to the extent that it were to discourage resales of the security.
 
     Neither the Company nor the Representatives make any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
 
     Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors to be considered in such negotiations are
prevailing market and general economic conditions, the market capitalizations,
trading histories and stages of development of other traded companies that the
Company and the Representatives believe to be comparable to the Company, the
results of operations of the Company in recent periods, the current financial
position of the Company, estimates of business potential of the company and the
present state of the Company's development and the availability for sale in the
market of a significant number of shares of Common Stock. Additionally,
consideration will be given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
 
                                 LEGAL MATTERS
 
     The validity of issuance of the Common Stock offered hereby will be passed
upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Robert Duggan, a partner with Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., also is the Secretary of the Company. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Greenberg Traurig, P.A., Miami, Florida.
 
                                    EXPERTS
 
     The financial statements of Artificial Life as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Wolf & Company, P.C., Boston, Massachusetts, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance where a copy of the document has been filed as an exhibit to
the Registration Statement, reference is made to the exhibit so filed. The
Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, registration statements and certain
other filings made with the Commission through its Electronic
                                       54
<PAGE>   56
 
Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's Word Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
 
     The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants,
and will make available quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law or by Nasdaq.
 
                                       55
<PAGE>   57
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Financial Statements:
  Balance Sheets as of December 31, 1996 and 1997, and June
     30, 1998 (unaudited)...................................  F-3
  Statements of Operations for the years ended December 31,
     1995, 1996 and 1997, and for the six months ended June
     30, 1997 (unaudited) and 1998 (unaudited)..............  F-4
  Statements of Changes in Stockholders' Equity for the
     years ended December 31, 1995, 1996 and 1997, and for
     the six months ended June 30, 1998 (unaudited).........  F-5
  Statements of Cash Flows for the years ended December 31,
     1995, 1996 and 1997, and for the six months ended June
     30, 1997 (unaudited) and 1998 (unaudited)..............  F-6
  Notes to Financial Statements.............................  F-7
</TABLE>
 
                                       F-1
<PAGE>   58
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Artificial Life, Inc.
Boston, Massachusetts
 
     We have audited the accompanying balance sheets of Artificial Life, Inc.
(formerly Neurotec International Corp.) as of December 31, 1996 and 1997, and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Artificial Life, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
 
                                          Wolf & Company, P.C.
 
Boston, Massachusetts
September 10, 1998, except for
  Note 2 as to which the date is
  September 22, 1998 and
  Note 8 as to which the date
  is September 23, 1998.
 
                                       F-2
<PAGE>   59
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------     JUNE 30,
                                                                1996         1997          1998
                                                              --------    ----------    -----------
                                                                                        (UNAUDITED)
<S>                                                           <C>         <C>           <C>
                                              ASSETS
Current assets:
  Cash......................................................  $ 30,139    $   22,382    $  551,591
  Accounts receivable, trade (Note 1).......................        --       273,187        26,062
  Due from officer/stockholder (Note 3).....................        --            --       153,916
  Due from former parent and affiliates (Note 3)............   251,502       243,499            --
  Refundable income taxes (Note 4)..........................    18,868         6,336       103,507
  Prepaid expenses and other current assets.................    33,141        59,442        11,056
                                                              --------    ----------    ----------
         Total current assets...............................   333,650       604,846       846,132
                                                              --------    ----------    ----------
Property and equipment:
  Furniture and fixtures....................................   176,128       176,128       177,435
  Computer equipment........................................   235,151       277,344       278,335
  Leasehold improvements....................................   159,334       159,334       159,334
  Office equipment..........................................    58,696        59,435        59,435
                                                              --------    ----------    ----------
                                                               629,309       672,241       674,539
  Less accumulated depreciation and amortization............   173,829       340,029       393,260
                                                              --------    ----------    ----------
                                                               455,480       332,212       281,279
                                                              --------    ----------    ----------
Other assets:
  Net deferred tax asset (Note 4)...........................    51,591        49,225        49,225
  Deposits and other assets (Note 7)........................    44,610        98,219        93,623
                                                              --------    ----------    ----------
                                                                96,201       147,444       142,848
                                                              --------    ----------    ----------
                                                              $885,331    $1,084,502    $1,270,259
                                                              ========    ==========    ==========
                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Note payable to former parent.............................  $ 77,922    $       --    $       --
  Accounts payable..........................................   120,539       195,159       195,491
  Due to officer/stockholder................................        --        27,015            --
  Deferred revenue..........................................        --       116,667            --
  Accrued expenses (Note 9).................................    52,176        95,252       238,017
  Net deferred tax liability (Note 4).......................     9,279         3,929         3,929
                                                              --------    ----------    ----------
         Total current liabilities..........................   259,916       438,022       437,437
                                                              --------    ----------    ----------
Note payable -- officer/stockholder (Note 3)................        --            --       500,000
                                                              --------    ----------    ----------
Commitments and contingencies (Note 5)
Stockholders' equity (Notes 7 and 8):
  Voting common stock, $.01 par value; 19,000,000 shares
    authorized, 6,967,213 shares issued and outstanding.....    69,672        69,672        69,672
  Non-Voting common stock, $.01 par value; 1,000,000 shares
    authorized, 53,278 shares issued and outstanding........        --            --           533
  Additional paid-in capital................................   430,328       430,328       611,162
  Retained earnings (deficit)...............................   125,415       146,480      (348,545)
                                                              --------    ----------    ----------
         Total stockholders' equity.........................   625,415       646,480       332,822
                                                              --------    ----------    ----------
                                                              $885,331    $1,084,502    $1,270,259
                                                              ========    ==========    ==========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-3
<PAGE>   60
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,         SIX MONTHS ENDED JUNE 30,
                                       ------------------------------------   -------------------------
                                          1995         1996         1997         1997          1998
                                       ----------   ----------   ----------   -----------   -----------
                                                                                     (UNAUDITED)
<S>                                    <C>          <C>          <C>          <C>           <C>
Revenues (Note 1 and 3):
  Software license agreements........  $       --   $       --   $  233,333   $  116,667    $  116,667
  Application services...............   1,216,716    2,789,878    1,347,089      914,461       332,713
  Cancellation fee income............          --           --      189,938           --            --
                                       ----------   ----------   ----------   ----------    ----------
         Total revenues..............   1,216,716    2,789,878    1,770,360    1,031,128       449,380
                                       ----------   ----------   ----------   ----------    ----------
Operating expenses:
  Selling, general and
    administrative...................     967,271    1,101,109    1,048,897      623,693       596,620
  Engineering........................     827,471      656,086      512,267      301,518       249,789
  Research and development...........          --           --           --           --       128,103
  Depreciation and amortization......      39,734      137,300      167,962       82,997        54,112
                                       ----------   ----------   ----------   ----------    ----------
         Total operating expenses....   1,834,476    1,894,495    1,729,126    1,008,208     1,028,624
                                       ----------   ----------   ----------   ----------    ----------
Income (loss) from operations........    (617,760)     895,383       41,234       22,920      (579,244)
Other income (expenses):
  Foreign exchange gain (loss).......     (27,386)      10,319       (5,706)       3,579            --
  Interest expense...................      (7,582)     (24,996)      (5,247)      (3,399)       (6,781)
                                       ----------   ----------   ----------   ----------    ----------
Income (loss) before provision
  (benefit) for income taxes.........    (652,728)     880,706       30,281       23,100      (586,025)
Provision (benefit) for income taxes
  (Note 4)...........................    (256,872)     337,362        9,216        7,030       (91,000)
                                       ----------   ----------   ----------   ----------    ----------
Net income (loss)....................  $ (395,856)  $  543,344   $   21,065   $   16,070    $ (495,025)
                                       ==========   ==========   ==========   ==========    ==========
Basic and diluted net income (loss)
  per share (Note 2).................  $     (.07)  $      .08   $       --   $       --    $     (.07)
Weighted average shares outstanding
  used in per share calculation......   5,573,770    6,967,213    6,967,213    6,967,213     6,969,568
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-4
<PAGE>   61
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                            COMMON STOCK (NOTE 7)
                                    -------------------------------------
                                          VOTING            NON-VOTING      ADDITIONAL   RETAINED
                                    -------------------   ---------------    PAID-IN     EARNINGS
                                     SHARES     AMOUNT    SHARES   AMOUNT    CAPITAL     (DEFICIT)
                                    ---------   -------   ------   ------   ----------   ---------
<S>                                 <C>         <C>       <C>      <C>      <C>          <C>
Balance at December 31, 1994......  1,393,443   $13,934       --    $ --     $ 86,066    $ (22,073)
Net Loss..........................         --        --       --      --           --     (395,856)
Issuance of Common Stock..........  5,573,770    55,738       --      --      344,262           --
                                    ---------   -------   ------    ----     --------    ---------
Balance at December 31, 1995......  6,967,213    69,672       --      --      430,328     (417,929)
Net income........................         --        --       --      --           --      543,344
                                    ---------   -------   ------    ----     --------    ---------
Balance at December 31, 1996......  6,967,213    69,672       --      --      430,328      125,415
Net income........................         --        --       --      --           --       21,065
                                    ---------   -------   ------    ----     --------    ---------
Balance at December 31, 1997......  6,967,213    69,672       --      --      430,328      146,480
Net loss (unaudited)..............         --        --       --      --           --     (495,025)
Issuance of common stock..........         --        --   53,278     533      180,834           --
                                    ---------   -------   ------    ----     --------    ---------
Balance at June 30, 1998..........  6,967,213   $69,672   53,278    $533     $611,162    $(348,545)
                                    =========   =======   ======    ====     ========    =========
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-5
<PAGE>   62
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,        SIX MONTHS ENDED JUNE 30,
                                               ---------------------------------   -------------------------
                                                 1995        1996        1997         1997          1998
                                               ---------   ---------   ---------   -----------   -----------
                                                                                          (UNAUDITED)
<S>                                            <C>         <C>         <C>         <C>           <C>
Cash flows from operating activities:
  Net income (loss)..........................  $(395,856)  $ 543,344   $  21,065    $  16,070     $(495,025)
  Adjustments to reconcile net income (loss)
    to net cash provided (used) by operating
    activities:
    Depreciation and amortization............     39,734     137,300     167,962       82,997        54,112
    Unrealized foreign exchange gain.........     (4,071)     (5,790)         --       (9,078)           --
    Deferred income taxes....................   (256,872)    214,560      (2,984)          --            --
    (Increase) decrease in deposits and other
      assets.................................    (42,471)     (5,345)    (55,371)      (1,800)        3,715
    (Increase) decrease in due from former
      parent and affiliates..................     59,515    (223,234)      8,003       63,476       243,499
    (Increase) decrease in accounts
      receivable, trade......................         --          --    (273,187)    (201,648)      247,125
    (Increase) decrease in refundable income
      taxes..................................    (30,258)     11,390      12,532        7,030       (97,171)
    (Increase) decrease in prepaid expenses
      other current assets...................    (32,378)       (763)    (26,301)     (33,323)       48,386
    Increase (decrease) in accounts payable
      and accrued expenses...................    579,625    (421,910)    117,696      121,857       143,097
    Increase (decrease) in deferred
      revenue................................         --          --     116,667           --      (116,667)
    Increase (decrease) in due to/from
      officer/stockholder....................         --          --      27,015           --      (180,931)
                                               ---------   ---------   ---------    ---------     ---------
    Net cash provided (used) by operating
      activities.............................    (83,032)    249,552     113,097       45,581      (149,860)
                                               ---------   ---------   ---------    ---------     ---------
Cash flows from investing activities:
  Purchases of property and equipment........   (386,833)   (242,476)    (42,932)     (34,263)       (2,298)
                                               ---------   ---------   ---------    ---------     ---------
Cash flows from financing activities:
  Repayment of note payable to former
    parent...................................         --          --     (77,922)          --            --
  Proceeds from note payable --
    officer/stockholder......................         --          --          --           --       500,000
  Proceeds from issuance of common stock.....    400,000          --          --           --       181,367
  Payment of subscription receivables........     50,000          --          --           --            --
                                               ---------   ---------   ---------    ---------     ---------
Net cash provided (used) by financing
  activities.................................    450,000          --     (77,922)          --       681,367
                                               ---------   ---------   ---------    ---------     ---------
Net increase (decrease) in cash..............    (19,865)      7,076      (7,757)      11,318       529,209
Cash at beginning of period..................     42,928      23,063      30,139       30,139        22,382
                                               ---------   ---------   ---------    ---------     ---------
Cash at end of period........................  $  23,063   $  30,139   $  22,382    $  41,457     $ 551,591
                                               =========   =========   =========    =========     =========
Supplemental disclosure of cash flow
  information:
  Income taxes paid..........................  $   8,327   $ 131,440   $      --    $      --     $   2,000
  Interest paid..............................      7,582      24,996       5,247        3,399         6,781
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-6
<PAGE>   63
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                         NOTES TO FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
     (ALL INFORMATION WITH RESPECT TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
 
1.  ORGANIZATION, RISKS AND UNCERTAINTIES
 
  NATURE OF OPERATIONS
 
     Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company designs to automate
and simplify time-consuming and complex business-related Internet functions such
as Web navigation, direct marketing, user profiling, information gathering,
messaging, knowledge management, sales response and call center automation. The
Company recently changed its primary business focus from software consulting to
the development, marketing and sale of its Alife suite of SmartBot software
products. Accordingly, the Company is at an early stage of development in its
new business strategy, and is subject to a number of the risks inherent in
establishing a new business. To address these risks, the Company must, among
other things, complete development of its SmartBot software products, enter into
strategic partnership, marketing and distribution arrangements, respond to
competitive developments, and attract, retain and motivate qualified personnel.
 
     In addition, because the Company's emerging online agent-based software
products business will require significant infusions of additional capital,
results of operations to date are not reflective of the Company's future results
of operations. The Company's decision to become a provider of software robot
products is predicated on the assumption that the demand for such products will
be large enough to permit the Company to operate profitably. There can be no
assurance that the Company's assumption will be correct or that the Company will
be able to successfully compete as a provider of such products. If the Company's
assumption is not accurate, or if the Company is unable to compete as a provider
of online agent-based software products, the Company's business, prospects,
financial condition and results of operations will be materially adversely
affected.
 
     The Company's management has recently obtained funds to support its
operations through a combination of sources including a long-term loan from a
stockholder and private placements of Common Stock. (See Notes 3 and 7.) The
Company is also pursuing additional resources through an initial public
offering. (See Note 7.)
 
     In 1995 and 1996, the Company was a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH, a German corporation. During 1995, all of the Company's
revenue was derived from various contracts with the Company's then parent
company and its affiliates. In 1996, approximately 91% of the Company's revenues
was derived from the Company's then parent company.
 
     During 1997, Eberhard Schoneburg, the Company's President, Chief Executive
Officer and Chairman and a minority stockholder of the Company's former parent
company, entered into an agreement with the former parent company to sell his
interest in the former parent company to the two remaining stockholders and
contemporaneously purchase all of the outstanding shares of Neurotec
International Corp. (the "Management Buyout"). In connection with the Management
Buyout, the Company agreed not to compete in any manner with the former parent
company in Europe through the period ended December 31, 1998. Subsequent to the
Management Buyout, the Company changed its name to Artificial Life, Inc.
 
     In 1997, approximately 60% of the Company's revenue was derived from
various contracts with the Company's former parent company and its affiliates.
As a result of the Management Buyout and the Company's changing its primary
business focus from software consulting to the development,
 
                                       F-7
<PAGE>   64
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
marketing and sale of its Alife suite of SmartBot software products, the Company
is not anticipating any future revenue to be derived from its former parent (see
Note 3).
 
  MAJOR CUSTOMER
 
     During 1997, the Company recognized revenue from one customer amounting to
approximately $710,000, representing 40% of its total revenues. During the six
months ended June 30, 1998, the substantial majority of the Company's revenue
was derived from this same customer. Accounts receivable, trade were due
entirely from this customer at December 31, 1997 and June 30, 1998.
 
  MANAGEMENT ESTIMATES
 
     The process of preparing financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. These
estimates and assumptions involve the areas of collection of receivables,
contract costs, depreciation and amortization and certain accruals, among
others. Actual results could differ from those estimates.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  UNAUDITED INTERIM FINANCIAL INFORMATION
 
     The interim financial statements of the Company at June 30, 1998 and for
the six months ended June 30, 1997 and 1998, included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the accompanying unaudited
interim financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 1998, and the results of its operations and its cash flows
for the six months ended June 30, 1997 and 1998.
 
  PROPERTY AND EQUIPMENT
 
     Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is calculated using the straight-line method over the
following useful lives:
 
<TABLE>
<CAPTION>
             CLASSIFICATION                       ESTIMATED USEFUL LIVES
             --------------                       ----------------------
<S>                                        <C>
Furniture and fixtures                                    7 years
Computer equipment                                       3-5 years
Leasehold improvements                     Shorter of useful life or lease term
Office equipment                                          5 years
</TABLE>
 
     Expenditures for maintenance, repairs and minor renewals are charged to
expense as incurred. Betterments and major renewals are capitalized.
 
                                       F-8
<PAGE>   65
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  COMPUTER SOFTWARE COSTS
 
     Costs of developing software which are incurred beyond the point of
demonstrated technological feasibility are capitalized and, after the product is
available for general release to customers, such costs are amortized based on
the greater of the charge resulting from the straight-line method over a
three-year period or the proportion of current sales to estimated future
revenues of the product. As of June 30, 1998, no software development costs have
been capitalized by the Company as such costs were immaterial.
 
  REVENUE RECOGNITION
 
     The Company recognizes revenue from marketing computer software programs as
follows:
 
        Revenues from the sale of initial "software license agreements" for
        computer programs and related services are recognized upon the delivery
        of the software.
 
        Development and application services contract revenues and related costs
        are recognized upon the completion of the contract or certain phases as
        defined in each agreement.
 
     There are no significant future costs associated with any of the Company's
revenue transactions. Development costs which are not required to be
capitalized, marketing and installation costs are charged to earnings as
incurred. No software development costs have been capitalized by the Company as
such costs are immaterial.
 
  RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all
changes in stockholders' equity during the period except those resulting from
investments by, or distributions to, stockholders. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
 
     In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
 
                                       F-9
<PAGE>   66
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  COMPUTATION OF NET INCOME (LOSS) PER SHARE
 
     The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. The provision and disclosure
requirements for SFAS No. 128 were required to be adopted for interim and annual
periods ending after December 15, 1997, with restatement of earnings per share
for prior periods. In accordance with SFAS No. 128, basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period and the weighted average
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants (using the Treasury Stock method); common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive. All common equivalent shares of the Company are not dilutive.
Therefore, diluted earnings per share is the same as basic earnings per share.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock issued for
nominal consideration, prior to the anticipated effective date of an IPO, are
required to be included in the calculation of basic and diluted net loss per
share, as if they were outstanding for all periods presented. To date, the
Company has not had any stock issuances for nominal consideration.
 
  STOCK-BASED COMPENSATION
 
     The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its employee stock options plans.
There are no effects on reported net income (loss) and earnings per share based
on the fair value of options and shares as prescribed by SFAS 123.
 
  STOCK DIVIDEND, REVERSE STOCK SPLIT AND CHANGES IN AUTHORIZED STOCK
 
     On June 10, 1998, the Company declared a dividend of 339 shares of common
stock for each share of common stock held to stockholders of record on June 10,
1998. On September 22, the Company effected a 1-for-2.44 reverse stock split and
amended the total authorized shares of Voting Common Stock to 19,000,000 shares
and Non-Voting Common Stock to 1,000,000 shares. All references in the financial
statements to shares, share prices, per share amounts, stock options and
authorized shares have been retroactively adjusted for the stock dividend,
reverse stock split and change in authorized stock. (See Note 8).
 
  INCOME TAXES
 
     Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax basis of assets and liabilities.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. A deferred tax asset is
recorded for any net operating loss, capital loss and tax credit carryforward
for income tax purposes, to the extent their realization is more likely than
not. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities will be adjusted through the provision for income taxes.
 
                                      F-10
<PAGE>   67
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  RELATED PARTY TRANSACTIONS
 
     The Company had transactions with its former parent company and a
wholly-owned subsidiary of the former parent company, MediaCenter GmbH
("MediaCenter"), and a stockholder of the former parent company as follows:
 
          a) The Company provided contract services to the former parent company
     and to a stockholder of the former parent company on which it recorded
     revenue of $1,216,716, $2,542,642 and $864,177 for the years ended December
     31, 1995, 1996 and 1997. Certain contracts for services are denominated in
     Deutsche Marks ("DM").
 
          b) The Company received advances from the former parent company in the
     amount of DM120,000. The advances were due on September 30, 1997 with
     interest at 8.5%. The note payable of $77,922 recorded on the balance sheet
     at December 31, 1996 is based on the exchange rate on that date. Interest
     expense on these advances amount to $7,582, $2,029 and $5,247 for the years
     ended December 31, 1995, 1996 and 1997, respectively. The advances were
     repaid in 1997, see below.
 
          c) The former parent company charged the Company for various expenses
     paid on the Company's behalf and the Company charged the former parent
     company and MediaCenter for various expenses paid by the Company on their
     behalf. Outstanding amounts were non-interest bearing.
 
     During 1997, in connection with the Management Buyout and the Company's
changing its primary business focus from software consulting to the development,
marketing and sale of its Alife suite of SmartBot software products, the Company
discontinued performing services for its former parent company and its
affiliates. At that time, the Company had in process several contracts for
services to be provided to the former parent company and outstanding accounts
receivable from the former parent of $160,000. In addition, the Company owed the
former parent $42,016 in accounts payable and accrued expenses, and $77,922 in
notes payable. In December of 1997, the Company and the former parent negotiated
a settlement agreement whereby the former parent agreed to forgive all
outstanding liabilities owed by the Company and make a cash payment of $230,000
in full settlement of all outstanding accounts receivable and all of its
contractual obligations to the Company. The transaction resulted in the
recognition of cancellation fee income of $189,938 in 1997. The $230,000 payment
was received in full in January 1998.
 
     During 1997, the Company's President and Chairman opted to forego
approximately 68% of his salary amounting to approximately $164,000.
 
                                      F-11
<PAGE>   68
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Amounts due from the former parent company, net and affiliates at December
31, 1996 and 1997 consists of the following:
 
<TABLE>
<CAPTION>
                                             1996                       1997
                                    -----------------------    -----------------------
                                                                           SHAREHOLDER
                                     FORMER                     FORMER      OF FORMER
                                     PARENT     MEDIACENTER     PARENT       PARENT
                                    --------    -----------    --------    -----------
<S>                                 <C>         <C>            <C>         <C>
Settlement Agreement..............  $     --      $    --      $230,000      $    --
Contract services.................   213,370           --            --       13,499
Reimbursements receivable.........    29,752       45,204            --           --
Reimbursements payable............   (35,168)          --            --           --
Interest payable..................    (1,656)          --            --           --
                                    --------      -------      --------      -------
          Total...................  $206,298      $45,204      $230,000      $13,499
                                    ========      =======      ========      =======
</TABLE>
 
     On June 29, 1998, the Company issued a note payable to an
officer/stockholder in the amount of $500,000. The note is unsecured and bears
interest at 10%. Payment of principal and accrued interest is due on January 1,
2000. (See Note 7).
 
     The Company pays expenses on behalf of and provides cash advances to an
officer/ stockholder from time to time. Amounts outstanding are non-interest
bearing and due on demand.
 
4.  INCOME TAXES
 
     The income tax provision (benefit) consists of:
 
<TABLE>
<CAPTION>
                                                    1995         1996       1997
                                                  ---------    --------    -------
<S>                                               <C>          <C>         <C>
Current:
  Federal.......................................  $      --    $ 75,124    $ 6,700
  State.........................................         --      47,678      5,500
                                                  ---------    --------    -------
                                                         --     122,802     12,200
                                                  ---------    --------    -------
Deferred (prepaid):
  Federal.......................................   (240,766)    201,107     (2,797)
  State.........................................    (16,106)     13,453       (187)
                                                  ---------    --------    -------
                                                   (256,872)    214,560     (2,984)
                                                  ---------    --------    -------
                                                  $(256,872)   $337,362    $ 9,216
                                                  =========    ========    =======
</TABLE>
 
     The difference between actual income tax expense and expected income tax
expense as computed by applying the U.S. federal income tax rate of 34% to
income before income taxes is explained as follows:
 
<TABLE>
<CAPTION>
                                                    1995         1996       1997
                                                  ---------    --------    -------
<S>                                               <C>          <C>         <C>
Expected income tax provision (benefit).........  $(221,928)   $299,440    $10,296
State taxes, net of federal income tax
  benefit.......................................    (10,630)     40,346      3,506
Surtax exemption................................         --          --     (5,753)
Other...........................................    (24,314)     (2,424)     1,167
                                                  ---------    --------    -------
  Provision (benefit) for income taxes..........  $(256,872)   $337,362    $ 9,216
                                                  =========    ========    =======
</TABLE>
 
                                      F-12
<PAGE>   69
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
          The tax effects of temporary differences that give rise to the
     deferred tax assets and deferred tax liabilities at December 31, 1996 and
     1997, are presented below:
 
<TABLE>
<CAPTION>
                                                          1996       1997
                                                         -------    -------
<S>                                                      <C>        <C>
Deferred tax assets:
  Start-up costs capitalized for income tax purposes...  $69,205    $46,499
  Vacation accrual not deductible for income tax
     purposes..........................................    3,114      4,182
  Property and equipment...............................       --      2,726
                                                         -------    -------
                                                          72,319     53,407
  Valuation allowance on deferred tax asset............       --         --
                                                         -------    -------
                                                          72,319     53,407
                                                         -------    -------
Deferred tax liabilities:
  Property and equipment...............................   17,614         --
  Prepaid rent deducted for income tax purposes........    8,422      8,111
  Unrealized foreign exchange gains....................    3,971         --
                                                         -------    -------
                                                          30,007      8,111
                                                         -------    -------
     Net deferred tax asset............................  $42,312    $45,296
                                                         =======    =======
</TABLE>
 
     There was no change in the valuation allowance on deferred tax assets in
1996 or 1997.
 
     The provision for income taxes for the six-month periods ended June 30,
1997 and 1998 are computed based on the 1997 actual effective tax rate of 30.4%
and estimated 1998 effective tax rate of 15.5%, respectively.
 
5.  COMMITMENTS
 
  CONSORTIUM AGREEMENT
 
     Effective October 10, 1995, the Company entered into a consortium agreement
with the Massachusetts Institute of Technology ("MIT"). Under the agreement, MIT
will conduct research projects for the "Things That Think Consortium." The
Consortium is an international association of corporate members who have joined
"to address the future of computation as it is increasingly imbedded in things
other than computers." The term of the agreement is for five years through
October 9, 2000. The agreement 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 agreement. The Company was sharing
50% of this cost with its former parent through June 1997. (See Note 3).
 
     On August 6, 1997, the Company obtained a suspension of the contract until
February 5, 1998, at which time the contract resumed under its original terms.
The Company will be solely responsible for the $125,000 annual cost through
October 9, 2000. Total costs incurred by the Company in connection with the
agreement amounted to $60,625, $62,500, and $32,598 for the years ended December
31, 1995, 1996 and 1997, respectively, and $32,598 and $62,500 for the six month
periods ended June 30, 1997 and 1998, respectively.
 
                                      F-13
<PAGE>   70
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  LEASES
 
     The Company leases office and other space and various office equipment
under various noncancelable leases. Future minimum annual lease payments,
exclusive of additional operating costs, are as follows:
 
<TABLE>
<CAPTION>
                       YEAR ENDING
                      DECEMBER 31,
                      ------------
<S>                                                        <C>
  1998...................................................  $221,372
  1999...................................................   205,725
  2000...................................................   205,352
  2001...................................................    17,113
                                                           --------
                                                           $649,562
                                                           ========
</TABLE>
 
     Rent expense for the years ended December 31, 1995, 1996 and 1997 amounted
to approximately $117,100, $231,300 and $228,300, respectively, and for the six
months ended June 30, 1997 and 1998 amounted to approximately $133,800 and
$120,200, respectively.
 
  EMPLOYMENT CONTRACTS
 
     The Company has employment agreements with all of its executive officers.
The agreements are generally one to three years in length and provide for
minimum salary levels. These agreements include severance payments under certain
conditions of approximately one half to three times each officer's annual
compensation. In addition the chief executive officer of the Company is entitled
to receive an annual incentive bonus of 3% of the Company's profits from
operations.
 
6.  PROFIT SHARING PLAN
 
     Effective October 1, 1995, the Company implemented a 401(k) profit sharing
plan for the benefit of all employees. Employees are eligible to participate
after twelve months of service and may contribute up to 15% of their
compensation subject to statutory limitations. The Company matches 50% of the
first 3% of compensation.
 
     Profit sharing expense for the years ended December 31, 1995, 1996 and 1997
amounted to $3,028, $10,260 and $11,968, respectively, and for the six months
ended June 30, 1997 and 1998 amounted to $6,504 and $6,677, respectively.
 
7.  STOCKHOLDERS' EQUITY
 
  PUBLIC OFFERING
 
     In August 1998, the Company executed a letter of intent to proceed with a
proposed initial public offering of the Company's stock (IPO). If the IPO is
consummated under the terms presently anticipated, the underwriters managing the
offering will have the right to appoint one member of the Board of Directors
after the closing of the IPO. The right to have a representative on the
Company's board extends for the term of the Warrant (defined below). The Company
has agreed to deliver a warrant (the "Warrant") to the underwriters at the
closing of the IPO equal to ten percent of the total number of shares sold
pursuant to the IPO. The Warrant is exercisable any time after one year from the
date of closing for a period of four years at a price equal to 120% of the
offering price per share. Included in deposits and other assets at June 30, 1998
is a $30,000 deposit paid to the underwriters in connection with the IPO.
 
                                      F-14
<PAGE>   71
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  COMMON STOCK
 
     At June 30, 1998 the Company had 19,000,000 authorized shares of common
stock, par value $.01, and 1,000,000 authorized shares of non-voting common
stock, par value $.01, of which 6,967,213 shares and 53,278 shares,
respectively, were outstanding. The non-voting common stock is convertible into
voting Common Stock on a one-for-one basis. Upon consummation of the Company's
proposed initial public offering, all shares of non-voting common stock will be
converted into shares of common stock.
 
     In June 1998, the Company sold 53,278 shares of non-voting common stock and
the majority stockholder of the Company sold 409,836 shares of voting common
stock through private placements to foreign investors overseas. The shares were
sold for $3.66 per share. Expenses incurred in connection with the private
placements amounted to $13,633. As a result, the Company received net proceeds
of $181,367.
 
     This stock was unregistered and was subject to restrictions on resale in
the United States pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended. In the event of a public offering of the Company's stock,
the stockholders may request the Company to register such shares for inclusion
in the public offering. Such request is subject to certain limitations which may
be imposed by the managing underwriter of the Company's public offering. The
holders of the voting common stock have agreed, among other things, to vote the
shares in a manner consistent with any votes cast by the chairman of the
Company. This agreement will terminate upon consummation of the IPO.
 
     Subsequent to the sale of stock by the majority stockholder, the Company
received a loan of $500,000 from the stockholder. (See Note 3).
 
  STOCK OPTIONS
 
     On April 1, 1998, the Company adopted the 1998 Equity Incentive Plan (the
"Plan") which provides for the issuance of both non-statutory and incentive
stock options to employees, officers, directors and consultants of the Company.
At that time the Company reserved 409,811 shares of common stock to be issued
under the Plan. Incentive stock options for 69,525 shares of common stock were
granted on May 1, 1998 with an initial exercise price of $3.66 per share, the
estimated fair market value on that date. The exercise price increases by $3.66
per share per quarter until the second anniversary of the date of grant at which
time the options are to expire.
 
     On June 30, 1998, the Plan was amended to increase the shares reserved for
issuance under the Plan to a total of 778,688 shares; 340,164 shares of voting
common stock and 438,524 shares of non-voting common stock. All options issued
prior to June 30, 1998 were for voting common stock. Effective with the
amendment, the Company granted non-statutory stock options for 184,426 shares of
voting common stock and 362,701 shares of non-voting common stock with an
exercise price of $3.66 per share expiring on July 1, 1999. On June 30, 1998,
the Company also amended the terms of the incentive stock options issued to two
individuals on May 1, 1998 for a total of 32,884 shares of common stock to
provide that the exercise price for such options is to remain at $3.66 per share
over the life of the option.
 
                                      F-15
<PAGE>   72
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the status of the Company's stock options as of June 30, 1998
and the changes during the period then ended is presented below.
 
<TABLE>
<CAPTION>
                                                                   WEIGHTED
                                                                   AVERAGE
                                                     SHARES     EXERCISE PRICE
                                                     -------    --------------
<S>                                                  <C>        <C>
Outstanding at beginning of period.................       --        $  --
Granted -- price equals fair value.................  616,652         3.66
Exercised..........................................       --           --
Canceled...........................................       --           --
                                                     -------        -----
Outstanding at end of period.......................  616,652        $3.66
                                                     =======        =====
Options exercisable at end of period...............  616,652
                                                     =======
Options available for future grants................  162,036
                                                     =======
</TABLE>
 
     The following table summarizes information about stock options outstanding
at June 30, 1998:
 
<TABLE>
<CAPTION>
                    OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------------------------------
   RANGE OF        NUMBER           WEIGHTED AVERAGE        WEIGHTED-AVERAGE
EXERCISE PRICE   OUTSTANDING   REMAINING CONTRACTUAL LIFE    EXERCISE PRICE
--------------   -----------   --------------------------   ----------------
<S>              <C>           <C>                          <C>
    $3.66          616,652             1.09 years                $3.66
</TABLE>
 
     The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. Compensation cost for the Company's
Plan determined consistent with Statement of Financial Accounting Standards No.
123 is not material to the Company's financial statements.
 
8.  SUBSEQUENT EVENT
 
     On September 23, 1998, the Company sold 824,000 shares of voting common
stock for $5.00 per share through private placements to foreign investors.
Expenses incurred in connection with the private placements amounted to $84,368,
resulting in net proceeds of $4,035,632 being received by the Company.
 
     The stock was unregistered and was subject to restrictions on resale in the
United States pursuant to Regulation S promulgated under the Securities Act of
1933, as amended. In the event of a public offering of the Company's stock, the
holders of 20% of the voting stock may request the Company to register such
shares for inclusion in the public offering. Such request is subject to certain
limitations which maybe imposed by the managing underwriter of the Company's
public offering, The holders of the stock have agreed, among other things, to
vote the shares in a manner consistent with any votes cast by the Chairman of
the Company. This agreement will terminate upon consummation of the IPO.
 
                                      F-16
<PAGE>   73
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
 
9.  ACCRUED EXPENSES
 
     Accrued expenses at December 31, 1996 and 1997 and June 30, 1998 consist of
the following:
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                     ------------------    JUNE 30,
                                                      1996       1997        1998
                                                     -------    -------    --------
<S>                                                  <C>        <C>        <C>
Accrued salaries...................................  $ 3,526    $ 3,657    $146,690
Accrued vacations..................................   14,288     13,089      15,019
Accrued and withheld payroll.......................   17,876     56,082       8,395
Accrued professional fees..........................   15,500     15,000          --
Accrued consortium fee (Note 5)....................       --         --      62,500
Other accrued expenses.............................      986      7,424       5,413
                                                     -------    -------    --------
  Total accrued expenses...........................  $52,176    $95,252    $238,017
                                                     =======    =======    ========
</TABLE>
 
     Included in accrued salaries at June 30, 1998 is $120,000 due to the
President and Chief Executive Officer for salary, the payment of which was
voluntarily deferred by the officer. The amounts were paid subsequent to June
30, 1998.
 
                                      F-17
<PAGE>   74
 
             ------------------------------------------------------
             ------------------------------------------------------
 
  NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                            PAGE
                                            ----
<S>                                         <C>
Prospectus Summary........................    3
Risk Factors..............................    7
Use of Proceeds...........................   17
Dividend Policy...........................   17
Capitalization............................   18
Dilution..................................   19
Selected Financial Data...................   20
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations..............................   22
Business..................................   28
Management................................   40
Certain Transactions......................   45
Principal and Selling Stockholders........   46
Description of Capital Stock..............   47
Shares Eligible for Future Sale...........   50
Underwriting..............................   52
Legal Matters.............................   54
Experts...................................   54
Additional Information....................   54
Index to Financial Statements.............  F-1
</TABLE>
 
  UNTIL                , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
             ------------------------------------------------------
             ------------------------------------------------------
             ------------------------------------------------------
             ------------------------------------------------------
                                             SHARES
 
                             ARTIFICIAL LIFE, INC.
                                  COMMON STOCK
 
                             [ARTIFICIAL LIFE LOGO]
                            -----------------------
                                   PROSPECTUS
                            -----------------------
                             NEW YORK BROKER, INC.
 
                         NEW YORK BROKER DEUTSCHLAND AG
 
                                            , 1998
 
             ------------------------------------------------------
             ------------------------------------------------------
<PAGE>   75
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee and the National Association of Securities Dealers, Inc.
("NASD") Filing Fee, the amounts listed below are estimates:
 
<TABLE>
<S>                                                           <C>
SEC registration fee........................................  $    4,256
Nasdaq listing fee..........................................      10,000
NASD filing fee.............................................       1,943
Blue Sky fees and expenses..................................      13,000
Printing and engraving expenses.............................     130,000
Accounting fees and expenses................................      60,000
Legal fees and expenses.....................................     450,000
Transfer agent and registrar fees and expenses..............       5,000
Underwriters' non-accountable expense.......................     386,400
Miscellaneous...............................................     139,401
                                                              ----------
          Total.............................................  $1,200,000
                                                              ==========
</TABLE>
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Company shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL"), each person who is
involved in any litigation or other proceeding because such person is or was a
director or officer of the Company or is or was serving as an officer or
director of another entity at the request of the Company, against all expense,
loss or liability reasonably incurred or suffered in connection therewith. The
Certificate of Incorporation provides that the right to indemnification includes
the right to be paid expenses incurred in defending any proceeding in advance of
its final disposition, provided, however, that such advance payment will only be
made upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the Company
does not pay a proper claim for indemnification in full within 60 days after a
written claim for such indemnification is received by the Company, the
Certificate of Incorporation and the Company's Bylaws authorize the claimant to
bring an action against the Company and prescribe what constitutes a defense to
such action.
 
     Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that such person is or was a director or officer of the corporation, if such
person acted in good faith and in a manner that he reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, if he or she had no reason to believe his or
her conduct was unlawful. In a derivative action, (i.e., one brought by or on
behalf of the corporation), indemnification may be provided only for expenses
actually and reasonably incurred by any director or officer in connection with
the defense or settlement of such an action or suit if such person acted in good
faith and in a manner that he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, except that no
indemnification shall be provided if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was
 
                                      II-1
<PAGE>   76
 
brought shall determine that the defendant is fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
 
     Pursuant to Section 102(b)(7) of the DGCL, Article Tenth of the Certificate
of Incorporation eliminates the liability of a director to the Company or its
stockholders for monetary damages for such a breach of fiduciary duty as a
director, except for liabilities arising (i) from any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) from acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, or (iv) from any transaction from
which the director derived an improper personal benefit.
 
     The Company intends to obtain insurance policies insuring the directors and
officers of the Company against certain liabilities that they may incur in their
capacity as directors and officers. Under such policies, the insurers, on behalf
of the Company, may also pay amounts for which the Company has granted
indemnification to the directors or officers.
 
     Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement and
persons who control the Company, under certain circumstances.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     In the three years preceding the filing of this Registration Statement, the
Company has sold the following securities that were not registered under the
Securities Act.
 
     (a) Issuances of Capital Stock and Warrants
 
     In November 1994 and April 1995, the Company and sold 10,000 and 40,000
shares of Common Stock, respectively (prior to a 340-for-1 stock split effected
in the form of a dividend of 339 shares for each share of the Company's Common
Stock beneficially owned on June 10, 1998 and a 1-for-2.44 reverse stock split
effected on September 22, 1998) to its sole stockholder for $10.00 per share for
total consideration of $100,000 and $400,000, respectively.
 
     In June 1998, the Company issued and sold an aggregate of 130,000 shares of
Non-Voting Common Stock (prior to a 1-for-2.44 reverse stock split effected on
September 22, 1998) to two investors for $1.50 per share in a private placement
for aggregate gross proceeds of $195,000.
 
     In September 1998, the Company issued and sold an aggregate of 824,000
shares of Common Stock to 23 investors for $5.00 per share in a private
placement for aggregate gross proceeds of $4,120,000.
 
     (b) Certain Grants and Exercises of Stock Options
 
     Pursuant to the 1998 Equity Incentive Plan, the Company had as of September
29, 1998 issued options to purchase an aggregate of 616,652 shares of Common
Stock. Options to purchase 26,083 shares of Common Stock pursuant to the
foregoing have been exercised at an exercise price of $3.66 per share and
options to purchase an aggregate of 590,569 shares of Common Stock are currently
outstanding and exercisable, at a weighted average exercise price of $3.73 per
share.
 
     The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder, or Rule
701 promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments
 
                                      II-2
<PAGE>   77
 
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
 
ITEM 16.  EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    *1.1      Form of Underwriting Agreement.
     3.1      Amended and Restated Certificate of Incorporation of the
              Registrant.
    *3.2      Form of Restated Certificate of Incorporation of the
              Registrant to be filed prior to the closing of this
              Offering.
     3.3      Bylaws of the Registrant
    *3.4      Form of Restated Bylaws of the Registrant to become
              effective immediately prior to the closing of this Offering.
    *4.1      Specimen Common Stock Certificate.
    *4.2      Specimen Common Stock Purchase Warrant.
    *5.1      Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. as to the legality of the shares being registered.
    10.1      Form of the Registrant's Employee Confidentiality and
              Inventions Agreement.
    10.2      Form of Registrant's Advisory Board Confidentiality and
              Inventions Agreement.
    10.3      Amended and Restated Executive Employment Agreement between
              the Registrant and Eberhard Schoneburg, dated as of
              September 1, 1998.
    10.4      Employment Agreement between the Registrant and Robert
              Pantano, dated as of May 1, 1998.
    10.5      Employment Agreement between the Registrant and Klaus Kater,
              dated as of May 1, 1998.
    10.6      Lease Agreement, dated February 6, 1995, between the
              Registrant and Copley Place Associates Nominee Corporation.
    10.7      Lease Amendment No. 1, dated July 27, 1995, between the
              Registrant and Copley Place Associates Nominee Corporation.
    10.8      Lease Amendment No. 2, dated February 27, 1997, between the
              Registrant and Copley Place Associates Nominee Corporation.
    10.9      Consortium Agreement, dated October 10, 1995, between the
              Registrant and Massachusetts Institute of Technology.
  *10.10      1998 Equity Incentive Plan.
   10.11      Form of Subscription Agreement, dated June 1998, between the
              Registrant, Eberhard Schoneburg and the purchaser of
              1,000,000 shares of Common Stock and the purchasers of an
              aggregate of 130,000 shares of Non-Voting Common Stock.
   10.12      Form of Subscription Agreement dated September 23, 1998
              between the Registrant and the purchasers of 824,000 shares
              of Common Stock.
   10.13      Form of Amendment and Confidential Offering Supplement,
              dated September 23, 1998.
    23.1      Consent of Wolf & Company, P.C.
   *23.2      Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. (See Exhibit 5.1).
    24.1      Power of attorney (included on the signature page hereto).
    27.1      Financial Data Schedule
    99.1      Consent of Hartmut Bergmann
</TABLE>
 
---------------
* To be filed by amendment.
 
ITEM 17.  UNDERTAKINGS
 
     (a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" above, or otherwise, the
                                      II-3
<PAGE>   78
 
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
     (b) The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
     (c) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     (d) The undersigned registrant hereby undertakes:
 
          (1) To file, during any period in which offers or sales are being
     made, a post-effective amendment to this registration statement:
 
          (i) To include any prospectus required by Section 10(a)(3) of the
     Securities Act of 1933;
 
          (ii) To reflect in the prospectus any facts or events arising after
     the effective date of the registration statement (or the most recent
     post-effective amendment thereof) which, individually or in the aggregate,
     represent a fundamental change in the information set forth in the
     registration statement. Notwithstanding the foregoing, any increase or
     decrease in volume of securities offered (if the total dollar value of
     securities offered would not exceed that which was registered) and any
     deviation from the low or high end of the estimated maximum offering range
     may be reflected in the form of prospectus filed with the Commission
     pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
     price represent no more than a 20 percent change in the maximum aggregate
     offering price set forth in the "Calculation of Registration Fee" table in
     the effective registration statement;
 
          (iii) To include any material information with respect to the plan of
     distribution not previously disclosed in the registration statement or any
     material change to such information in the registration statement;"
 
          (2) That, for the purpose of determining any liability under the
     Securities Act of 1933, each such post-effective amendment shall be deemed
     to be a new registration statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof.
 
          (3) To remove from registration by means of a post-effective amendment
     any of the securities being registered which remain unsold at the
     termination of the offering.
 
                                      II-4
<PAGE>   79
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts, on September 29, 1998.
 
                                          ARTIFICIAL LIFE, INC.
 
                                          By: /s/ EBERHARD SCHONEBURG
 
                                            ------------------------------------
                                            Eberhard Schoneburg
                                            President and Chief Executive
                                             Officer
 
                               POWER OF ATTORNEY
 
     We the undersigned officers and directors of Artificial Life, Inc., hereby
severally constitute and appoint Eberhard Schoneburg and Robert Pantano, and
each of them singly (with full power to each of them to act alone), our true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement (or any other Registration Statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                     SIGNATURE                                  TITLE                     DATE
                     ---------                                  -----                     ----
<C>                                                  <S>                           <C>
 
              /s/ EBERHARD SCHONEBURG                President, Chief Executive    September 29, 1998
---------------------------------------------------  Officer and Director
                Eberhard Schoneburg                  (Principal executive
                                                     officer)
 
                /s/ ROBERT PANTANO                   Chief Financial Officer       September 29, 1998
---------------------------------------------------  (Principal financial and
                  Robert Pantano                     accounting officer)
 
                 /s/ BRUNO GABRIEL                   Director                      September 26, 1998
---------------------------------------------------
                   Bruno Gabriel
 
              /s/ ELMAR WOHLGENSINGER                Director                      September 26, 1998
---------------------------------------------------
                Elmar Wohlgensinger
</TABLE>
 
                                      II-5
<PAGE>   80
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                            SEQUENTIALLY
                                                                              NUMBERED
EXHIBIT NO.                           DESCRIPTION                              PAGES
-----------                           -----------                           ------------
<C>           <S>                                                           <C>
   *1.1       Form of Underwriting Agreement..............................
    3.1       Amended and Restated Certificate of Incorporation of the
              Registrant..................................................
   *3.2       Form of Restated Certificate of Incorporation of the
              Registrant to be filed prior to the closing of this
              Offering....................................................
    3.3       Bylaws of the Registrant....................................
   *3.4       Form of Restated Bylaws of the Registrant to become
              effective immediately prior to the closing of this
              Offering....................................................
   *4.1       Specimen Common Stock Certificate...........................
   *4.2       Specimen Common Stock Purchase Warrant......................
   *5.1       Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. as to the legality of the shares being registered......
   10.1       Form of the Registrant's Employee Confidentiality and
              Inventions Agreement........................................
   10.2       Form of Registrant's Advisory Board Confidentiality and
              Inventions Agreement........................................
   10.3       Amended and Restated Executive Employment Agreement between
              the Registrant and Eberhard Schoneburg, dated as of
              September 1, 1998...........................................
   10.4       Employment Agreement between the Registrant and Robert
              Pantano, dated as of May 1, 1998............................
   10.5       Employment Agreement between the Registrant and Klaus Kater,
              dated as of May 1, 1998.....................................
   10.6       Lease Agreement, dated February 6, 1995, between the
              Registrant and Copley Place Associates Nominee
              Corporation.................................................
   10.7       Lease Amendment No. 1, dated July 27, 1995, between the
              Registrant and Copley Place Associates Nominee
              Corporation.................................................
   10.8       Lease Amendment No. 2, dated February 27, 1997, between the
              Registrant and Copley Place Associates Nominee
              Corporation.................................................
   10.9       Consortium Agreement, dated October 10, 1995, between the
              Registrant and Massachusetts Institute of Technology........
 *10.10       1998 Equity Incentive Plan..................................
  10.11       Form of Subscription Agreement, dated June 1998, between the
              Registrant, Eberhard Schoneburg and the purchaser of
              1,000,000 shares of Common Stock and the purchasers of an
              aggregate of 130,000 shares of Non-Voting Common Stock......
  10.12       Form of Subscription Agreement, dated September 23, 1998,
              between the Registrant and the purchasers of 824,000 shares
              of Common Stock.............................................
  10.13       Form of Amendment and Confidential Offering Supplement,
              dated September 23, 1998....................................
   23.1       Consent of Wolf & Company, P.C. ............................
  *23.2       Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. (See Exhibit 5.1)......................................
   24.1       Power of attorney (included on the signature page hereto)...
   27.1       Financial Data Schedule.....................................
   99.1       Consent of Hartmut Bergmann.................................
</TABLE>
 
---------------
* To be filed by amendment.
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{"company-data": {"conformed-name": "ARTIFICIAL LIFE INC", "cik": "0001070361", "assigned-sic": "", "irs-number": "043253298"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-64619", "film-number": "98717565"}, "business-address": {"street1": "FOUR COPLEY PL", "street2": "STE 102", "city": "BOSTON", "state": "MA", "zip": "02116", "phone": "6172665542"}, "mail-address": {"street1": "FOUR COPLEY PL", "street2": "STE 102", "city": "BOSTON", "state": "MA", "zip": "02116"}}
1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
 
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                            ------------------------
 
                             ARTIFICIAL LIFE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE                                   7372                                  04-3253298
    (STATE OR OTHER JURISDICTION OF            (PRIMARY STANDARD INDUSTRIAL                   (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)            CLASSIFICATION CODE NUMBER)                 IDENTIFICATION NUMBER)
FOUR COPLEY PLACE, SUITE 102
                          BOSTON, MASSACHUSETTS 02116
                                 (617) 266-5542
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
                              EBERHARD SCHONEBURG
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             ARTIFICIAL LIFE, INC.
                          FOUR COPLEY PLACE, SUITE 102
                          BOSTON, MASSACHUSETTS 02116
                                 (617) 266-5542
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                            ------------------------
 
                                   COPIES TO:
ROBERT DUGGAN, ESQ.                                          PAUL BERKOWITZ, ESQ.
                  PETER S. LAWRENCE, ESQ.                                       LISA CARSTARPHEN, ESQ.
    MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.                        GREENBERG TRAURIG, P.A.
                    ONE FINANCIAL CENTER                                         1221 BRICKELL AVENUE
                BOSTON, MASSACHUSETTS 02111                                      MIAMI, FLORIDA 33131
                       (617) 542-6000                                               (305) 579-0500
------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
 
    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [X]
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.  [ ]
                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
                                                                          PROPOSED MAXIMUM       PROPOSED MAXIMUM
                                                      AMOUNT TO BE       OFFERING PRICE PER     AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED     REGISTERED             SHARE(2)               PRICE(2)
--------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share...             1,840,000(1)             $7.00               $12,880,000
--------------------------------------------------------------------------------------------------------------------
Warrant to be issued to the Representatives of the
  Underwriters upon consummation of the
  Offering................                                  1                    --                    $100
--------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share(3)...             184,000               $8.40                $1,545,600
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------  -------------------
--------------------------------------------------  -------------------
 
                                                         AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED   REGISTRATION FEE
--------------------------------------------------  -------------------
Common Stock, $.01 par value per share...                $3,799.60
-------------------------------------------------------------------------------------------
Warrant to be issued to the Representatives of the
  Underwriters upon consummation of the
  Offering................                                 $.03
---------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share(3)...              $455.95
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
(1) Includes 240,000 shares that the Underwriters may purchase to cover
    over-allotments, if any.
 
(2) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457 under the Securities Act of 1933.
 
(3) Represents total number of shares of Common Stock issuable upon exercise of
    the Warrant to be issued to the Representatives of the Underwriters.
                            ------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2
 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
                SUBJECT TO COMPLETION, DATED             , 1998
 
PROSPECTUS
 
                                1,600,000 SHARES
 
                             [ARTIFICIAL LIFE LOGO]
 
                             ARTIFICIAL LIFE, INC.
                                  COMMON STOCK
 
     Of the 1,600,000 shares of Common Stock offered hereby, 1,200,000 shares
are being sold by Artificial Life, Inc. ("Artificial Life" or the "Company") and
400,000 shares are being sold by the Selling Stockholder. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholder.
 
     Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $6.00 and $7.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
 
     The Company has applied for listing of the Common Stock on the Nasdaq
SmallCap Market under the symbol "ALIF."
                            ------------------------
 
     THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
                            ------------------------
 
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
 COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
                                                                  UNDERWRITING                               PROCEEDS TO
                                               PRICE TO           DISCOUNTS AND         PROCEEDS TO            SELLING
                                                PUBLIC           COMMISSIONS(1)         COMPANY(2)           STOCKHOLDER
----------------------------------------------------------------------------------------------------------------------------
Per Share...............................           $                    $                    $                    $
----------------------------------------------------------------------------------------------------------------------------
Total(3)................................           $                    $                    $                    $
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
(1) Does not include additional compensation to New York Broker, Inc. and New
    York Broker Deutschland AG (the "Representatives") of (a) a non-accountable
    expense allowance equal to 3% of the gross proceeds of the Offering and (b)
    warrants entitling the Representatives to purchase up to 160,000 shares of
    Common Stock (the "Representatives' Warrants") for a period of four years
    commencing one year from the date of this Prospectus at 120% of the initial
    public offering price. In addition, the Company and the Selling Stockholder
    have agreed to indemnify the Underwriter against certain liabilities,
    including liabilities under the Securities Act of 1933, as amended. See
    "Underwriting."
 
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
 
(3) The Company has granted to the Underwriters a 30-day option to purchase up
    to 240,000 additional shares of Common Stock solely to cover
    over-allotments, if any. To the extent the option is exercised, the
    Underwriters will offer the shares at the Price to Public shown above. If
    all such shares are purchased, the total Price to Public, Underwriting
    Discount, and Proceeds to Company will be $            , $            and
    $            , respectively. See "Underwriting."
                            ------------------------
 
     The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about             , 1998, at the office of New York Broker,
Inc. in Fairfax, Virginia.
 
NEW YORK BROKER, INC.                             NEW YORK BROKER DEUTSCHLAND AG
                                                         (International Manager)
 
               The date of this Prospectus is             , 1998
3
 
GRAPHIC DESCRIPTION:
 
 [Graphical representation of Artificial Life, Inc.'s products, applications and
user interfaces. Graph shows in a circular manner the core software technology
in the center with the software robot products (SmartBots) emanating from the
center. On the outer edge of the circle are the primary applications of the
Company's software robot products. Outside of the circle are pictures of the
Avatars, the life-like three-dimensional graphical interfaces through which most
of the SmartBots communicate with the user.]
 
 Artificial Life, Inc. is developing software robots. The Company designs
intelligent software robots for commercial use on the Internet. These robots are
each based on the Company's Alife-SmartEngine technology.
 
 The Alife-SmartEngine provides the bots with language understanding
capabilities. The Alife family of intelligent bots currently developed consists
of seven basic software robots.
 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
 
     The Company claims a trademark on Artificial Life(TM) ALife(TM),
ALife-WebGuide(TM), ALife-SalesRep(TM), ALife-Messenger(TM),
ALife-Portfolio-Manager(TM), ALife-Call-Center-Agent(TM),
ALife-Knowledge-Manager(TM), ALife-Personal-Tutor(TM), ALife-SmartEngine(TM),
SmartEngine(TM), SmartBot(TM), and the Company's logo. All other trade names,
trademarks or servicemarks appearing in this prospectus are the property of
their respective owners and are not the property of the Company.
                                        2
4
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise noted herein, all information in this Prospectus (i) reflects the
adoption of the Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), to be effected upon consummation of the
Offering, removing the Company's existing class of Non-Voting Common Stock,
increasing the authorized Common Stock to 30,000,000 shares and creating and
authorizing 5,000,000 shares of undesignated Preferred Stock, (ii) reflects the
amendment of the Company's Bylaws effective upon consummation of the Offering,
(iii) reflects a 1-for-2.44 reverse stock split of the Common Stock of the
Company effected on September 22, 1998, and (iv) assumes no exercise of the
Underwriters' over-allotment option.
 
                                  THE COMPANY
 
     Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing applications in data mining, Web-page
analysis, statistical analysis and direct marketing to support the functionality
of the SmartBot products. While each Artificial Life SmartBot can function
independently and is programmed for a particular application, customers can
combine the SmartBots to create what the Company believes is the industry's
first integrated commercial, robot-based electronic commerce ("e-commerce")
solution.
 
     The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
 
     The Company's SmartBot products are designed to communicate in natural
language and to respond "intelligently" to a user's command or inquiry, and in
some cases, to act autonomously. All of the Company's SmartBot products are
based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine is
the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The Company
believes that its products will allow people to interact with computers in a
more natural way -- similar to a conversation with a human being.
 
     The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
                                        3
5
 
     The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the commercial versions of the
Alife-WebGuide in the fourth quarter of 1998. The Company is presently
developing the initial versions of seven SmartBot products listed below:
 
     - ALIFE-WEBGUIDE:  This SmartBot is designed to reside on a Web site and
       help users navigate the site by accepting and processing questions, such
       as search queries, from users in natural language, and responding to
       users in natural language. The bot engages the user in a "conversation"
       through questions and answers and, upon learning of the user's interests,
       is designed to display Web pages that match the content of the
       "conversation" or to suggest links to other locations on the Web site.
 
     - ALIFE-SALESREP:  The Alife-SalesRep is being designed for e-commerce
       retailers to use for one-to-one marketing on the Internet. Retailers will
       input user profile information and product information into this
       SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
       information via the Internet.
 
     - ALIFE-MESSENGER:  The Alife-Messenger is being designed to act as a
       natural language-based automated e-mail reply and answering service. By
       customizing the Alife-Messenger, a company can automate replies to
       incoming e-mail queries and customer requests, thereby reducing the need
       for human intermediaries.
 
     - ALIFE-PORTFOLIO-MANAGER:  This SmartBot is being developed to monitor, in
       real-time, an individual's investment portfolio using criteria
       established by the individual and, when such criteria have been met, or
       failed to have been met, to autonomously in real-time contact the
       individual by telephone, pager, e-mail or some other mode of
       communication and let the individual know that trading action might be
       warranted.
 
     - ALIFE-CALL-CENTER-AGENT:  The Alife-Call-Center-Agent is being designed
       for call centers and help desks to be integrated with existing call
       center server software to provide an automated first response to incoming
       voice telephone calls or e-mail requests and to handle call center
       requirements with virtually no aid from human operators.
 
     - ALIFE-KNOWLEDGE-MANAGER:  This SmartBot is being designed to extract
       information contained in a company's Intranet documents, organize it and
       make it more easily accessible for retrieval in order to enable companies
       to more efficiently and intelligently manage the large amount of data and
       documents that companies are making available on their Intranets.
 
     - ALIFE-PERSONAL-TUTOR:  The Alife-Personal-Tutor is a tutoring program
       being designed to extract profile information from natural language
       conversation between the bot and the student user and to automatically
       adapt the difficulty and content of the lessons to the skill level of the
       student based on this information.
 
     The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee and, with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and Macintosh computers in the
 
                                        4
6
 
future. The Company intends to release the commercial versions of the
Alife-WebGuide in the fourth quarter of 1998 and a number of its other SmartBot
products in 1999. See "Business -- Products."
 
     The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("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. from Neurotec GmbH. In August 1997,
the Company's name was changed to Artificial Life, Inc. The Company's principal
executive offices are located at Four Copley Place, Suite 102, Boston,
Massachusetts, 02116 and its telephone number is (617) 266-5542. The Company's
World Wide Web address is http://www.artificial-life.com. Information contained
on the Company's Web site shall not be deemed to be a part of this Prospectus.
 
                                  RISK FACTORS
 
     Through July 1997, the date on which Eberhard Schoneburg, the Company's
President, Chief Executive Officer and Chairman, purchased the Company from its
former German parent, the Company had engaged primarily in the provision of
software consulting services to such parent. Thereafter, the Company changed its
primary business focus from software consulting to the development, marketing
and sale of its Alife suite of SmartBot software products. Accordingly, the
Company is at an early stage of development in its new business strategy and is
therefore subject to a number of the risks inherent in establishing a new
business. Moreover, the market for "intelligent" agent-based software products
for Internet-related use is new and emerging, is rapidly evolving, has an
increasing number of entrants and will be subject to frequent and continuing
changes in technology and customer preference. To date, the Company has not sold
any of its SmartBot software products. For these reasons, the Company has no
basis to predict whether its products will perform as intended or whether
customers will accept and adopt its products in commercially significant
numbers. The Company may never sell sufficient numbers of its products to
achieve or maintain profitability. Therefore, an investment in the Company's
stock is highly speculative and subject to risk of loss. See "Risk Factors"
beginning on page 7.
 
                                        5
7
 
                                  THE OFFERING
 
Common Stock offered by the Company...     1,200,000 shares
 
Common Stock offered by the Selling
  Stockholder.........................     400,000 shares
 
Common Stock to be outstanding after
the Offering..........................     9,070,574 shares(1)
 
Use of proceeds.......................     The Company intends to use the net
                                           proceeds of the Offering to fund
                                           research and product development, to
                                           expand its sales and marketing
                                           capabilities, to establish strategic
                                           alliances, to expand its employee
                                           base and infrastructure and for
                                           general corporate and working capital
                                           purposes.
 
Proposed Nasdaq SmallCap Market
symbol................................     ALIF
---------------
(1) Excludes 590,569 shares of Common Stock reserved for issuance upon the
    exercise of stock options outstanding as of September 29, 1998 at a weighted
    average exercise price of $3.73 per share and 160,000 shares of Common Stock
    reserved for issuance upon the exercise of warrants to be sold to the
    Representatives upon the consummation of the Offering at an exercise price
    per share equal to 120% of the initial public offering price (the
    "Representatives' Warrant").
 
                             SUMMARY FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED            SIX MONTHS ENDED
                                                              DECEMBER 31,               JUNE 30,
                                                       --------------------------    ----------------
                                                        1995      1996      1997      1997      1998
                                                       ------    ------    ------    ------    ------
STATEMENT OF OPERATIONS DATA:
  Revenue............................................  $1,217    $2,790    $1,770    $1,031    $  449
  Income (loss) from operations......................    (618)      895        41        23      (579)
  Net Income (loss)..................................    (396)      543        21        16      (495)
  Net income (loss) per share(1).....................  $ (.07)   $  .08    $  .00    $  .00    $ (.07)
  Shares used in computing net income (loss) per
    share(1).........................................   5,574     6,967     6,967     6,967     6,970
AS OF JUNE 30, 1998
                                                              ---------------------------
                                                                            PRO FORMA
                                                              ACTUAL     AS ADJUSTED(2)
                                                              ------    -----------------
BALANCE SHEET DATA:
  Cash......................................................  $  552         $10,659
  Working capital...........................................     409          10,516
  Total assets..............................................   1,270          11,377
  Total stockholders' equity................................  $  333         $10,440
---------------
(1) Net income (loss) per share is determined by dividing the net income (loss)
    attributable to common stockholders by the weighted average number of Common
    Stock and Common Stock equivalents outstanding during the period. See Note 2
    of Notes to Financial Statements.
 
(2) As adjusted to give effect to the sale of 1,200,000 shares of Common Stock
    offered by the Company, after deducting the underwriting discount and the
    offering expenses, at an assumed initial public price of $6.50 per share and
    the application of the estimated net proceeds therefrom as set forth in "Use
    of Proceeds." Also gives pro forma effect to the issuance by the Company of
    26,083 shares of Common Stock upon the exercise of stock options on July 31,
    1998 at $3.66 per share and the sale and issuance by the Company of 824,000
    shares of Common Stock on September 23, 1998 at $5.00 per share and the
    receipt of $4,035,632 of net proceeds therefrom.
 
                                        6
8
 
                                  RISK FACTORS
 
     An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby. Certain statements
in this Prospectus, including statements regarding the intent, belief or current
expectations of the Company or its management with respect to, among other
things, (i) the Company's goals and operating strategies, (ii) the anticipated
release of the Company's products and (iii) the Company's plans to distribute
and market its products, as well as other statements contained herein regarding
matters that are not historical facts, constitute "forward-looking statements."
Such forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance and achievement of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the following risk
factors.
 
     RECENT CHANGE IN STRATEGY.  The Company has recently changed its primary
business focus from software consulting to the development, marketing and sale
of its Alife product suite of "intelligent" software robots (also known as
software agents). Accordingly, the Company is at an early stage of development
in its new business strategy and is subject to certain of the risks inherent in
the establishment of a new business enterprise. To address these risks, the
Company must, among other things, complete development of its software robot
products, enter into strategic partnerships, marketing and distribution
arrangements, respond to competitive developments, and attract, retain and
motivate qualified personnel. In addition, because the Company has adopted this
new business strategy, results of operations to date are not reflective of the
Company's future results of operations. The Company's decision to become a
provider of software robot products is predicated on the assumption that the
demand for such products will be large enough to permit the Company to operate
profitably. There can be no assurance that the Company's assumption will be
correct or that the Company will be able to successfully compete as a provider
of such products. If the Company's assumption is not accurate, or if the Company
is unable to compete as a provider of agent-based software products, the
Company's business, prospects, financial condition and results of operations
will be materially adversely affected.
 
     MINIMAL REVENUES AND RECENT LOSSES; PERIOD TO PERIOD COMPARISONS; LIMITED
OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES.  Since its incorporation in
November 1994, the Company has been engaged primarily in the provision of
software consulting services and to date has generated limited revenues. Through
1997, the Company has recorded cumulative net income of $146,480 primarily
through its software consulting business. As a consequence of the Company's
recent change in business strategy, the Company expects that the substantial
majority of its future revenues will be derived from sales of its software robot
products and that revenues from its consulting business will significantly
decrease. Accordingly, past financial results do not reflect the results of the
Company's current business activities. In the six month period ended June 30,
1998, the Company incurred a net loss of $495,025. Furthermore, its limited
operating history leads the Company to believe that period-to-period comparisons
of its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. The Company
faces the risks and problems associated with pursuing a new business strategy
and has a limited operating history on which to evaluate its future prospects.
Such prospects should be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a business in a new
and emerging industry characterized by rapid technological change, a number of
potential market entrants and intense competition. The Company expects to incur
significant losses until at least the year 2000. There can be no assurance that
the Company will achieve or sustain significant revenues or become cash flow
positive or profitable in the near future or ever.
 
                                        7
9
 
     DEPENDENCE ON EMERGING MARKETS; ACCEPTANCE OF THE COMPANY'S PRODUCTS.  The
Company's future financial performance will depend in large part on the growth
in demand for agent-based software products, such as the Company's suite of
SmartBot products. This market is new and emerging, is rapidly evolving, is
characterized by an increasing number of market entrants and will be subject to
frequent and continuing changes in customer preferences and technology. As is
typical in new and evolving markets, demand and market acceptance for the
Company's technologies is subject to a high level of uncertainty. Because the
market for the Company's products is evolving, it is difficult to assess or
predict with any assurance the size or growth rate, if any, of this market.
There can be no assurance that a significant market for the Company's products
will develop, or that it will develop at an acceptable rate or that new
competitors will not enter the market. In addition, even if a significant market
develops for such products, there can be no assurance that the Company's
products will be successful in such market. If a significant market fails to
develop, develops more slowly than expected or attracts new competitors, or if
the Company's products do not achieve market acceptance, the Company's business,
prospects, financial condition and results of operations will be materially
adversely affected.
 
     COMPETITION.  The market for the Company's products and services is new,
evolving and growing rapidly. Competition can be expected to intensify
significantly as the market matures and the more established software companies,
such as Microsoft Corporation, become increasingly involved. Barriers to entry
are relatively insubstantial. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Brightware, Inc.;
Broadvision, Inc.; Extempo, Inc.; Haptek, Inc.; Nearlife, Inc.; Netsage Corp.;
Neuromedia, Inc. and Virtual Personalities, Inc. This list may not be complete
and may change and substantially increase over time. The Company believes that
the principal competitive factors affecting the market for the Company's
products include core technology, delivery methods, brand recognition, ease of
use and interfaces. The relative importance of each of these factors depends
upon the specific customer involved. There can be no assurance that the Company
will be able to compete effectively with respect to any of these factors.
 
     The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing products and product
enhancements that it believes address customer requirements, there can be no
assurance that the Company will successfully complete the development or
introduction of these products and product enhancements on a timely basis or
that these products and product enhancements will achieve market acceptance.
Accordingly, there can be no assurance that the Company will be able to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See
"Business -- Competition."
 
     PRODUCT CONCENTRATION.  The Company expects to derive substantially all of
its revenues from sales of its SmartBot software robot products and associated
services. Broad market acceptance of these products is critical to the Company's
future success. As a result, failure to achieve broad market acceptance, or, if
achieved, future declines in demand of these products as a result of
competition, technological change, ease of use or otherwise would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, the Company's future financial
performance may depend in part on the successful development, introduction and
customer acceptance of future versions of the Company's software robot products,
and there can be no assurance that any such future products will achieve market
acceptance. See "Business -- Products and Services."
 
                                        8
10
 
     PRODUCT DEFECTS AND PRODUCT LIABILITY.  The Company's software robot
products are complex and could from time to time contain design defects or
software errors that could be difficult to detect and correct. The Company's
products have not yet been released for commercial use. Thus, there can be no
assurance that, despite testing by the Company, errors will not be found in the
Company's products once they are commercially released which could result in
delay in or inability to achieve market acceptance and thus could have a
material adverse impact upon the Company's business, prospects, financial
condition and results of operations.
 
     Because the Company's software robot products can be used by its clients to
perform mission critical functions, design defects, software errors, misuse of
the Company's products, incorrect data from external sources or other potential
problems within or out of the Company's control that may arise from the use of
the Company's products could result in financial or other damages to the
Company's clients. The Company maintains limited product liability insurance.
The Company anticipates that its sales and licensing agreements with its clients
will typically contain provisions designed to limit the Company's exposure to
potential claims. Such provisions, however, may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, prospects, financial condition and results of operations.
 
     RAPID TECHNOLOGICAL CHANGE.  To remain competitive, the Company must
continue to enhance and improve the ease of use, responsiveness, functionality
and features of its family of SmartBot software robot products. The industry in
which the Company operates is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new products
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing
products and proprietary technology and software obsolete. The Company's success
will depend, in part, on its ability to enhance its existing products, develop
new products and technology that address the increasingly sophisticated and
varied needs of its customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
There can be no assurance that the Company will successfully use new
technologies or adapt its proprietary technology and products to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
 
     DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL.  The Company's
performance is substantially dependent on the continued services and performance
of its senior management and other key personnel, particularly Eberhard
Schoneburg, the Company's President, Chief Executive Officer and Chairman. The
Company has entered into an employment agreement with Mr. Schoneburg, as well as
with the Company's Chief Financial Officer and Chief Technology Officer. The
Company's performance also depends upon the Company's ability to retain and
motivate its other officers and key employees. The loss of the services of any
of its executive officers or other key employees could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. The Company's future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
software engineers and managerial and marketing personnel. There is currently a
shortage of qualified software engineers and programmers. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to successfully attract, integrate or retain sufficiently qualified
personnel. The failure to attract and retain the necessary personnel could have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Employees" and
"Management."
 
     DEPENDENCE ON THIRD PARTY CONTRACTORS.  The Company intends to use
consultants to complete portions of the development work on its Alife product
suite of SmartBot software products and to assist customers in the installation
of the Company's SmartBot software products. Competition
                                        9
11
 
for such personnel is intense. There can be no assurance that the Company will
be successful in attracting or retaining such consultants. In addition, the
Company's ability to provide its software consulting services and introduce its
products is dependent, in part, on the ability of these independent consultants
to complete their engagements in a timely and cost-effective manner. In
particular, consulting resources will be required to install, support and
customize the Company's software products, including creating the content of the
Knowledge Bases. Therefore, the availability of such resources will directly
impact sales of such products. Some of these consultants will be employees of
other companies who will only be able to work on the Company's products on a
part-time basis. If the Company is not successful in attracting the necessary
consultants or if such consultants cannot complete the necessary tasks in a
timely and cost-effective manner, the Company's business, prospects, financial
condition and results of operations could be materially adversely effected.
 
     RISKS ASSOCIATED WITH INTERNATIONAL SALES.  A key component of the
Company's strategy is to expand its sales in foreign markets, especially in
Europe. The Company anticipates that it will expend significant financial and
management resources to develop programs of partnering and strategic investments
internationally. If the revenues generated by these marketing programs are
insufficient to offset the expense of establishing and maintaining such
programs, the Company's business, prospects, financial condition and results of
operations could be materially adversely affected. There can be no assurance
that the Company will be able to expand its sales in foreign markets.
 
     The Company's international sales are subject to certain risks not inherent
in its domestic sales, including political and economic instability in foreign
markets, 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. All of such
factors may suppress demand for the Company's services and products. The impact
of such factors on the Company's business is inherently unpredictable. There can
be no assurance that such factors will not have a material adverse effect upon
the Company's revenues from international sales and, consequently, the Company's
business, prospects, financial condition and results of operations. See
"Business -- Strategy."
 
     DEPENDENCE ON CONTINUED GROWTH OF INTERNET AND ONLINE COMMERCE.  The
Company's future revenues and any future profits are in a large part dependent
upon the willingness of consumers to accept the Internet as an effective medium
of commerce and for obtaining information. The Company is especially dependent
upon the long-term acceptance and growth of online commerce. Rapid growth in the
use of and interest in online services is a recent phenomenon, and there can be
no assurance that such acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the Internet
and other online services as a medium of commerce. Demand and market acceptance
for recently introduced services and products over the Internet are subject to a
high level of uncertainty. For the Company to be successful, consumers must
accept and utilize this novel way of conducting business and obtaining
information.
 
     The Internet may not be accepted by consumers as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that online
services continue to experience significant growth in the number of users, their
frequency of use or an increase in their bandwidth requirements, there can be no
assurance that the infrastructure of the Internet and other online services will
be able to support the demands placed upon them. In addition, Internet services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of online activity
or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support Internet services also
could result in slower response times and adversely affect usage of the Internet
and other online services generally. If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for
                                       10
12
 
Internet services does not effectively support the growth that may occur, or if
the Internet does not become a viable commercial marketplace, the Company's
business, prospects, financial condition and results of operations would be
materially adversely affected.
 
     INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS.  The Company will be
relying upon trade secrets, know-how, copyrights and continuing technological
innovations to develop and maintain its competitive position. The Company seeks
to protect such information, in part, by confidentiality agreements with its
corporate partners, collaborators, employees and consultants. These agreements
provide that all confidential information developed or made known during the
course of the individual's or entity's relationship with the Company is to be
kept confidential and not be disclosed to third parties except in specific
circumstances. The Company has caused each of its employees to execute forms of
Confidentiality and Inventions Agreements which provide that, to the extent
permitted by applicable law, all inventions conceived by the individual during
the individual's employment are the exclusive property of the Company. There can
be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
Further, there can be no assurance that the Company will be able to protect its
trade secrets and copyrights, or that others will not independently develop
substantially equivalent proprietary information and techniques.
 
     The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. The occurrence of any such event may
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business -- Intellectual Property and
Other Proprietary Rights."
 
     NEED FOR ADDITIONAL CAPITAL.  The Company currently believes the net
proceeds of the Offering, together with the Company's existing cash, cash
equivalents, short-term investments and other cash generated from operations,
will enable the Company to maintain its current and planned operations at least
through July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. Delays in the completion of
software development programs are common in the industry. If the Company
experiences delays in the scheduled development of its initial SmartBot software
robot products, it may require substantial additional funds until such time as
products are completed and cash generated from sales of products and services is
sufficient to fund continued growth of the business. In the event that such
additional financing is necessary, the Company may seek to raise such funds
through public or private equity or debt financing or other means. No assurance
can be given that additional financing will be available when needed, or that,
if available, such financing will be obtained on terms acceptable to the
Company. To the extent that the Company raises additional capital by issuing
equity securities, ownership dilution will result to existing stockholders. In
the event that adequate funds are not available, the Company's business,
prospects, financial condition and results of operations may be materially
adversely affected. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results and Operations -- Liquidity and
Capital Resources."
 
     RISKS ASSOCIATED WITH BRAND DEVELOPMENT.  The Company believes that
establishing and maintaining brand identity is a critical aspect of its
strategy. Furthermore, the Company believes that brand recognition will become
increasingly important as low barriers to entry encourage competition in the
software robot industry. In order to attract and retain customers and strategic
partners, and in response to competitive pressures, the Company intends to
increase substantially its financial commitment to the creation and maintenance
of brand development. The Company plans to accomplish this, although not
exclusively, through advertising campaigns in several forms of media,
                                       11
13
 
including radio, television, print and trade shows, with a particular emphasis
on the Internet channels. If the Company does not generate a corresponding
increase in revenue as a result of its branding efforts or otherwise fails to
promote its brand successfully, or if the Company incurs excessive expenses in
an attempt to promote and maintain its brand, the Company's business, prospects,
financial condition and results of operations would be materially adversely
affected.
 
     RISKS OF DOING BUSINESS ABROAD.  The Company anticipates that some of the
consultants it may hire to complete portions of the development work on its
products may be located in foreign countries. In addition, the Company intends
to organize subsidiaries in foreign countries. As a result, the Company may be
subject to a number of risks, including, among other things, difficulties
relating to administering its business globally, managing foreign operations,
currency fluctuations, restrictions against the repatriation of earnings, export
requirements and restrictions, and multiple and possibly overlapping tax
structures. The realization of any of the foregoing could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
 
     On January 1, 1999, a new currency called the "euro" is scheduled to be
adopted as the common legal currency in eleven of the fifteen member countries
of the European Union. During 2002, all European Union countries are expected to
be operating with the euro as their single currency. Uncertainty exists as to
the effect the euro will have on the marketplace. Additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. The Company cannot yet predict the
anticipated impact of the euro conversion on the Company.
 
     DEPENDENCE ON THIRD PARTY LICENSES.  The Company is designing its SmartBot
software products to recognize voice input as well as text-based input. The
voice recognition capabilities of these products will depend to a large extent
on the availability of highly accurate voice recognition software packages,
which the Company intends to license from third parties rather than develop
itself. The Company believes that the success of its products will depend to a
large extent on its ability to allow users to interact in a natural
conversational manner. There can be no assurance that the Company will be
successful in identifying third party voice recognition software which will
successfully interact with its products or that the Company will be able to
license such software products on commercially reasonable terms, or at all.
Failure by the Company to successfully identify viable voice recognition
software or enter into license agreements could materially adversely affect the
Company's business, prospects, financial condition and results of operations.
 
     GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES.  The Company believes that
it is not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of domestic and foreign laws and regulations covering
issues such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services are being considered and
may be enacted. The European Community has already adopted a directive
restricting the use of personal data. The adoption of such laws or regulations
may decrease the growth in use of the Internet, which would, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business. Moreover, the applicability to online services of
existing domestic and foreign laws in various jurisdictions governing issues
such as intellectual property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to online services could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
 
     Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject the Company to additional state sales and income
taxes. As some of the Company's products will be available over
 
                                       12
14
 
the Internet in multiple states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in each such state and foreign country. The failure by the Company
to qualify as a foreign corporation in a jurisdiction where it is required to do
so could subject the Company to taxes and penalties for the failure to do so. It
is possible that the governments of other states and foreign countries also
might attempt to regulate the Company's transmissions of content on its Web
sites or prosecute the Company for violations of their laws. There can be no
assurance that violations of local laws will not be alleged or charged by state
or foreign governments, that the Company might not unintentionally violate such
law or that such laws will not be modified, or new laws enacted, in the future.
 
     In addition, several telecommunications carriers are petitioning to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
In addition, because the growing popularity and use of the Internet has burdened
the existing telecommunications infrastructure and many areas with high Internet
use have begun to experience interruptions in phone service, local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate Internet
service providers ("ISPs") and online service providers ("OSPs") in a manner
similar to long distance telephone carriers and to impose access fees on the
ISPs and OSPs. If either of these petitions is granted, or the relief sought
therein is otherwise obtained, the costs of communicating on the Internet could
increase substantially, potentially slowing the growth in use of the Internet.
Any such new legislation or regulation or application or interpretation of
existing laws could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
 
     INTERNET COMMERCE SECURITY RISKS.  A significant barrier to electronic
commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the algorithms used by the Company
to protect data. If any such compromise of the Company's security were to occur
it could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. The Company may be required to
expend significant capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of Internet transactions and the privacy of users may
also inhibit the growth of the Internet generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third party contractors involve the storage and
transmission of proprietary information, security breaches could expose the
Company to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such security breaches would not have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
 
     YEAR 2000 COMPLIANCE.  The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
Year 2000 and lead to significant business delays and disruptions. The Company
has analyzed the software applications that it uses or has developed and
believes that they are Year 2000 compliant. However, until the Year 2000
arrives, the Company cannot be absolutely certain that its analysis is correct.
The costs of any Year 2000 remedial modifications must be expensed in the year
incurred, and thus will impact the Company's earnings. The Company is currently
unable to predict the extent to which it would be vulnerable to any failure by
its clients or suppliers to remediate any Year 2000 issues on a timely basis.
The failure of a client or supplier subject to the Year 2000 to convert its
systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
 
                                       13
15
 
business, prospects, financial condition and results of operations. In addition,
the Company's products are designed to operate with third party software and
data. The operation of the Company's existing and proposed products will be
adversely affected if such third party software and data are not Year 2000
compliant or if such third parties have not used compatible technology in
achieving compliance.
 
     BROAD DISCRETION OF MANAGEMENT AS TO USE OF PROCEEDS.  The Company intends
to use the net proceeds from this Offering (i) to fund research and product
development, (ii) to increase its sales and marketing capabilities, both
domestically and internationally, by expanding its marketing and promotional
programs, (iii) to establish strategic alliances, (iv) to make strategic
acquisitions and investments, (v) to increase its employee base and expand the
Company's infrastructure and (vi) for general corporate purposes, including
working capital. The Company may use a portion of such net proceeds to acquire
or invest in businesses, technologies, services or products that are
complementary to those of the Company. While the Company may from time to time
evaluate such potential acquisitions, investments or other transactions, the
Company currently has no understandings, commitments or agreements with respect
to any acquisitions. The Company has not determined the amounts it plans to
expend with respect to each of the expected uses or the timing of such
expenditures. Accordingly, management will have broad discretion with respect to
the expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
 
     CONTROL BY PRINCIPAL STOCKHOLDER.  Upon completion of the Offering,
Eberhard Schoneburg, the Company's President, Chief Executive Officer and
Chairman, will beneficially own approximately 61.4% of the outstanding shares of
Common Stock (approximately 59.8% if the Underwriters' over-allotment option is
exercised in full). Accordingly, Mr. Schoneburg will retain the voting power to
exercise control over the election of members of the Board of Directors as well
as any decision whether to merge or sell the assets of the Company, adopt, amend
or repeal the Company's Certificate of Incorporation and Bylaws, or take other
actions requiring the vote or consent of the Company's stockholders. In
addition, such a concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, and may also impede or preclude
transactions in which stockholders might otherwise receive a premium for their
shares over current market prices. See "Management -- Directors and Executive
Officers" and "Principal and Selling Stockholders."
 
     POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS.  Upon consummation of
the Offering, the Company's Certificate of Incorporation will authorize the
Board of Directors to issue, without stockholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 70% of the
voting power of all of the then outstanding shares of the capital stock of the
Company, voting together as a single class, shall be required for the
stockholders to adopt, amend or repeal any provisions of the Bylaws of the
Company; (ii) stockholders of the Company may not take any action by written
consent without a meeting; (iii) the Board of Directors will be classified into
three classes with staggered terms of three years each; and (iv) members of the
Board of Directors may be removed only for cause and after reasonable notice and
an opportunity to be heard before the body proposing to remove such director.
The Company's Bylaws provide that, for nominations to the Board of Directors or
for other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder
 
                                       14
16
 
must first have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a stockholder's notice generally must be delivered not
less than 60 days nor more than 90 days prior to the annual meeting. If the
meeting is not an annual meeting, the notice must generally be delivered not
more than 90 days prior to the special meeting and not later than the later of
60 days prior to the special meeting or ten days following the day on which
public announcement of the meeting is first made by the Company. The foregoing
provisions of the Company's Certificate of Incorporation and Bylaws could have
the effect of delaying, deterring or preventing a change in control of the
Company. Delaware law also contains provisions that may have the effect of
delaying, deterring or preventing a non-negotiated merger or other business
combination involving the Company. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with and obtain the
approval of its Board of Directors in connection with the transaction. Certain
of these provisions may, however, discourage a future acquisition of the Company
not approved by the Board of Directors in which stockholders might receive an
attractive value for their shares or that a substantial number or even a
majority of the Company's stockholders might believe to be in their best
interest. As a result, stockholders who desire to participate in such a
transaction may not have the opportunity to do so. See "Description of Capital
Stock -- Delaware Law and Certain Charter and Bylaw Provisions."
 
     SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE.  Sales of Common Stock (including Common Stock issued upon the exercise
of outstanding options) in the public market after this Offering could
materially adversely affect the market price of the Common Stock. These sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company's
management deems acceptable, or at all. Upon the completion of this Offering,
the Company will have 9,070,574 shares of Common Stock outstanding, assuming no
exercise of options or the Representatives' Warrant and assuming no exercise of
the Underwriters' over-allotment option. Of these outstanding shares of Common
Stock, the 1,600,000 shares sold in this Offering will be freely tradeable,
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act. The remaining 7,470,574 shares
of Common Stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 and were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act.
These shares may be resold in the public market only if registered or pursuant
to an exemption from registration, such as Rule 144. All officers, directors and
certain holders of Common Stock beneficially owning, in the aggregate,
               shares of Common Stock and holders of options to purchase
               shares of Common Stock, have agreed, pursuant to certain lock-up
agreements, that they will not offer, sell, contract to sell, grant any option
to sell, pledge, hypothecate or otherwise dispose of, directly or indirectly,
any shares of Common Stock owned by them, or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company, for a
period of one year after the date of this Prospectus without the prior written
consent of New York Broker, Inc., and, with respect to certain other
stockholders owning, in the aggregate,           shares of Common Stock, for a
period of six months after the date of this Prospectus without the prior written
consent of New York Broker, Inc. Upon expiration of the lock-up agreements, all
shares of Common Stock currently outstanding will be immediately eligible for
resale, subject to the requirements of Rule 144. Immediately following the
completion of this Offering, holders of 1,287,114 shares of Common Stock will be
entitled to certain registration rights. However, pursuant to the lockup
agreements,                of these shares of Common Stock may not be sold for
one year after the date of this Prospectus without the prior written consent of
New York Broker, Inc. If such holders, by exercising their rights, cause a large
number of shares to be registered and sold on the public market, such sales
could have a material adverse effect on the market price of the Company's Common
Stock. The Company intends to file a registration statement covering the
1,173,917 shares of Common Stock issuable or reserved for issuance under the
1998 Equity Incentive Plan and, upon filing, any shares subsequently issued
under such plans will be eligible for sale in the public market,
 
                                       15
17
 
subject to compliance with Rule 144 in the case of affiliates of the Company.
The Company is unable to predict the effect such sales may have on the then
prevailing market price of the Common Stock. See "Management -- Stock Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
 
     NO PUBLIC MARKET FOR THE COMMON STOCK; PRICE AND MARKET VOLATILITY.  Prior
to the Offering there has been no public market for the Company's Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the Offering. The initial offering price will
be determined by negotiation between the Company and the representatives of the
Underwriters based upon several factors. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The market price of the Company's Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new products
introduced by the Company or its competitors, or changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market price of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, prospects
financial condition and results of operations. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. See
"Underwriting".
 
     If shares of the Company's Common Stock are traded, they may trade at a
discount from the price paid for such shares, depending upon the market for
similar securities and other factors. No assurance can be given that a holder of
Common Stock will be able to sell the Common Stock in the future or that such
sale will be at a price equal to or higher than the price paid for such Common
Stock. No assurance can be given as to the liquidity of any trading market for
the Common Stock. The liquidity of any market for the Common Stock will depend
upon the number of holders of Common Stock, the interest of securities dealers
in making a market in the Common Stock, if any, and other factors.
 
     COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS.  The Company's Common Stock
will be quoted on the Nasdaq SmallCap Market (the "SmallCap Market"). In order
to continue to be included in the SmallCap Market, a company must meet certain
maintenance criteria. Effective February 1998, the SmallCap Market maintenance
criteria require that a company must have (i) $2,000,000 in net tangible assets
or a $35,000,000 market capitalization or $500,000 of net income in two of the
last three years, (ii) a minimum bid price of $1.00 per share and (iii) a public
float of 1,000,000 shares. Failure to meet the SmallCap Market maintenance
criteria may result in the delisting of the Company's Common Stock. Trading, if
any, in the Company's Common Stock would thereafter be conducted in the
over-the-counter market. As a result of such delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's Common Stock.
 
     IMMEDIATE AND SUBSTANTIAL DILUTION.  Purchasers of shares of Common Stock
in this Offering will suffer an immediate and substantial dilution in the net
tangible book value of the Common Stock from the initial public offering price.
See "Dilution."
 
     ABSENCE OF DIVIDENDS.  No cash dividends have been paid on the Common Stock
to date and the Company does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
 
                                       16
18
 
                                USE OF PROCEEDS
 
     The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered by the Company, after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be $5,976,000 ($7,411,200 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $6.50 per share. The Company will not receive
any proceeds from the sale of the 400,000 shares of Common Stock offered by the
Selling Stockholder. See "Principal and Selling Stockholders."
 
     The Company intends to use the net proceeds from the Offering (i) to fund
research and product development, (ii) to increase its sales and marketing
capabilities, both domestically and internationally, by expanding its marketing
and promotional programs and establishing overseas sales offices, (iii) to
establish strategic alliances, (iv) to make strategic acquisitions and
investments, (v) to increase its employee base and expand the Company's
infrastructure and (vi) for general corporate purposes, including working
capital. The Company may use a portion of such net proceeds to acquire or invest
in businesses, technologies, services or products that are complementary to
those of the Company. While the Company may from time to time evaluate such
potential acquisitions, investments, or other transactions, the Company
currently has no understandings, commitments or agreements with respect to any
acquisitions. The Company has not determined the amounts it plans to expend with
respect to each of the expected uses or the timing of such expenditures. As a
consequence, management will have the discretion to allocate the net proceeds
from this Offering. The amounts actually expended for each use may vary
significantly depending on a number of factors, including the amount of future
revenue, the amount of cash generated or used by the Company's operations, the
progress of the Company's sales and marketing efforts, the ability of the
Company to enter into collaborative arrangements, the success of the Company's
recruiting efforts, the status of competitive products and acquisition
opportunities presented to the Company. Pending such uses, the net proceeds to
the Company from this Offering will be invested in short-term, investment-grade,
interest-bearing instruments. See "Risk Factors -- Broad Discretion of
Management as to Use of Proceeds."
 
     The Company currently believes the net proceeds of the Offering, together
with the Company's existing cash, cash equivalents, short-term investments and
other cash generated from operations, will enable the Company to maintain its
current and planned operations at least through July 2000. There can be no
assurance, however, that this will be the case. See "Risk Factors -- Need for
Additional Capital" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                DIVIDEND POLICY
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
its business. See "Risk Factors -- Absence of Dividends."
 
                                       17
19
 
                                 CAPITALIZATION
 
     The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company as
adjusted to reflect the sale of the 1,200,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $6.50 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds therefrom as set
forth in "Use of Proceeds." This table should be read in conjunction with the
Company's Financial Statements, including the Notes thereto, and other financial
information included elsewhere in this Prospectus.
JUNE 30, 1998
                                                              ------------------------
                                                                          PRO FORMA
                                                              ACTUAL    AS ADJUSTED(1)
                                                              -------   --------------
                                                                   (IN THOUSANDS)
Long-term debt..............................................  $   500     $     500
Stockholders' equity:
Preferred Stock, $0.01 par value, no shares authorized,
  issued or outstanding, actual; 5,000,000 shares
  authorized, no shares issued and outstanding as
  adjusted..................................................       --            --
Common Stock, $0.01 par value, 19,000,000 shares authorized,
  6,967,213 shares issued and outstanding actual; 30,000,000
  shares authorized, 9,070,574 shares issued and outstanding
  as adjusted(2)............................................     69.7          90.7
Non-Voting Common Stock, $0.01 par value, 1,000,000 shares
  authorized, 53,278 shares issued and outstanding actual;
  no shares authorized, issued and outstanding
  as adjusted...............................................       .5            --
Additional paid-in capital..................................    611.1      10,697.7
Representatives' Warrant....................................       --            .1
Accumulated deficit.........................................   (348.5)       (348.5)
                                                              -------     ---------
          Total stockholders' equity........................  $ 332.8     $10,440.0
                                                              =======     =========
---------------
(1) Also gives pro forma effect to (i) the issuance by the Company of 26,083
    shares of Common Stock upon the exercise of stock options on July 31, 1998
    at $3.66 per share, (ii) the sale and issuance by the Company of 824,000
    shares of Common Stock on September 23, 1998 and the receipt of $4,035,632
    of net proceeds therefrom, (iii) the conversion of all Non-Voting Common
    Stock into shares of Common Stock on a 1-for-1 basis upon consummation of
    the Offering, (iv) the adoption of the Certificate of Incorporation, to be
    effective upon closing of the Offering, removing the Company's existing
    class of Non-Voting Common Stock and creating a class of undesignated
    Preferred Stock, and (v) the sale and issuance of the Representatives'
    Warrant upon consummation of the Offering.
 
(2) Excludes 590,569 shares of Common Stock reserved for issuance upon the
    exercise of stock options outstanding as of September 29, 1998 at a weighted
    average exercise price of $3.73 per share and 160,000 shares of Common Stock
    reserved for issuance upon the exercise of the Representatives' Warrant.
 
                                       18
20
 
                                    DILUTION
 
     The net tangible book value of the Company as of June 30, 1998, on a pro
forma basis to give effect to (i) the sale on September 23, 1998 of 824,000
shares of Common Stock and the receipt of $4,035,632 of net proceeds therefrom
and (ii) the exercise of options on July 31, 1998 to purchase 26,083 shares of
Common Stock at an exercise price of $3.66 per share, was $4,463,918 or
approximately $.57 per share. "Net tangible book value" per share represents the
total tangible assets of the Company, less total liabilities, divided by the
number of shares of Common Stock outstanding. Assuming the receipt by the
Company of the net proceeds from the sale of the Representatives' Warrant and
the 1,200,000 shares of Common Stock offered by the Company at an assumed public
offering price of $6.50 per share after deducting underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value of the Company as of June 30, 1998 would have been $10,440,018, or $1.15
per share. This represents an immediate increase in the pro forma net tangible
book value of $.58 per share to existing stockholders of the Company and an
immediate dilution of $5.35 per share to new investors purchasing Common Stock
in this Offering. The following table illustrates the per share dilution to be
incurred by new investors as of June 30, 1998:
Assumed initial public offering price.......................          $6.50
  Pro forma net tangible book value per share at June 30,
     1998...................................................  $.57
  Increase per share attributable to new investors..........   .58
                                                              ----
Pro forma net tangible book value per share after the
  Offering..................................................           1.15
                                                                      -----
Dilution per share to new investors.........................          $5.35
                                                                      =====
The following table sets forth, on a pro forma basis as set forth above, as
of June 30, 1998, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing stockholders and by the investors purchasing shares of
Common Stock offered hereby (assuming a public offering price of $6.50 per
share):
SHARES PURCHASED       TOTAL CONSIDERATION
                                 --------------------    ----------------------    AVERAGE PRICE
                                  NUMBER      PERCENT      AMOUNT       PERCENT      PER SHARE
                                 ---------    -------    -----------    -------    -------------
Existing stockholders..........  7,870,574     86.8%     $ 4,812,463     38.2%         $ .61
New investors..................  1,200,000     13.2%       7,800,000     61.8%         $6.50
                                 ---------     ----      -----------     ----
          Total................  9,070,574      100%     $12,612,463      100%
                                 =========     ====      ===========     ====
The above information excludes 590,569 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options as of September 29, 1998
at a weighted average exercise price of $3.73 per share and 160,000 shares of
Common Stock reserved for issuance upon the exercise of the Representatives'
Warrant. To the extent that such options and warrant are exercised, there will
be further dilution to new investors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 7 of Notes to the
Financial Statements.
 
                                       19
21
 
                            SELECTED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following data, insofar as it relates to the years 1994 through 1997,
has been derived from annual Financial Statements and Notes thereto, some of
which appear elsewhere herein. The selected balance sheet data as of December
31, 1996 and 1997, and the selected statement of operations data for the three
fiscal years ended December 31, 1997, are derived from the Company's Financial
Statements which have been audited by Wolf & Company, P.C., independent
certified public accountants, whose report appears elsewhere herein. The
selected financial data presented below at June 30, 1998 and for the six months
ended June 30, 1997 and June 30, 1998 have been derived from, and are qualified
by reference to, the Company's unaudited Financial Statements also appearing
herein. Such unaudited Financial Statements, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results for the unaudited interim periods. The
data should be read in conjunction with the Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. In 1998, the
Company shifted its primary business focus from software consulting to product
development, marketing and sales. As a consequence, the Company expects that the
substantial majority of its future revenues will be derived from sales of its
software robot products and that revenues from its consulting business will
significantly decrease. Accordingly, past financial results do not reflect the
results of the Company's current business activities. Furthermore, its limited
operating history leads the Company to believe that period-to-period comparisons
of its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. See "Risk
Factors-Minimal Revenues; Period to Period Comparisons; Limited Operating
History; Anticipation of Continued Losses."
SIX MONTHS ENDED
                                                         YEAR ENDED DECEMBER 31,               JUNE 30,
                                                  -------------------------------------    ----------------
                                                  1994(1)     1995      1996      1997      1997      1998
                                                  -------    ------    ------    ------    ------    ------
                                                                                             (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
  Application services..........................  $   --     $1,217    $2,790    $1,347    $  914    $  332
  Other.........................................      --         --        --       423       117       117
                                                  ------     ------    ------    ------    ------    ------
         Total revenues.........................      --      1,217     2,790     1,770     1,031       449
                                                  ------     ------    ------    ------    ------    ------
Operating expenses:
  Selling, general and administrative...........      22        967     1,101     1,049       624       596
  Engineering...................................      --        828       656       512       301       250
  Research and development......................      --         --        --        --        --       128
  Depreciation and amortization.................      --         40       138       168        83        54
                                                  ------     ------    ------    ------    ------    ------
         Total operating expenses...............      22      1,835     1,895     1,729     1,008     1,028
                                                  ------     ------    ------    ------    ------    ------
         Income (loss) from operations..........     (22)      (618)      895        41        23      (579)
  Other income(expense).........................      --        (35)      (15)      (11)       --        (7)
                                                  ------     ------    ------    ------    ------    ------
         Income (loss) before tax...............     (22)      (653)      880        30        23      (586)
  Provision (benefit) for income taxes..........      --       (257)      337         9         7       (91)
                                                  ------     ------    ------    ------    ------    ------
         Net income (loss)......................  $  (22)    $ (396)   $  543    $   21    $   16    $ (495)
                                                  ======     ======    ======    ======    ======    ======
Net income (loss) per share(2)..................  $ (.02)    $ (.07)   $  .08    $  .00    $  .00    $ (.07)
Shares used in computing net income (loss) per
  share(2)......................................   1,393      5,574     6,967     6,967     6,967     6,970
20
22
AS OF DECEMBER 31,             AS OF JUNE 30, 1998
                                                ----------------------------------   -----------------------
                                                                                                PRO FORMA
                                                1994(1)    1995     1996     1997    ACTUAL   AS ADJUSTED(3)
                                                -------   ------   ------   ------   ------   --------------
                                                                                           (UNAUDITED)
BALANCE SHEET DATA:
Cash..........................................     $43     $  23     $ 30    $  22    $ 552      $10,659
Working capital (deficit).....................      28      (565)      74      167      409       10,516
Total assets..................................      43       760      885     1085    1,270       11,377
Long-term debt................................      --        --       --       --      500          500
Total stockholders' equity....................      28        82      625      646      333       10,440
---------------
(1) Initial period of operations from November 15, 1994 to December 31, 1994.
 
(2) Net income (loss) per share is determined by dividing the net income (loss)
    attributable to common stockholders by the weighted average number of Common
    Stock and Common Stock equivalents outstanding during the period. See Note 2
    of Notes to Financial Statements.
 
(3) As adjusted to give effect to the sale of 1,200,000 shares of Common Stock
    offered hereby, after deducting the underwriting discount and the offering
    expenses, at an assumed initial public price of $6.50 per share and the
    application of the estimated net proceeds therefrom as set forth in "Use of
    Proceeds." Also gives pro forma effect to the issuance by the Company of
    26,083 shares of Common Stock upon the exercise of stock options on July 31,
    1998 at $3.66 per share and the sale and issuance by the Company of 824,000
    shares of Common Stock on September 23, 1998 at $5.00 per share and the
    receipt of $4,035,632 of net proceeds therefrom.
 
                                       21
23
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements, including the Notes thereto, of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including the matters
set forth in "Risk Factors."
 
OVERVIEW
 
     The Company was incorporated in Delaware in November 1994 as Neurotec
International Corp., a wholly-owned subsidiary of Neurotec Hochtechnologie GmbH
("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. 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 designing, developing and marketing its Alife suite of SmartBot software
products.
 
     Management's decision to shift the primary focus of the Company's business
from software consulting to product development and commercialization will
adversely affect the Company's results of operations in the near term. To date,
the Company's only source of revenue has been derived from its software
consulting services, and it has generated no revenue from the sale of its
SmartBot software products. The Company is currently expanding its research and
development, production and marketing capabilities associated with the
anticipated sale of its SmartBot products, and as a result, operating expenses
are expected to increase significantly going forward. The Company expects to
continue to incur increasing losses and generate negative cash flow from
operations until at least the year 2000. To the extent that the Company's
product development, marketing and sales efforts do not result in commercially
successful products that generate significant net sales, 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 to
achieve or maintain profitability.
 
     In addition, as a result of the Company's recent transition from software
consulting to product development, marketing and sales, the Company's research
and development expenditures increased significantly during the six months ended
June 30, 1998. Due to the early stage of such research and development efforts,
no software development costs were capitalized during that period. Prior to
December 31, 1997, substantially all research and development was performed by
the Company in connection with contractual software consulting services with
customers for which the Company was reimbursed. Such costs are included in
engineering expenses in the Company's financial statements through December 31,
1997.
 
     Because the Company has shifted its business focus from software consulting
to product development, marketing and sales, 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, 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
 
                                       22
24
 
and its ability to attract and retain qualified personnel. Gross profit margins
will vary from product to product and although the Company may have some ability
to affect its product mix through effective selling of high margin products, the
Company's sales mix may vary from period to period and its gross margins will
fluctuate accordingly.
 
RESULTS OF OPERATIONS
 
     The Company's principal source of revenue from inception through May 1998
has been software consulting services. From inception through June 1997, the
preponderance of those revenues were generated by subcontracts issued from
Artificial Life's former parent company. 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. Thereafter, the Company focused essentially all available resources on
product development. To date, the Company has not released any commercial
versions of its SmartBot products for sale.
 
  SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
 
     Revenues:  Revenues for the six months ended June 30, 1998 were $449,380 as
compared to $1,031,128 for the same period of the prior year. The decrease of
$581,748, or 56.4%, resulted from the Company's decision to transition its
primary business focus from software consulting to product development and
sales.
 
     Engineering Expenses:  Engineering expenses for the six months ended June
30, 1998 were $249,789 as compared to $301,518 for the same period of the prior
year. The decrease of $51,729, or 17.2%, was directly attributable to the
reallocation of resources to research and development as a result of the
Company's change of its primary business focus from software consulting to
product development, marketing and sales.
 
     Research and Development Expenses:  Research and development expenses for
the six months ended June 30, 1998 were $128,103. Prior to 1998, substantially
all research and development was performed by the Company in connection with
contractual consulting arrangements with its customers, for which it was
reimbursed. Such costs were included in engineering expenses. Upon conclusion of
its long-term consulting contract in May 1998, the Company focused essentially
all available resources on product development. Accordingly, the Company expects
that research and development expenditures will continue to rise significantly
in the foreseeable future as the Company expands its research and development
capabilities relating to such product development.
 
     Selling, General and Administrative Expenses:  Selling, general and
administrative expenses for the six months ended June 30, 1998 were $596,620 as
compared to $623,693 for the same period of the prior year. The decrease of
$27,073, or 4.3%, was directly attributable to reduced administrative, sales and
marketing staff during the Company's transition from software consulting to
product development, marketing and sales. Selling expenses (sales and marketing)
and public relations have begun, and are anticipated to continue, to increase in
anticipation of product releases and commercialization efforts.
 
     Net Loss:  The net loss for the six months ended June 30, 1998 was $495,025
as compared to net income of $16,070 for the same period of the prior year. This
decrease was directly related to the decrease in software consulting revenues
related to the Company's transition to product development, marketing and sales.
 
  YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
     Revenues:  Revenues for the year ended December 31, 1997 were $1,770,360 as
compared to $2,789,878 for the year ended December 31, 1996. The decrease of
$1,019,518, or 36.5%, is directly
 
                                       23
25
 
attributable to the Company's discontinuing software consulting work for its
former parent after the Management Buyout.
 
     Engineering Expenses:  Engineering expenses for the year ended December 31,
1997 were $512,267 as compared to $656,086 for the year ended December 31, 1996.
The decrease of $143,819, or 21.9%, resulted primarily from the Company's
discontinuing software consulting work for its former parent after the
Management Buyout and the shift in its primary business focus away from software
consulting.
 
     Research and Development Expenses:  Research and development expenses for
the year ended December 31, 1997 were related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
 
     Selling, General and Administrative Expenses:  Selling, general and
administrative expenses for the year ended December 31, 1997 were $1,048,897 as
compared to $1,101,109 for the year ended December 31, 1996. The decrease of
$52,212, or 4.7%, is attributable to reduced sales and marketing overhead
associated with the Company's reduction in contractual software consulting
services.
 
     Net Income:  Net income for the year ended December 31, 1997 was $21,065 as
compared to $543,344 for the year ended December 31, 1996. The decrease of
$522,279, or 96.1%, is attributable to the Company's discontinuing contractual
consulting services for its former parent and transitioning its primary business
focus away from software consulting.
 
  YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Revenues:  Revenues for the year ended December 31, 1996 were $2,789,878 as
compared to $1,216,716 for the year ended December 31, 1995. The increase of
$1,573,162, or 129.3%, was principally attributable to the performance of
software consulting services for its former parent and other affiliates, and the
initial revenues realized from the Company's major domestic software consulting
contract.
 
     Engineering Expenses:  Engineering expenses for the year ended December 31,
1996 were $656,086 as compared to $827,471 for the year ended December 31, 1995.
The decrease of $171,385, or 20.7%, was directly attributable to reduced
engineering charges from the Company's former parent as the Company's in-house
engineering staff was in place and operational.
 
     Research and Development Expenses:  Research and development expenses for
the year ended December 31, 1996 related to contractual software consulting
services for which the Company was reimbursed and were included in engineering
expenses.
 
     Selling, General and Administrative Expenses:  Selling, general and
administrative expenses for the year ended December 31, 1996 were $1,101,109 as
compared to $967,271 for the year ended December 31, 1995. The increase of
$133,838, or 13.8%, represented the addition of a Director of Sales and
Marketing along with related staff, additional administrative support staff,
increased office overhead and increased travel and consulting costs. These
increases were offset in part by the elimination of one-time start up costs
incurred in 1995.
 
     Net Income:  Net income for the year ended December 31, 1996 was $543,344
as compared to a net loss of $395,856 for the year ended December 31, 1995. The
increase in earnings of $939,200, or 237.3%, was related to several factors.
First, approximately $282,000, or 71.2%, of the 1995 net loss was related to
start-up costs that were expensed in that period. Second, charges for
engineering expenses from the Company's former parent were reduced significantly
in 1996 as the Company's engineering team was in place and operational. Finally,
because the administrative infrastructure was already established in 1995, there
were limited additional costs required to manage the Company's business in 1996.
 
                                       24
26
 
  LIQUIDITY AND CAPITAL RESOURCES
 
     From inception through the year ended December 31, 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 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 and a private placement of Non-Voting Common Stock of $181,367,
the net proceeds of which the Company received in June 1998. In September 1998,
the Company raised $4,035,632 in net proceeds from a private placement of
824,000 shares of Voting Common Stock. 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, 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 certificates of deposit.
 
     As of June 30, 1998, the Company had cash and cash equivalents of $551,591.
After giving effect to the issuance by the Company of 26,083 shares of Common
Stock upon the exercise of stock options on July 31, 1998 at $3.66 per share and
the receipt of $95,464 in net proceeds therefrom and the sale and issuance by
the Company of 824,000 shares of Common Stock on September 23, 1998 for $5.00
per share and receipt of $4,035,632 in net proceeds therefrom, the Company would
have had cash and cash equivalents as of June 30, 1998 of $4,682,687.
 
     Effective October 10, 1995, the Company entered into a consortium agreement
(the "MIT Agreement") with the Massachusetts Institute of Technology ("MIT").
Under the MIT Agreement, MIT will conduct research projects for the "Things That
Think Consortium." The term of the agreement is for five years through October
9, 2000 but provides for early termination, with one year written notice, as
well as renewal options. The Company is obligated to pay an annual membership
fee of $125,000 under the MIT Agreement.
 
     The Company leases office and other space and various office equipment
under various noncancelable leases. Minimum annual lease payments, exclusive of
additional operating costs, for the years ended December 31, 1998, 1999, 2000
and 2001 are $221,372, $205,725, $205,352 and $17,113, respectively.
 
     The Company has employment agreements with certain corporate officers. The
agreements are generally one to three years in length and provide for minimum
base salaries. These agreements include severance payments under certain
conditions of approximately 50% to 300% of each officer's annual compensation.
In addition the President, Chief Executive Officer and Chairman of the Company
is entitled to receive an annual incentive bonus of 3% of the Company's profits
from operations.
 
     The Company plans to establish in the near term subsidiaries in Germany,
the Czech Republic and the Russian Republic for which it will incur start-up
expenses.
 
     The Company believes that the net proceeds of this Offering, 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 July 2000, although there can be no assurance that the Company will not
have additional capital needs prior to such time. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements after
that time, the Company may seek to sell additional equity or debt securities or
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or terms
acceptable to the Company, if at all. See "Risk Factors-Need for Additional
Capital."
 
                                       25
27
 
     The Company has incurred interim losses through June 1998, and the Company
anticipates a loss for income tax purposes for fiscal 1998. A portion of this
loss will be available to carry forward and reduce income taxes, if any, in
future periods.
 
YEAR 2000
 
     The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Any of the Company's
computer programs or other information systems that have time-sensitive software
or embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
 
     The Company has completed an initial review of its information and
non-information technology systems. This review included its existing and
planned computer software and hardware. The Company believes that these systems
are Year 2000 compliant and has made an initial determination that the costs
and/or consequences associated with the Year 2000 issue are not expected to have
a material adverse effect on its business operations or future financial
condition. The Company, however, will continue to monitor the Year 2000
readiness of these systems. The Company will evaluate the need to complete a
further review, which may include soliciting and obtaining certification of Year
2000 compliance from certain third party software vendors and determining the
readiness of its significant suppliers and customers.
 
     In addition, the Company's products are designed to operate with third
party software and data. The operations of the Company's existing and proposed
products will be adversely affected if such third party software and data are
not Year 2000 compliant or if such third parties have not used compatible
technology in achieving compliance.
 
     To the extent that the Company's assessment is finalized without
identifying any non-compliant systems operated by the Company or by third
parties, the Year 2000 issue could have a material effect on the operations of
the Company. The Company could experience delays in the development of its
products. Once its products are developed and offered for commercial sale, the
Company could experience delays in delivering such products or could deliver
products that do not operate correctly, which could cause the Company to lose
business and even customers and could subject the Company to claims for damages.
Problems with the Year 2000 issue could also result in delays in the Company
invoicing its customers or in the Company receiving payments from them. The
severity of these possible problems would depend on the nature of the problem
and how quickly it could be corrected or an alternative implemented, which is
unknown at this time.
 
     After completing its assessment, the Company will develop appropriate
contingency plans to address situations in which various systems of the Company,
or of third-parties with which the Company does business, are not Year 2000
compliant. Some risks of the Year 2000 issue, however, are beyond the control of
the Company and its suppliers and customers. For example, no preparations or
contingency plan will protect the Company from a downturn in economic activity
caused by the Year 2000 issue.
 
EURO CONVERSION
 
     On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt a new currency called the "euro" as their common
legal currency (the "Euro Conversion"). The Company is currently unsure of the
potential impact that the Euro Conversion will have on its business, financial
condition and results of operations.
 
RECENT PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This
 
                                       26
28
 
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in stockholders' equity
during the period except those resulting from investments by, or distributions
to, stockholders. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. SFAS
No. 130 had no impact on the Company's financial statements.
 
     In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
 
     In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
 
                                       27
29
 
                                    BUSINESS
 
OVERVIEW
 
     Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company is developing to
automate and simplify time-consuming and complex business-related Internet
functions such as Web navigation, direct marketing, user profiling, information
gathering, messaging, knowledge management, sales response and call center
automation. The Company is also developing products for applications in data
mining, Web-page analysis, statistical analysis and direct marketing to support
the functionality of the SmartBot products. While each Artificial Life SmartBot
can function independently and is programmed for a particular application,
customers can combine the SmartBots to create what the Company believes is the
industry's first integrated commercial, robot-based electronic commerce
("e-commerce") solution.
 
     The rapidly increasing number of Web users and ubiquitous access to the
Internet, both in the United States and internationally, have resulted in the
emergence of the Internet as a new mass medium through which persons and
entities gather information, communicate, market and sell products and services,
interact and seek entertainment. However, the Company believes that the
Internet's success has also made it increasingly difficult for Internet users to
search for and locate information relevant to their interests and for companies
engaged in selling goods and services over the Internet to effectively market
and support their products and services. Artificial Life is developing its
family of SmartBot products to help address these needs.
 
     The Company's SmartBot products are designed to communicate in natural
language and to respond "intelligently" to a user's command or inquiry, and in
some cases, to act autonomously. All of the Company's SmartBot products are
based on the Company's Alife-SmartEngine technology. The Alife-SmartEngine is
the core component that gives the Company's products the ability to converse
with its users in natural language, either by text or speech, and also to
process and respond to natural language commands or questions. The
Alife-SmartEngine contains several "intelligent" modules that process and
interpret manually input or verbal natural language. These modules work together
to break down the essential components of human conversation -- detailed
knowledge of certain topics, casual talk about topics of interest ("small
talk"), short and long term memory of previously discussed topics, and some
emotional content and intentions that drive the conversation -- and use these
components to "understand" and respond to the user in a manner that is more
human-like and less machine-like than current "query-based" software. The
Company believes that its products will allow people to interact with computers
in a more natural way -- similar to a conversation with a human being.
 
     The Company believes that "intelligent" software products represent an
emerging standard in the way individuals and businesses will retrieve, present
and manipulate information on the Internet. The advent of graphical user
interfaces and window-based operating systems created a new personal computing
standard and led to significantly increased computer use because they made
computers easier to use. Users no longer had to engage in the time consuming
task of learning and accurately executing textual operating commands. Instead, a
generation of computer users operated their computers by pointing and clicking
with a "mouse." The Company believes that the introduction and adoption of
"intelligent" software programs like its SmartBots will make the Internet easier
to use through natural language communication and by freeing users from much of
the time needed to manually search for data on the Internet and then to
manipulate such data for the user's desired purpose.
 
     The Company released its first SmartBot product, the non-commercial version
of the Alife-WebGuide, in September 1998. To date, the Company has not sold any
SmartBot products but expects to commence sale of the commercial versions of the
Alife-WebGuide in the fourth quarter of
 
                                       28
30
 
1998. The Company is presently developing the initial versions of the seven
SmartBot products listed below:
 
     - ALIFE-WEBGUIDE:  This SmartBot is designed to reside on a Web site and
       help users navigate the site by accepting and processing questions, such
       as search queries, from users in natural language and responding to users
       in natural language. The bot engages the user in a "conversation" through
       questions and answers and, upon learning of the user's interests, is
       designed to display Web pages that match the content of the
       "conversation" or to suggest links to other locations on the Web site.
 
     - ALIFE-SALESREP:  The Alife-SalesRep is being designed for e-commerce
       retailers to use for one-to-one marketing on the Internet. Retailers will
       input user profile information and product information into this
       SmartBot's Knowledge Bases to deliver customer-specific, targeted sales
       information via the Internet.
 
     - ALIFE-MESSENGER:  The Alife-Messenger is being designed to act as a
       natural language-based automated e-mail reply and answering service. By
       customizing the Alife-Messenger, a company can automate replies to
       incoming e-mail queries and customer requests, thereby reducing the need
       for human intermediaries.
 
     - ALIFE-PORTFOLIO-MANAGER:  This SmartBot is being developed to monitor, in
       real-time, an individual's investment portfolio using criteria
       established by the individual and, when such criteria have been met, or
       failed to have been met, to autonomously in real-time contact the
       individual by telephone, pager, e-mail or some other mode of
       communication and let the individual know that trading action might be
       warranted.
 
     - ALIFE-CALL-CENTER-AGENT:  The Alife-Call-Center-Agent is being designed
       for call centers and help desks to be integrated with existing call
       center server software to provide an automated first response to incoming
       voice telephone calls or e-mail requests and to handle call center
       requirements with virtually no aid from human operators.
 
     - ALIFE-KNOWLEDGE-MANAGER:  This SmartBot is being designed to extract
       information contained in a company's Intranet documents, organize it and
       make it more easily accessible for retrieval in order to enable companies
       to more efficiently and intelligently manage the large amount of data and
       documents that companies are making available on their Intranets.
 
     - ALIFE-PERSONAL-TUTOR:  The Alife-Personal-Tutor is a tutoring program
       being designed to extract profile information from natural language
       conversation between the bot and the student user and to automatically
       adapt the difficulty and content of the lessons to the skill level of the
       student based on this information.
 
     The Company plans to offer a fully-functional "Personal" version of most of
its products to non-commercial users either free or at a low price. The Company
believes that this approach, which has been used successfully by other Internet
companies, will result in more rapid acceptance and sales of the Company's
products to commercial users. The commercial versions of the SmartBot will
include a "Professional" version for professional and small corporate users
and/or a transaction and client/server based "Enterprise" version for networked
corporate users. For the commercial versions of its SmartBot products, the
Company intends to charge a one-time licensing fee, and with respect to the
"Enterprise" version, intends to also charge a transactional fee based upon the
number of users which interact with its bots. The Company develops its SmartBot
products on widely available standard hardware and software platforms such as
Windows NT/95/98 and Internet browsers such as the Netscape
Navigator/Communicator and Microsoft Internet Explorer. The Company also expects
to offer some of the products for Unix and MacIntosh computers in the future.
 
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INDUSTRY BACKGROUND
 
     Computer users and businesses have rapidly adopted the Internet as a means
to gather information, communicate, transact business, interact and be
entertained, making it an important new mass medium. International Data
Corporation ("IDC"), a market research firm, estimates that the number of
Internet users exceeded 69 million in 1997, and will grow to over 320 million by
2002. The Internet enables advertisers to target advertising campaigns utilizing
sophisticated databases of information about the users of various sites and to
directly generate revenues from these users through online transactions. As a
result, the Internet has become a compelling means to advertise and market
products and services. IDC estimates that the total value of goods and services
purchased over the Internet will grow from $12 billion in 1997 to approximately
$425 billion per year by the end of 2002.
 
     Consequently, the amount of information available on the Internet has grown
dramatically. Web sites have proliferated along with the data available on such
sites, making it more difficult and time consuming for users to find the
information they want. Users are spending a substantial portion of their on-line
time searching for the specific information, products or services they desire.
Furthermore, once an Internet user locates a desired site or sites, the user
often finds it difficult to navigate such sites. As Web technology has improved,
many Web sites have become more complex by adding new features, products,
services, chat rooms, games, and other services. It is not uncommon for one Web
site to have dozens of different options and links to other associated sites.
While it is generally true that this increase in information and choices
benefits Web users, more effective tools are needed to find information,
products and services efficiently.
 
     For corporations offering products and services on the Internet, the
rapidly increasing number of Internet users offers benefits but also presents
challenges. For example, a company may place a description of a new product on
its Web site and then find that within a few hours, thousands of Internet users
have sent e-mail messages to learn more about the product. While the volume of
inquiries suggests that the company might ultimately generate significant
revenues from selling its new product online, responding to each of these
inquiries in a timely manner can require an expensive customer service force. A
second problem facing e-commerce companies is the dramatic increase in
competition among e-commerce sites. Numerous e-commerce sites are launched
worldwide on the Internet daily. Accordingly, e-commerce retailers must find
increasingly efficient and cost-effective ways to market their products and
services to new customers and maintain or enhance existing customer
relationships.
 
THE ARTIFICIAL LIFE SOLUTION
 
     Artificial Life is developing its Alife suite of SmartBot products to
assist in solving problems relating to information retrieval, Web navigation,
sales and service support and direct marketing on the Internet. These software
robots are designed to communicate in natural language and to respond
"intelligently" to the user's command or inquiry, and in some cases, to act
autonomously.
 
     All of the Company's SmartBot products are based on the Company's
Alife-SmartEngine technology. The Alife-SmartEngine is the core component that
gives the Company's products the ability to converse with its users in natural
language, either by text or speech, and also to process and respond to natural
language commands or questions. The Alife-SmartEngine contains several
"intelligent" modules that process and interpret manual input or verbal natural
language. These modules work together to break down the essential components of
human conversation -- detailed knowledge of certain topics, casual talk about
topics of interest ("small talk"), short and long term memory of previously
discussed topics, and some emotional content and intentions that drive the
conversation -- and use these components to "understand" and respond to the user
in a manner that is more human-like and less machine-like than current
"query-based" software. The Company believes that its products will allow people
to interact with computers in a more natural way -- similar to a conversation
with a human being.
 
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     Historically, general natural language understanding and processing
software programs (often classified under the category "artificial
intelligence") have focused on understanding the meaning of a sentence in the
same way as a human would, so that the software program can react appropriately
to a spoken sentence or a sentence typed in at the keyboard. These programs have
had only limited success. The Alife-SmartEngine instead attempts to mimic
comprehension of a sentence by using complex pattern matching techniques to
determine the actual goals and intentions of the user. By "understanding" the
user's goals and intentions, Alife-SmartEngine-based products are being designed
to possess the ability to actively drive and maintain a conversation about
certain topics, and not merely react to the user.
 
     The Alife-SmartEngine stores information in "Knowledge Bases," databases
which can be combined or exchanged to give the derived products differing sets
of expertise. Customers can add information to a Knowledge Base using a special
"Knowledge Capture Editor." The Alife-SmartEngine has several linked stages that
read spoken or text-based input and produce spoken or text-based output. When a
user types in text or speaks to the Alife-SmartEngine via standard voice
recognition software packages, the pre-processed speech input is routed to a
parser. The parser then converts the input from a stream of text to a series of
words and phrases. An analysis module draws on the topic information in the
memory section of the Alife-SmartEngine as well as the syntactic structure of
the sentence derived from the Knowledge Base. The major control module of the
Alife-SmartEngine is a meta-control module (the "Meta Controller") that is
essential for switching between the different speech processing modules to
process the input and prepare the appropriate response corresponding to a given
input. The Meta Controller picks a reply appropriate to the perceived intention
of the user by applying a set of rules that define the conversational strategy
of the bot. All modules communicate through the Meta Controller, which also
coordinates and balances the weighting of each of the separate modules as the
bot prepares its composite action.
 
     Most of the Company's SmartBots communicate with the user through a
life-like three-dimensional graphical interface known as an "Avatar." Each
product comes with a standard human-like Avatar. However, the Avatar may be
customized by the customer, including using pre-existing branded icons or
displays. For instance, an e-commerce retailer of computer equipment might
customize its Avatar so that visitors to its Web site converse with a talking
computer. The Company believes that the use of an animated "talking partner"
allows people to interact with computers in a more natural and personal manner,
and that the ability of the Company's customers to customize the Avatars allows
such customers to develop or maintain brand or name recognition among visitors
to a customer's Web site.
 
PRODUCTS
 
     The Company is currently developing seven basic software robots for use
individually or in various combinations. The Company presently intends to
develop three different product versions of most of its SmartBots: (i) a
"Personal" version intended for use by individual users on their personal Web
pages; (ii) a "Professional" version intended for use by professionals and small
businesses on their Web sites; and (iii) a transaction and client/server based
"Enterprise" version intended for use by large companies, institutions and
government agencies that want to integrate the bots into their existing
computing environment with enhanced and special customizable product features.
 
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     The overall Alife product suite of SmartBots is represented by the diagram
below.
 
                             [SmartBots Flow Chart]
 
     ALIFE-WEBGUIDE:  The Company released the Personal version of this SmartBot
in September 1998. It is designed to reside on a Web site and help users
navigate the site by accepting and processing questions, such as search queries,
from users in natural language and responding to users in natural language. This
SmartBot engages the user in a "conversation" through questions and answers and,
upon learning of the user's interests, is designed to display Web pages that
match the content of the "conversation" or to suggest links to other locations
on the Web site. In an e-commerce application, the Alife-WebGuide can be
designed by the Web site host to function like a human sales associate at a
retail store, greeting customers coming through the door of the virtual store
and assisting them with advice and background information about products and
prices. This bot allows the use of a customizable animated Avatar interface.
 
     Alife-WebGuide runs on both Netscape Navigator or Communicator 3.0 or
higher and Microsoft Internet Explorer 3.0 or higher. The Enterprise version of
the Alife-WebGuide is being designed with a client/server architecture,
requiring a Java virtual machine 1.02 or higher. The Knowledge Capture Tool and
the Statistical Tools of the Alife-WebGuide Professional and Enterprise version
are being designed to run on Microsoft Windows 95, 98 or NT. The Company
released the Personal version 1.0 of the Alife-WebGuide in September 1998 and
intends to release the Professional version 1.0 and Enterprise version 1.0 in
the fourth quarter of 1998 or the first quarter of 1999. The Company believes
that the potential market for this product includes Internet Web sites which
need or desire a more user-friendly natural language interface.
 
     ALIFE-SALESREP:  The Alife-SalesRep is being designed for e-commerce
retailers to use for one-to-one marketing on the Internet. Retailers will be
able to input user profile information and product information into this
SmartBot's Knowledge Bases to deliver customer-specific targeted sales
information on the Internet via e-mail. For example, the Alife-SalesRep can be
configured by a corporate user to utilize customer profile information to
deliver information about a specific sale or promotion to an existing or
potential customer. In this type of application, the user will typically have
the option of downloading the Alife-SalesRep Avatar to his or her computer. Once
the Avatar is resident on the user's computer, the user can access the
e-commerce retailer's Web site simply by clicking on the Avatar, which will
appear as an icon on the user's computer screen and which in many cases will
maintain a link to the host Web site.
 
                                       32
34
 
     The Company is also designing Alife-SalesRep to engage in autonomous
action. For example, a user will download an Avatar, and the Avatar will
continue to appear on the user's start-up screen. Each time the user turns on
his computer, the Avatar, through its link to the host Web site, will
automatically download new information that the program has determined may be of
interest to the user, based upon the information in its Knowledge Bases. For
example, the user could learn from the Avatar resident on the computer that the
host company is having a sale on modems which run at faster speeds than the one
the user currently owns. The host company will have determined which modem the
user currently owns because the user had a "conversation" with the
ALife-SalesRep about the user's computer hardware. Later, the user might be
offered discounted tickets by the Avatar to an upcoming computer industry trade
show in the user's hometown at which the host will be exhibiting its products.
 
     Alife-SalesRep is being designed to run on personal computers with
Microsoft Windows 95, 98 or NT. The Company intends to release the 1.0
Professional and Enterprise versions of Alife-SalesRep in 1999. The initial
target market for this product consists of advertising companies, companies with
direct Internet marketing activities and more generally all companies with
extensive Internet sales and marketing strategies and activities.
 
     Although Alife-WebGuide and Alife-SalesRep are independent products, the
Company believes that potential customers will be best served by combining the
Alife-WebGuide and the Alife-SalesRep into an integrated one-to-one marketing
solution. The two products can be customized so that when a user communicates
with the Alife-WebGuide, a customer profile of the user containing the user's
interests and expectations would be generated by analyzing the natural language
communication log files generated by the Alife-WebGuide. This information would
then be used by Alife-SalesRep to initiate targeted marketing via e-mail to
contact the customer about specific product or service offerings. This
integrated one-to-one marketing solution is graphically depicted below:
 
                          [Alife-WebGuide Flow Chart]
 
     ALIFE-MESSENGER:  The Alife-Messenger is being designed to serve as a
natural language-based automated e-mail reply and answering service. By
customizing the Knowledge Bases of the Alife-Messenger, a company can automate
replies to incoming e-mail queries and customer requests. The Alife-Messenger is
being designed to work like an off-line Alife-WebGuide by selecting appropriate
answers to input queries in an "intelligent" way. However, instead of displaying
Web pages, the Alife-Messenger is being designed to automatically scan an
incoming e-mail for certain keywords and phrases, prepare a reply e-mail and
attach, as appropriate, additional information that matches what this SmartBot
determines might be useful to the user, such as relevant documents, price-lists,
and links to other Web sites. For an individual who purchases Alife-Messenger
for his Web page, it could be used as a customized e-mail "answering machine" on
the Internet. For a corporate purchaser already using Alife-SalesRep, the
Alife-Messenger could be configured to select the appropriate Alife-SalesRep to
be attached to the reply e-mails, with the goal of improving and supporting the
direct marketing channel.
 
     The Alife-Messenger is being designed to support standard e-mail systems.
The Company intends to release the 1.0 version of the Alife-Messenger in the
first quarter of 1999. The Company
 
                                       33
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intends to market this product to companies and institutions which need to
extensively interact with clients via e-mail or which have extensive
customer/client service programs using the Internet.
 
     ALIFE-PORTFOLIO-MANAGER:  The Alife-Portfolio-Manager is being developed to
monitor an individual's investment portfolio. The user can specify the desired
characteristics of his or her portfolio, such as particular stocks to own,
specific buy and sell thresholds for individual stocks, and desired ratios of
types of stocks. Once the user's portfolio guidelines are established, the
Alife-Portfolio-Manager will monitor the portfolio 24 hours per day and
autonomously notify the user when the user's price or ratio guidelines are not
being met through one of a variety of predefined media such as e-mail, telephone
or pager. In addition to monitoring existing investment portfolios, the Alife-
Portfolio-Manager is being designed to find other potential investments fitting
the user's specified criteria and notify the investor about any such investment
opportunities once found.
 
     The Alife-Portfolio-Manager is being designed to run on personal computers
with Microsoft Windows 95, 98 or NT. The Company plans to release the 1.0
version of the Alife-Portfolio-Manager in the second quarter of 1999. The
Company believes that the market for this product will consist of individuals
and companies in the financial services industry, including Internet brokers, as
well as individual investors.
 
     ALIFE-CALL-CENTER-AGENT:  The Alife-Call-Center-Agent is being designed for
call centers and help desks to be integrated with existing call center server
software to provide an automated first response to incoming voice telephone
calls or e-mail requests and to handle the call center requirements virtually
unaided by human operators. The Alife-Call-Center-Agent is being designed to be
able to recognize voice input as well as text-based input such as e-mail.
However, the voice recognition capabilities of Alife-Call-Center-Agent will
depend to a large extent on the availability of highly accurate voice
recognition systems for telephones, which the Company does not develop or sell.
The Alife-Call-Center-Agent, like the Alife-Messenger, will analyze incoming
requests and prepare relevant responses, but will also interact and interface
with call center management, routing and accounting systems.
 
     The Alife-Call-Center-Agent will require an operating platform with a Java
virtual machine. Additional software and hardware enhancements may be necessary
depending on the specific interfaces to call center operating systems. The
Company plans to release the 1.0 version of Alife-Call-Center-Agent by the end
of 1999. The Company intends to market this product directly to customers with
call centers and to call center software vendors. The following diagram
graphically depicts the operation of the ALife-Call-Center-Agent.
 
                      [Alife-Call Center Agent Flow Chart]
 
     ALIFE-KNOWLEDGE-MANAGER:  This SmartBot is being designed to extract
information contained in a company's Intranet documents, organize it and make it
more easily accessible for retrieval to enable companies to more efficiently and
intelligently manage the large amount of data and documents that companies are
making available on their Intranets. Alife-Knowledge-Manager can be configured
to allow each Intranet user to describe his own profile, background and
interests in addition to other information contained on the Intranet. Once so
configured, users can make natural language search queries about topics of
interest through the ALife-Knowledge-Manager, and the program will respond by
providing relevant information contained on the company's Intranet, including
information about other users with similar interests or areas of expertise.
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36
 
     The Alife-Knowledge-Manager is being designed to run on standard OS
platforms and to provide for interfaces to standard databases and third party
document retrieval and management systems. The Company intends to release the
first versions of Alife-Knowledge-Manager in late 1999 or early 2000. The
Company plans to market this product primarily to large corporations with an
existing Intranet infrastructure.
 
     ALIFE-PERSONAL-TUTOR:  The Company is developing this SmartBot to address
certain limitations of traditional Computer-based Training ("CBT") and
Internet-based Training ("IBT") products that are currently available. Whereas
conventional CBT and IBT programs follow a pre-defined path of learning, the
Alife-Personal-Tutor is being designed to use student profile information
extracted from natural language conversation between the SmartBot and the
student user to automatically adapt the difficulty and content of the lessons to
the skill level of the student. Using the natural language capabilities of the
Alife-SmartEngine, students will be able to ask numerous questions about any
topic at any time in plain English. In addition, the Alife-Personal-Tutor is
being designed to respond to questions with additional explanatory multimedia
data (video and audio) depending on the context of the ongoing lecture between
the student and the Alife-Personal-Tutor. It will also formulate questions and
tests depending on the flow of the conversation and lesson.
 
     The Alife-Personal-Tutor is being designed in two components and is
currently planned to be sold in two ways: (i) in several application packages
with specific content (such as science, history etc.), called "tutorials," and
(ii) as a generic tool for developing such tutorials. Both modules of the
Alife-Personal-Tutor are being designed to run on Windows 98 and NT (stand alone
versions) or on standard Internet browsers for on-line applications. The Company
intends to release the first tutorials in the first quarter of 1999 and the
generic version by the second quarter of 1999. The Company's target market for
this product is expected to be the CBT and IBT market and the general education
market.
 
SERVICES
 
     The Company expects to provide consulting, maintenance, technical hotline
and support services for most or all of its products. The Company anticipates
that customers will require support for, and customized versions of, the
Company's SmartBot products or additional developments in order to tailor the
product to the customers' needs. In addition, the Company plans to provide
support for the creation and maintenance of the Knowledge Bases of its bots and
customer specific back-office tools for analyzing client profiles gathered by
its bots.
 
     The Company anticipates that it will continue to derive a portion of its
revenues from software consulting projects. In particular, the Company expects
that it will provide custom solutions for companies seeking consulting expertise
with agent-based software programs.
 
COMPANY STRATEGY
 
     The Company's objective is to become a leader in the development and
implementation of commercial software robot-based solutions to solve various
issues confronting today's Internet use. To achieve this objective, the
Company's strategy includes the following key elements:
 
     BUILD BRAND NAME RECOGNITION.  The Company is seeking to achieve rapid and
broad adoption of its products and strong brand recognition. The Company will
seek to achieve this strategy by offering "Personal" versions of its products
for non-commercial use free of charge or at a low price. The Company also
intends to embark on an aggressive promotional campaign to increase awareness of
the Artificial Life brand and the Alife family of products. The promotional
campaign is expected to involve all common media (i.e. radio, television, print
and trade shows) with a particular emphasis on Internet channels.
 
     CREATE MULTIPLE REVENUE STREAMS.  The Company believes that its growing
product line, corporate customization, product Web sites and an installed user
base will present a significant
 
                                       35
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opportunity to develop and maintain multiple revenue streams resulting from
product sales, customization and consulting, licensing fees and potentially in
the future, advertising revenues. As these different revenue streams mature,
decisions will be made as to the expansion and contraction of existing programs
based on their success as well as the introduction of new programs.
 
     ESTABLISH STRATEGIC ALLIANCES.  The Company intends to aggressively pursue
strategic alliances to gain access to complementary technologies and
distribution channels. The Company continually evaluates relationships with
companies that offer technologies complementary to the Company's SmartBot
products (such as speech integration and high-end graphics providers). The
Company intends to use alliances wherever possible to gain economies of scale
and to allow it to focus on its core strengths while using those of its partners
to add the complementary functionality necessary to increase value to users.
 
     EXPAND GLOBALLY.  The Company believes that significant opportunities exist
to capitalize on the growth of the Internet internationally. Because the Company
was once a subsidiary of a large and well-known German multimedia and Internet
solutions company, it already has significant contacts with a number of European
businesses. The Company believes that its products can be used worldwide, and
accordingly the Company intends to initiate an international program of
partnering and strategic investment to exploit cross-marketing, co-branding and
promotional opportunities.
 
     LEVERAGE EXISTING CUSTOMER BASE.  The Company intends to cultivate its
future installed user base to gather feedback, test new product releases and
create customer loyalty. The Company plans to collect customer profile data
(through the use of a User Profile Form) for use in development of companion
products and services with the ultimate goal of developing a "community" of
loyal users who are familiar and comfortable with the Company's products. The
Company plans to allow individual users who fill out the User Profile Form to
participate in beta testing of products, information sessions, product and
corporate announcements and product focus chat forums. The Company believes that
such communication, participation and interaction will foster long-term customer
loyalty. Several types of incentives are planned to foster both the sharing of
profile information and the return of value for participation. These may take
the form of reduced user fees, if applicable, free software, contests and other
participatory programs.
 
     EXPAND AND ENHANCE PRODUCT BASE AND TECHNOLOGY.  The Company believes that
it must regularly provide new products and technologies and improve existing
ones to be successful. The Company's products utilize proprietary technologies,
including the Alife-SmartEngine. The Company's strategy is to continue to
enhance its existing technologies and develop new technologies that it can
incorporate into future product offerings. Because the Company's product lines
are being centered around core concepts and technology, the Company believes
many complementary products will be able to be developed by leveraging the
Company's existing competencies and experience into new ideas. Furthermore, the
Company believes that its overall strategy will allow it to address issues
regarding products and services in a dynamic, almost real-time basis, thereby
allowing rapid response to market feedback and developments.
 
MARKETING AND SALES
 
     The Company plans to offer an initial fully-functional "Personal" version
of most of its products to individual, non-commercial users either free of
charge or at a low price. The Company believes that this approach, which has
been used successfully by other Internet companies, will result in more rapid
acceptance and sale of the Company's products to commercial users: a
"Professional" version for professional and small corporate users and/or a
transaction and client/server based "Enterprise" version for networked corporate
users. For the commercial versions of its SmartBot products, the Company intends
to charge a one-time licensing fee and, with respect to the "Enterprise"
version, intends to also charge a transactional fee based upon the number of
users which interact with its bots. This strategy has been successful in the
past for companies such as
 
                                       36
38
 
Netscape, which distributed free versions of its browser software, and
RealNetworks, Inc., which has brought streaming audio and video to the Internet.
 
     The Company intends to sell the Alife-WebGuide, the Alife-Messenger and the
Alife-SalesRep via Company Web sites and through additional distribution
partners. The Company may decide to license the Professional and/or Enterprise
versions of these products for a certain period for free in order to generate
market penetration and increase demand for these commercial versions of the
Company's products.
 
     The Company intends to enter into a strategic relationship with an
international partner already established in the call center market to market
and sell the Alife-Call-Center-Agent. The Company believes this will be
necessary because the call center software market is already highly competitive.
 
     The Company intends to market and sell the Alife-Portfolio-Manager in
cooperation with one or more established companies in the financial services
industry and/or the online banking and trading community.
 
     The Alife-Personal-Tutor and the Alife-Knowledge-Manager target the IBT,
CBT market and the Intranet and corporate market. Accordingly, the Company
intends to distribute and market these products in cooperation with partners
with established experience and sales channels in these growing business
segments.
 
     The Company has not entered into any such distribution or marketing
relationship, and there can be no assurance that it will be able to do so on
terms acceptable to it, or at all.
 
     In addition to the marketing efforts for the individual products in the
Alife product suite, the Company intends to initiate aggressive marketing
campaigns beginning in the first half of 1999 to establish recognition of the
Artificial Life brand. The marketing activities are expected to involve all
common media (radio, TV, magazines, newspapers, trade shows) with a particular
emphasis on the Internet channels. The Company will use its own products like
the Alife-SalesRep and the Alife-WebGuide to promote its products and services.
 
     The Company will also generate marketing material using its in-house
capabilities and multi-media know-how to produce video spots and innovative
interactive advertisement techniques for the Internet.
 
STRATEGIC ALLIANCES
 
     The Company is currently evaluating several strategic alliances with
companies in the United States and Europe for marketing and selling products as
well as for collaborations in product development. The closing of collaboration
agreements may influence future product development, the market direction of
certain products and the success of certain product marketing efforts. To date,
however, the Company has not entered into any such strategic alliance or
collaboration agreement, and there can be no assurance that it will be able to
enter into such strategic agreements on terms acceptable to the Company, or at
all. See "-- Marketing and Sales."
 
PRODUCT DEVELOPMENT
 
     The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. The Company is exploring the opportunity to extend the functionality
of its Alife-SmartEngine-derived products through the inclusion of third party
software and applications in the development of such products.
 
     The Company's development organization is arranged in four groups: the Core
Technology Group, which does research and designs and develops the technologies;
the Production Group, which specifies, produces and maintains product releases;
the Quality Assurance Group, which verifies that products meet their
specifications and the Company's quality standards; and the
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39
 
Competence Group, which focuses on rapid prototyping of new ideas, consulting
and adapting customer specific versions of the products. The Company allocates
responsibilities among the groups to optimize the time, cost and quality control
issues associated with product development.
 
     As of September 29, 1998, there were 18 employees on the Company's
development staff. The Company estimates that its total product development
expenses for its Alife-SmartEngine product suite will significantly increase
through 1998 and thereafter as it expects to allocate substantial resources to
future research and development. Through June 30, 1998, the Company had not
incurred any capitalized software development costs from its development
efforts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
     To the extent one or more of the Company's competitors introduce products
that more fully address customer requirements, the Company's business could be
materially adversely affected. There can be no assurance that the Company will
be successful in developing and marketing enhancements to its existing products
or new products, incorporating new technology on a timely basis, or that its new
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, prospects, financial condition
and results of operations will be materially adversely affected. See "Risk
Factors -- Rapid Technological Change."
 
COMPETITION
 
     The market for the Company's products and services is new, evolving and
growing rapidly. Competition can be expected to intensify significantly as the
market matures and the more established software companies, such as Microsoft
Corporation, become increasingly involved. Barriers to entry are relatively
insubstantial. The Company believes that the principal competitive factors for
companies seeking to become involved in the software robot industry are core
technology, delivery methods, brand recognition, ease of use and interfaces.
 
     The Company uses its core technology, the Alife-SmartEngine, in a wide
variety of business areas. Although the Company has not yet identified any
competitors in exactly the same areas in which it is active, there are companies
that have overlapping activities and therefore could be regarded as competition
to Artificial Life. Such firms include, among others: Brightware, Inc.,
Broadvision, Inc., Extempo, Inc., Haptek, Inc., Nearlife, Inc., Netsage Corp.,
Neuromedia, Inc. and Virtual Personalities, Inc. This list may not be complete
and may change and substantially increase over time.
 
     Some of the Company's existing and potential competitors have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. Such competitors are able to engage in more thorough marketing
campaigns for their products and services, be more aggressive from a pricing
standpoint and make more attractive offers to potential employees and partners.
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
     The Company will be relying upon trade secrets, know-how, copyrights and
continuing technological innovations to develop and maintain its competitive
position. The Company seeks to protect such information, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. These agreements provide that all confidential information
developed or made known during the course of the individual's or entity's
relationship with the Company is to be kept confidential and not be disclosed to
third parties except in specific circumstances. The Company has caused each of
its employees to execute forms of Confidentiality and Inventions Agreements
which provide that, to the extent permitted by applicable law, all inventions
conceived by the individual during the individual's employment will remain the
exclusive property of the Company. There can be no assurance that these
agreements will not be breached,
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that the Company would have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. Further, there can be no assurance that the Company
will be able to protect its copyrights, trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques.
 
     The Company has no patents or patent applications pending, nor does it have
any registered copyrights. There can be no assurance that the existing or future
patents of third parties will not have an adverse effect on the ability of the
Company to continue to commercialize its products. Furthermore, there can be no
assurance that other companies will not independently develop similar products
or duplicate any of the Company's planned products or obtain patents that will
require the Company to alter its products or processes, pay licensing fees or
cease development of its planned products. See "Risk Factors -- Intellectual
Property and Other Proprietary Rights."
 
EMPLOYEES
 
     As of September 29, 1998, the Company had 24 full-time employees and three
part-time interns. The Company will need to hire additional staff to accomplish
its business development goals. There can be no assurance that the Company will
be able to find, attract or retain such additional staff. See "Risk
Factors -- Dependence on Key Personnel; Need for Additional Personnel."
 
SUB-CONTRACTORS AND EXTERNAL HUMAN RESOURCES
 
     To fulfill timely delivery of products, the Company is currently using
external human resources and sub-contractors to develop its products. There can
be no assurance that these external resources and sub-contractors will be
available in the future, or that the current conditions and agreements with
these contractors or resources will remain reasonable. See "Risk Factors --
Dependence on Third Party Contractors."
 
FACILITIES
 
     The Company rents 7,334 square feet of office space at Four Copley Place,
Suite 102, Boston, Massachusetts 02116, USA. The 36 month lease commenced
February 1, 1998, at an annual rental of $205,332. The management of the Company
is aware of the fact that additional office space will be required in fiscal
1999 due to the planned expansion of the Company. The Company believes, however,
that it will be able to obtain any additional space in a timely manner and on
commercially reasonable terms.
 
LEGAL PROCEEDINGS
 
     There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
 
                                       39
41
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table sets forth certain information regarding the executive
officers and directors of the Company as of September 29, 1998:
NAME                                     AGE    POSITION
----                                     ---    --------
Eberhard Schoneburg....................  41     President, Chief Executive Officer and
                                                  Chairman of the Board
Bruno Gabriel..........................  52     Director
Elmar Wohlgensinger(1)(2)..............  59     Director
Hartmut Bergmann(1)(2).................  48     Director
Robert Pantano.........................  37     Chief Financial Officer
Klaus Kater............................  31     Chief Technology Officer
---------------
(1) Member of the Audit Committee.
 
(2) Member of the Compensation Committee.
 
     Eberhard Schoneburg has been President and a member of the Board of
Directors of the Company since November 1994. He was Chief Executive Officer
from November 1994 to May 1996 and from October 1997 to the present. Mr.
Schoneburg has been the Chairman of the Board of Directors of the Company since
the founding of the Company. The Company was founded in November 1994 as
Neurotec International Corp., a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH ("Neurotec GmbH"), a German multimedia and Internet
solutions company owned by Mr. Schoneburg and two corporate investors: a major
German retailer and an industrial conglomerate. Neurotec GmbH was part of the
Neurotec Group, a group of high tech companies founded in Germany by Mr.
Schoneburg in 1993. In 1997 he sold all of his shares in Neurotec GmbH to the
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company from Neurotec GmbH. From 1989 to 1994 Mr. Schoneburg was a professor for
industrial applications of artificial intelligence at Fachhochschule Furtwangen,
Germany. From 1988 to 1993, he was the Chairman of the BIT Group, a group of
five German high tech companies which he founded in 1988.
 
     Mr. Schoneburg was awarded the First Prize of the Berlin Innovation Award
in 1990 for the development of the First European Neural Compiler and again in
1992 for the development of an expert system for detecting chemical hazards for
Procter and Gamble. He has published five course books on a wide variety of
topics such as computer viruses, neural networks, evolution strategies and
genetic programming and over 60 research papers on related topics. He is also a
member of the jury of the Golden Award of Montreux.
 
     Bruno Gabriel joined the Company's Board of Directors in September 1998.
Since 1989, Mr. Gabriel has been a management consultant to several European
companies. From 1984 to 1989, he was the Chief Executive Officer and President
of the ALSO Group, a European distributor of personal computers and computer
equipment which he founded in 1984. From 1978 to 1984, Mr. Gabriel was the Chief
Executive Officer of ADV/ORGA, a major German software and consulting company.
From 1976 until 1978, he was manager for new media at Tagesanzeiger Zurich, a
Swiss newspaper company. Mr. Gabriel began his career in 1971 as a manager for
software development at the Telekurs AG, a Swiss telecommunications company.
 
     Elmar Wohlgensinger joined the Company's Board of Directors in September
1998. He has worked for the IHA Institute, a Swiss market research company,
since 1961 where he has been a member of the board since 1970 and President
since 1980. Mr. Wohlgensinger is a Vice President of ATAG Holding, an accounting
firm, and has been a member of ATAG Ernst & Young management, an accounting
firm, since 1991. Mr. Wohlgensinger also serves on the boards of German GFK, EKN
 
                                       40
42
 
Bank Nidwalden, Schweizerische Gesellschaft Fuer Marketing and the Chamber of
Commerce of Central Switzerland.
 
     Hartmut Bergmann has been appointed to join the Board of Directors upon
completion of the Offering pursuant to an agreement between the Company and the
Representatives. See "Underwriting." Mr. Bergmann has been Chairman of the
Management Board of New York Broker Deutschland AG since 1990. From 1976 until
he joined New York Broker Deutschland AG, he was with Hornblower Fischer AG, a
regional German brokerage firm where he was a Member of the Management Board
from 1976 through 1989. Previously he was a financial consultant with Merrill
Lynch in Germany.
 
     Robert Pantano, the Company's Chief Financial Officer, joined the Company
in April 1995 as an accountant, was appointed Controller and Director of Human
Resources in 1996 and was promoted to his present position in September 1997.
From 1993 until joining the Company, Mr. Pantano worked as the Controller and
General Manager of Intertech International Corp., an international engineering
firm. From 1990 to 1993, he was a Principal with Global Vision International, an
international export trade consulting firm specializing in central and eastern
Europe. Mr. Pantano holds a B.A. in accounting from Bentley College.
 
     Klaus Kater joined the Company as Chief Technology Officer in May 1998.
From December 1997 through April 1998, Mr. Kater provided consulting services to
the Company. Prior to that time, from June 1997 to December 1997, he was
Managing Director for the mediaCenter Research Institute GmbH, a German
multimedia research center and a subsidiary of Neurotec GmbH. From March 1996 to
July 1997, Mr. Kater worked as a freelance consultant, coordinating the
activities of the Wirtschaftsforderungsgesellschaft Business Development
Institute in the context of multimedia initiatives, and concurrently from 1993
to 1996, he worked for Neurotec GmbH, where he served as project manager for
chemical expert systems. From 1992 to 1993, Mr. Kater was a project manager at
Expert Informatik GmbH, where he managed a team that developed an expert system
for Procter & Gamble. From 1990 to 1992, he ran his own company Kater & Stirm
Softwareentwicklung GbR which produced and sold software for the hotel
management market. Mr. Kater holds a degree in computer science and artificial
intelligence from Fachhochschule of Furtwangen in Germany.
 
BOARD OF DIRECTORS
 
     The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of this Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Mr. Wohlgensinger will serve in the class whose term
expires in 1999; Mr. Gabriel will serve in the class whose term expires in 2000;
and Mr. Schoneburg will serve in the class whose term expires in 2001. Upon
consummation of the Offering, the Representatives will have the right to appoint
one member of the Board of Directors of the Company for a period of five years.
The Representatives have named Hartmut Bergmann as their appointee and he will
be elected to the class whose term expires in 2000 effective upon consummation
of the Offering.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has a Compensation Committee which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company, including salaries and incentive compensation
for executive officers. Initially, the whole Board will take action on the
recommendations of the Compensation Committee and will administer the 1998
Equity Incentive Plan. The Board also has an Audit Committee, which reviews the
results and scope of audits and other services provided by the Company's
independent public accountants and matters relating to the Company's internal
control system.
 
                                       41
43
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Messrs. Wohlgensinger and Bergmann, both non-employee directors, will
constitute the Company's Compensation Committee. No executive officer of the
Company will serve as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
 
COMPENSATION OF DIRECTORS
 
     Directors who are not employees of the Company receive $3,000 for each
meeting of the Board of Directors attended and are reimbursed for reasonable
out-of-pocket expenses incurred in attending such meetings. Non-employee
directors are also eligible for participation in the Company's 1998 Equity
Incentive Plan, and the Company may in the future grant non-qualified stock
options to non-employee directors as an incentive to join or remain on the Board
of Directors.
 
ADVISORY BOARD
 
     The Company's Advisory Board consists of individuals with demonstrated
expertise in fields related to the Company's business who advise the Company
concerning long-term planning, research and development. Members also evaluate
the Company's research program, recommend personnel to the Company and advise
the Company on technology matters. The Advisory Board has advised the Company on
specific marketing, management and artistic technical issues. Advisory Board
members are compensated on a time and expenses basis and have received options
to purchase shares of Common Stock of the Company.
 
     No member of the Advisory Board is employed by the Company, and members may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a small
portion of their time to the Company. The members of the Company's Advisory
Board are:
ADVISOR                     AFFILIATION                 EXPERTISE
--------------------------------  -----------------------    -----------------------
Hermann Wolf Richter............  HWR Strategic Marketing    Internet and Multimedia
Prof. Petr Vrana................  Universitat of Kassel      Media Arts
Prof. Paulo Gaudino, Ph.D.......  Boston University          Neural Science and
                                                             Cognitive Computing
EXECUTIVE COMPENSATION
 
     SUMMARY COMPENSATION.  The following table sets forth certain information
with respect to compensation paid or accrued for services rendered to the
Company in all capacities for the fiscal year ended December 31, 1997 by its
present and former Chief Executive Officer (the "Named Executive Officers"). No
other executive officer of the Company earned greater than $100,000 in the
fiscal year ended December 31, 1997(1).
 
                           SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
                                        ---------------------------------------------
                                                                         OTHER ANNUAL
NAME AND PRINCIPAL POSITION(1)          YEAR    SALARY($)    BONUS($)    COMPENSATION
------------------------------          ----    ---------    --------    ------------
Eberhard Schoneburg
  President and Chief
  Executive Officer(2)................  1997    $ 54,254       --          $22,500(3)
Pamela A. Tomkinson
  Former Chief Executive
  Officer(4)..........................  1997    $113,861       --           --
---------------
(1) Neither Robert Pantano, who became the Company's Chief Financial Officer in
    September 1997, nor Klaus Kater, who became the Company's Chief Technology
    Officer in May 1998,
 
                                       42
44
 
    had total compensation which exceeded $100,000 in the fiscal year ended
    December 31, 1997. However, both Mr. Pantano and Mr. Kater entered into
    employment agreements with the Company on May 1, 1998, under which each will
    receive an annual base salary of $100,000. See "-- Executive Employment
    Agreements."
 
(2) Mr. Schoneburg assumed the position of Chief Executive Officer in October
    1997.
 
(3) Consists of rent paid by the Company for an apartment occupied by Mr.
    Schoneburg. The Company ceased making such payments in January 1998.
 
(4) Ms. Tomkinson resigned as Chief Executive Officer on October 20, 1997.
 
     OPTION GRANTS.  There were no options granted by the Company during the
fiscal year ended December 31, 1997 to any of the Named Executive Officers.
 
     OPTION EXERCISES AND YEAR-END OPTION VALUES.  The Named Executive Officers
did not exercise any options during the fiscal year ended December 31, 1997 and
did not hold any stock options at December 31, 1997.
 
EXECUTIVE EMPLOYMENT AGREEMENTS
 
     Under an Executive Employment Agreement dated July 1, 1998, and amended and
restated as of September 1, 1998, the Company has agreed to employ Eberhard
Schoneburg as President, Chief Executive Officer and Chairman of the Board of
Directors for a period of three years at an initial annual base salary of
$240,000 plus an incentive bonus equal to 3% of the Company's income from
operations. The agreement also provides that the annual base salary will
increase as determined by the Board but at not less than 10% per year. If Mr.
Schoneburg is terminated without cause (including a failure to renew the
agreement) or if he terminates his employment for "good reason" (as defined in
the agreement), he will be entitled to receive a lump sum payment of one to
three times (depending upon whether such termination occurs before or after a
change of control of the Company) the sum of (i) his base salary plus (ii) the
greater of the average of his two most recent annual bonuses or his annual bonus
payable in the year of termination. The agreement also contains a non-compete
and non-solicitation provision which covers the longer of the term of his
employment or any time period during which he serves as a director of the
Company, plus a period of one year thereafter.
 
     Pursuant to Employment Agreements dated May 1, 1998, the Company has agreed
to employ Robert Pantano as Chief Financial Officer and Klaus Kater as Chief
Technology Officer (each an "Officer" and collectively, the "Officers") for at
least eighteen months at initial annual base salaries of $100,000. The
agreements also provide that the Officers are entitled to participate in any
bonus and incentive programs that may be in effect for employees of the Company
and that the Officers' base salaries will be reviewed at least annually by the
Company's Chief Executive Officer and may be adjusted upward at such time at the
sole discretion of the Chief Executive Officer. On May 1, 1999 the Officers will
each be entitled to receive stock options with a fair market value of $25,000.
If either Officer is terminated by the Company without "cause" (as defined in
the agreements) or if he terminates his employment for "good reason" (as defined
in the agreements) he is entitled to severance pay, at the rate in effect on the
termination date, for a period of six months. The agreements also contain
non-compete and non-solicitation provisions which cover the term of the
Officer's employment plus any additional time during which the Officer is
receiving any severance benefits from the Company, as well as confidentiality
and assignment of invention and intellectual property provisions.
 
EMPLOYEE BENEFIT PLANS
 
     1998 EQUITY INCENTIVE PLAN.  The Company's 1998 Equity Incentive Plan (the
"Incentive Plan") was approved by the Company's Board of Directors and its
stockholders in April 1998. The Incentive Plan authorizes the grant of incentive
stock options within the meaning of Section 422 of the Internal
 
                                       43
45
 
Revenue Code of 1986, as amended (the "Code"), non-qualified stock options,
stock grants and certain stock equivalents (including, but not limited to,
phantom stock, performance units, dividend equivalents and stock appreciation
rights) (collectively "stock awards"). A total of 1,200,000 shares of Common
Stock (subject to adjustment for stock splits and similar capital changes) have
been reserved for issuance under the Incentive Plan, and 26,083 shares had been
issued pursuant to stock awards granted under the Incentive Plan, 590,569 shares
were subject to outstanding options and 583,348 shares were available for future
grant. Grants of stock awards under the Incentive Plan and all questions of
interpretations with respect to the Incentive Plan are determined by the
Compensation Committee of the Board of Directors of the Company or the whole
Board of Directors, if applicable.
 
     In the event of a change of control of the Company, the Compensation
Committee in its discretion may, at the time a stock award is made or at any
time thereafter, take one or more of the following actions: (i) provide for the
acceleration of any time period relating to the exercise or payment of a stock
award; (ii) provide for payment of cash or other property with a fair market
value equal to the amount that would have been received upon the exercise or
payment of a stock award had the stock award been exercised or paid upon the
change in control; (iii) adjust the terms of a stock award in a manner
determined by the Compensation Committee to reflect the change in control; (iv)
cause a stock award to be assumed, or new rights substituted therefor, by
another entity; or (v) make such other provision as the Compensation Committee
may consider equitable and in the best interests of the Company.
 
     401(K) PLAN.  The Company's 401(k) Profit Sharing Plan (the "401(k) Plan")
covers substantially all employees of the Company. Each year, participants may
contribute from 2% to 15% of pretax annual compensation, subject to the
statutory limit (a maximum of $10,000 in 1998). In addition, the Company makes a
matching contribution equal to 50% of each participant's elective contribution
up to a maximum of 1.5% of the participant's annual compensation. Participants
are immediately vested in their contributions plus actual earnings thereon. A
participant is 100% vested in the Company's matching contributions after five
"years of service" (as defined in the 401(k) Plan).
 
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
 
     The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors' fiduciary duty
of care. The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. See "Description of Capital Stock -- Delaware
Law and Certain Charter and Bylaw Provisions."
 
     The Certificate of Incorporation of the Company provides mandatory
indemnification rights to any officer or director of the Company who, by reason
of the fact that he or she is an officer or director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Such limitation of liability and indemnification may not
apply to liabilities arising under the Federal securities laws and does not
affect the availability of equitable remedies.
 
     There is no pending litigation or proceeding involving a director, officer,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
 
                                       44
46
 
                              CERTAIN TRANSACTIONS
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The Company was founded in November 1994 as Neurotec International Corp., a
wholly-owned subsidiary of Neurotec Hochtechnologie GmbH ("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
remaining stockholders and contemporaneously purchased 100% of the shares of the
Company (Neurotec International Corp.) from Neurotec GmbH for approximately
$500,000.
 
     On June 29, 1998, Mr. Schoneburg loaned the Company $500,000 at an annual
interest rate of 10%. The full amount of the loan, including principal and all
accumulated interest thereon, is due and payable on January 1, 2000.
 
     In April 1997, Mr. Schoneburg agreed to forego the majority of his $240,000
annual salary as President and Chief Executive Officer until such time as
sufficient funds were available for reinstatement. During 1997, Mr. Schoneburg
was paid a total of $76,754 in salary and other compensation. See
"Management -- Executive Compensation." Beginning January 1, 1998, Mr.
Schoneburg's salary was deferred. During the time that his salary was deferred,
the Company advanced Mr. Schoneburg approximately $153,916 for living expenses.
On September 25, 1998 the Company paid Mr. Schoneburg a total of $175,385
representing 38 weeks of deferred salary. Mr. Schoneburg used the after tax
proceeds of this payment to repay the majority of the advances made to him
during the deferral period.
 
     During 1998, the Company has paid approximately $35,200 in total cash
consideration to Bruno Gabriel, a director of the Company, for consulting
services rendered to the Company.
 
     On June 30, 1998, Mr. Gabriel and Elmar Wohlgensinger, directors of the
Company were granted options to purchase 184,426 and 163,934 shares of Common
Stock, respectively. These options were granted in consideration of advisory
services rendered to the Company.
 
                                       45
47
 
                       PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of September 29, 1998,
and as adjusted to reflect the sale of the shares offered by the Company and the
Selling Stockholder in this Offering, by (i) persons known by the Company to be
beneficial owners of more than 5% of the outstanding shares of Common Stock,
(ii) the Selling Stockholder, (iii) the Named Executive Officers and other
executive officers, (iv) each director of the Company and (v) all current
executive officers and directors as a group:
SHARES OF                             SHARES OF
                                      COMMON STOCK                          COMMON STOCK
                                      BENEFICIALLY                          BENEFICIALLY
                                     OWNED PRIOR TO                          OWNED AFTER
                                     THE OFFERING(1)                       THE OFFERING(1)
NAME AND ADDRESS(2) OF           -----------------------    SHARES     -----------------------
BENEFICIAL OWNER                  NUMBER      PERCENT(3)    OFFERED     NUMBER      PERCENT(3)
----------------------           ---------    ----------    -------    ---------    ----------
Eberhard Schoneburg............  5,967,377      75.8%       400,000    5,567,377      61.4%
Cybermind Interactive Europe
  AG...........................    409,836       5.2%            --      409,836       4.5%
  Am Borsigturm 48
  13507 Berlin
  Germany
Pamela A. Tomkinson(4).........          0          *            --            0          *
Robert Pantano(5)..............     16,442          *            --       16,442          *
Klaus Kater(5).................     16,442          *            --       16,442          *
Bruno Gabriel(6)...............    774,426       9.6%            --      774,426       8.4%
Elmar Wohlgensinger(5).........    163,934       2.0%            --      163,934       1.8%
Hartmut Bergmann(7)............          0          *            --            0          *
All current executive officers
  and directors as a group (6
  persons)(8)..................  6,938,621      84.1%       400,000    6,538,621      69.2%
---------------
 *  Less than 1%
 
(1) Shares of Common Stock that an individual or group has the right to acquire
    within 60 days of September 29, 1998, pursuant to the exercise of options or
    warrants are deemed to be outstanding for the purposes of computing the
    percentage ownership of such individual or group, but are not deemed to be
    outstanding for the purpose of computing the percentage ownership of any
    other person shown in the table. Except as indicated in footnotes to this
    table, the Company believes that the stockholders named in this table have
    sole voting and investment power with respect to all shares of Common Stock
    shown to be beneficially owned by them based on information provided to the
    Company by such stockholders.
 
(2) The address of all persons who are executive officers or directors of the
    Company is: c/o Artificial Life, Inc., Four Copley Place, Suite 102, Boston,
    Massachusetts, 02116.
 
(3) Percentage of ownership is based on 7,870,574 shares of Common Stock
    outstanding on September 29, 1998 and 9,070,574 shares of Common Stock
    outstanding after the completion of this Offering.
 
(4) Ms. Tomkinson resigned as Chief Executive Officer of the Company on October
    20, 1997.
 
(5) Consists solely of shares subject to stock options which are currently
    exercisable.
 
(6) Includes 184,426 shares subject to stock options which are currently
    exercisable.
 
(7) Mr. Bergmann will become a director upon consummation of the Offering. See
    "Underwriting."
 
(8) Includes 381,244 shares subject to stock options which are currently
    exercisable.
 
                                       46
48
 
                          DESCRIPTION OF CAPITAL STOCK
 
     Effective upon consummation of the Offering, the Company's authorized
capital stock will consist of 30,000,000 shares of Common Stock, par value $.01
per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"). Upon completion of this Offering, there will
be 9,070,574 shares of Common Stock and no shares of Preferred Stock
outstanding. As of September 29, 1998, there were 7,870,574 shares of Common
Stock outstanding, held of record by 35 stockholders. In addition, as of
September 29, 1998 there were outstanding options to purchase 590,569 shares of
Common Stock. Upon consummation of the Offering, there will be outstanding
warrants to purchase 160,000 shares of Common Stock.
 
COMMON STOCK
 
     Upon consummation of the Offering, the 53,278 outstanding shares of
Non-Voting Common Stock will be automatically converted into 53,278 shares of
Voting Common Stock and the Company's Certificate of Incorporation will not
authorize the issuance of any shares of Non-Voting Common Stock in the future.
 
     The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the rights
and preferences of the holders of any outstanding Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends as are declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock have the right to a ratable portion of assets remaining after the payment
of all debts and other liabilities of the Company, subject to the liquidation
preferences of the holders of any outstanding Preferred Stock. Holders of Common
Stock have neither pre-emptive rights nor rights to convert their Common Stock
into any other securities and are not subject to future calls or assessments by
the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
offered hereby upon issuance and sale will be, fully paid and non-assessable.
The rights, preferences and privileges of the holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock that the Company may designate and issue in the future.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to certain limitations
prescribed by Delaware law, without further action by the stockholders, to issue
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms, the number of shares constituting any series and the
designation of such series. The Company believes that the Board of Directors'
power to set the terms of, and the Company's ability to issue, Preferred Stock
will provide flexibility in connection with possible financing transactions in
the future. The issuance of Preferred Stock, however, could adversely affect the
voting power of holders of Common Stock and decrease the amount of any
liquidation distribution to such holders. The presence of outstanding Preferred
Stock could also have the effect of delaying, deterring or preventing a change
in control of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
 
REPRESENTATIVES' WARRANTS
 
     Upon consummation of the Offering, the Representatives will be granted a
warrant to purchase 160,000 shares of Common Stock at an exercise price equal to
120% of the initial public offering price. This warrant is exercisable for a
four year period beginning on the first anniversary of the date on which this
Prospectus is declared effective by the Commission and expires on the fifth
anniversary of such date. The number of shares for which the warrant is
exercisable is subject to
 
                                       47
49
 
adjustment for stock splits, combinations or dividends and reclassifications,
exchanges or substitutions.
 
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
 
     The provisions of the Certificate of Incorporation and Restated Bylaws
("the Bylaws") of the Company discussed below could make more difficult or
discourage a proxy contest or other change in the Company's management or the
acquisition or attempted acquisition of control by a holder of a substantial
amount of the Company's voting stock. It is possible that such provisions could
make it more difficult to accomplish, or could deter, transactions that
stockholders may otherwise consider to be in their best interests or those of
the Company.
 
     The Company is subject to the anti-takeover provisions of Section 203 of
the DGCL. In general, Section 203 prohibits a Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is, or the transaction
in which the person became an interested stockholder was, approved in a
prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
 
     The Board of Directors of the Company will be divided into three classes as
nearly equal in number as possible upon consummation of the Offering. Each year
the stockholders will elect the members of one of the three classes to a
three-year term of office. Upon consummation of the Offering, Mr. Wohlgensinger
will serve in the class whose term expires in 1999; Messrs. Gabriel and Bergmann
will serve in the class whose term expires in 2000; and Mr. Schoneburg will
serve in the class whose term expires in 2001. All directors elected to the
Company's classified Board of Directors will serve until the election and
qualification of their respective successors or their earlier resignation or
removal. The Board of Directors is authorized to create new directorships and to
fill such positions so created and is permitted to specify the class to which
any such new position is assigned. The person filling such position would serve
for the term applicable to that class. The Board of Directors (or its remaining
members, even if less than a quorum) is also empowered to fill vacancies on the
Board of Directors occurring for any reason for the remainder of the term of the
class of directors in which the vacancy occurred. Members of the Board of
Directors may only be removed for cause. These provisions are likely to increase
the time required for stockholders to change the composition of the Board of
Directors. For example, in general, at least two annual meetings will be
necessary for stockholders to effect a change in a majority of the members of
the Board of Directors.
 
     The Company's Bylaws provide that, for nominations to the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to the annual meeting. If the meeting is not an annual
meeting, the notice must generally be delivered not more than 90 days prior to
the special meeting and not later than the later of 60 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made by the Company. Only such business may be conducted at a
special meeting of stockholders as is brought before the meeting pursuant to the
Company's notice of meeting. The notice by a stockholder must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about the nominee or a description of
the proposed business to be brought before the meeting.
 
                                       48
50
 
     The Certificate of Incorporation also requires that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by a
consent in writing. Special meetings of the stockholders may be called only by
the Board of Directors of the Company pursuant to a resolution adopted by a
majority of the total number of directors authorized.
 
     The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. The
Certificate of Incorporation of the Company requires the affirmative vote of the
holders of at least 70% of the outstanding voting stock of the Company, voting
together as a single class, to amend or repeal any of the provisions discussed
in this section entitled "Delaware Law and Certain Charter and Bylaw Provisions"
or to reduce the number of authorized shares of Common Stock or Preferred Stock.
Such 70% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. Such 70% vote is also required for any amendment
to, or repeal of, the Company's Bylaws by the stockholders. The Bylaws may also
be amended or repealed by a simple majority vote of the Board of Directors.
 
     As permitted by the DGCL, the Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for beach of the director's fiduciary duties
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or successor provisions of the DGCL, or
(iv) for any transaction from which the director derives an improper personal
benefit.
 
     The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law (except, in some circumstances, with respect to suits
initiated by the director or officer) and advance expenses to such directors or
officers to defend any action for which rights of indemnification are provided.
In addition, the Certificate of Incorporation and Bylaws of the Company also
permit the Company to grant such rights to its employees and agents. The Bylaws
also provide that the Company may enter into indemnification agreements with its
directors and officers and purchase insurance on behalf of any person whom it is
required or permitted to indemnify. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors, officers and employees.
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. The transfer agent's telephone number is (212)
936-5100.
 
                                       49
51
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this Offering, there has been no market for the Common Stock of
the Company. The Company can make no prediction as the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the perception
that such sales may occur, could adversely affect prevailing market prices. See
"Risk Factors -- Shares Eligible for Future Sale."
 
     Upon completion of this Offering, the Company expects to have 9,070,574
shares of Common Stock outstanding (excluding 590,569 and 160,000 shares
reserved for issuance upon the exercise of outstanding stock options and the
Representatives' Warrant, respectively) (9,310,574 shares of Common Stock
outstanding if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 1,600,000 shares offered hereby will be freely tradable
without restrictions or further registration under the Securities Act, except
for any shares purchased by "affiliates" of the Company, as that term is defined
in Rule 144 under the Securities Act ("Rule 144"), which shares will be subject
to the resale limitations imposed by Rule 144, as described below.
 
     All of the remaining 7,470,574 shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold in
the absence of registration under the Securities Act, except pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144. Of the restricted securities, no shares are eligible for
sale in the public market immediately after this Offering pursuant to Rule
144(k) under the Securities Act ("Rule 144(k)"). A total of 5,567,377 restricted
securities will be eligible for sale in the public market in accordance with
Rule 144 beginning 90 days after the date of this Prospectus. Taking into
consideration the effect of the lock-up agreements described below and the
provisions of Rules 144 and 144(k), no restricted shares will be eligible for
sale until the expiration of the lock-up agreements one year after the date of
this Prospectus, subject to the provisions of Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately 90,705 shares after this Offering) or (ii)
the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two years
is entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
 
     Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act ("Rule 701"). In general, Rule 701
permits resales of shares issued pursuant to certain compensatory benefit plans
and contracts, commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities and Exchange Act of 1934, as amended,
in reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. As of September 29, 1998,
the Company has granted options covering 590,569 shares of Common Stock that
have not yet been exercised and which become exercisable at various times in the
future. Any shares of Common Stock issued upon the exercise of options, in
addition to the 701 Shares, will be eligible for sale pursuant to Rule 701.
 
     As of September 29, 1998, the Company has also issued 26,083 shares of
Common Stock pursuant to the exercise of stock options (the "701 Shares").
                                       50
52
 
     The executive officers and directors and certain other existing
stockholders of the Company, who beneficially own in the aggregate
shares of Common Stock and holders of options to purchase             shares of
Common Stock, have agreed that they will not, without the prior written consent
of New York Broker, Inc., offer, pledge, sell, contract to sell, grant any
option to purchase or otherwise dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of one year after the date of this
Prospectus, and, with respect to           Registrable Shares to be registered
by certain holders in this Offering, for a period of six months after the date
of this Prospectus.
 
REGISTRATION RIGHTS
 
     The holders of 1,287,114 shares of Common Stock (the "Registrable Shares")
issued in Private Placements in June 1998 and September 1998 have "piggyback"
registration rights to request that the Company register any of such shares in
the event that the Company proposes to register any of its securities under the
Securities Act (other than in connection with an acquisition or issuance of
stock options or pursuant to a Form S-8 (for use with certain Company employee
benefit plans), Form S-4 (for use in connection with certain business
combinations involving the Company) or comparable registration statement).
However, if such piggyback registration rights are exercised in connection with
an underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to reduce the number of such
shares to be included in such public offering. In addition, holders of Common
Stock representing 824,000 of the shares of the Registrable Shares have the
right, without limitation, to include up to an aggregate of 20% of such shares
for registration in the Offering. Holders of      shares have requested the
registration of such shares in the Offering. Except for these shares, no other
Registrable Shares will form a part of the shares of Common Stock registered in
this Offering. The holders of the
Registrable Shares to be registered in this Offering have entered into six-month
lock-up agreements and the holders of             of the Registrable Shares have
entered into one year lock-up agreements as described above.
 
     All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions and stock transfer fees and expenses)
and the fees and expenses of legal counsel to the selling stockholders will be
borne by the Company.
 
                                       51
53
 
                                  UNDERWRITING
 
     Subject to the terms and conditions set out in the underwriting agreement,
dated                , 1998, among the Company, the Selling Stockholder and the
Underwriters (the "Underwriting Agreement"), the Underwriters, acting through
New York Broker, Inc. (the "Representative") and New York Broker Deutschland AG
(the "International Manager" and together with New York Broker, Inc., the
"Representatives"), have severally agreed to purchase from the Company and from
the Selling Stockholder, the number of shares of Common Stock set forth opposite
their respective names below:
NUMBER OF
                            NAME                               SHARES
                            ----                              ---------
New York Broker, Inc. ......................................
New York Broker Deutschland AG..............................
 
                                                              ---------
          Total.............................................  1,600,000
                                                              =========
Pursuant to the Underwriting Agreement, the shares of Common Stock are
being offered and sold through two selling groups. New York Broker, Inc. is
acting as Representative for the U.S. Selling Group which is offering and
selling shares of Common Stock only in the United States. New York Broker
Deutschland AG is acting as International Manager with respect to the
International Selling Group which is offering and selling shares of Common Stock
in all countries outside of the United States.
 
     The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below), if any
are purchased. The Company and the Selling Stockholder have been advised that
the Underwriters propose initially to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not in excess of
$     per share. The public offering price and other selling terms may be
changed by the Representative after the initial offering to the public.
 
     The Underwriting Agreement provides for indemnification among the Company,
the Selling Stockholder and the Underwriters against certain liabilities in
connection with this Offering, including liabilities under the Securities Act.
 
     The Company has granted the Underwriters an option exercisable during the
30 day period after the date of this prospectus to purchase up to an aggregate
of 240,000 additional shares of Common Stock at the public offering price, less
the Underwriting discounts and commissions, for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will become obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the table above bears to the
total number of shares in such table, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
 
     Upon consummation of the Offering, the Representatives will have the right
to appoint one member to the Board of Directors of the Company for a period of
five years. The Representatives have named Hartmut Bergmann as their appointee
and he will be elected to the class whose term expires in 2000. Mr. Bergmann is
Chairman of the Management Board of New York Broker Deutschland AG.
 
     The Company has agreed to pay the Underwriters a non-accountable expense
allowance of three percent of the gross proceeds derived from the sale of the
shares of Common Stock, of which
 
                                       52
54
 
$30,000 has been paid to date. The Company has also agreed to pay all expenses
in connection with qualifying the shares of Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters. The Company
has also agreed to pay the expenses of the Selling Stockholder. In addition, the
Company has agreed to pay the fees of German and United States counsel for the
Underwriters which includes the cost of preparation of all filings with the
Securities and Exchange Commission and the Nasdaq Stock Market which fees are
customarily incurred by issuers.
 
     The Company has agreed to sell to the Representatives and their designees
for $100 a warrant (the "Representatives' Warrant") to purchase up to 160,000
shares of Common Stock (184,000 shares if the Underwriters' over-allotment
option is exercised in full) for a period of four years commencing one year from
the date of this Prospectus at a price equal to 120% of the initial public
offering price. During the Warrant exercise term, the holders of the
Representatives' Warrant are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock with a resulting
dilution in the interest of other stockholders. In addition, during that period,
the terms on which the Company will be able to obtain additional capital may be
adversely affected, because the Representatives are likely to exercise the
Representatives' Warrant at a time when the Company would, in all likelihood, be
able to obtain capital by a new offering of securities on terms more favorable
than those provided in the Representatives' Warrant. Any profit realized by the
Representatives on the sale of the Representatives' Warrant or the underlying
shares of Common Stock may be deemed additional underwriting compensation. See
"Description of Capital Stock -- Representatives' Warrant."
 
     The Company, and its officers, directors and certain other stockholders who
beneficially own           shares in the aggregate, have agreed not to offer,
pledge, sell, contract to sell, grant any option to purchase or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for, or any rights to
purchase or acquire, shares for a period of one year following the date of this
Prospectus without the prior written consent of the Representative which may, in
its sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements.
 
     The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
 
     Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the liability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
 
     If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
 
     The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.
 
     In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of a security to be higher than it
might be in the absence of such purchases.
 
                                       53
55
 
The imposition of a penalty bid might also have an effect on the price of a
security to the extent that it were to discourage resales of the security.
 
     Neither the Company nor the Representatives make any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
 
     Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors to be considered in such negotiations are
prevailing market and general economic conditions, the market capitalizations,
trading histories and stages of development of other traded companies that the
Company and the Representatives believe to be comparable to the Company, the
results of operations of the Company in recent periods, the current financial
position of the Company, estimates of business potential of the company and the
present state of the Company's development and the availability for sale in the
market of a significant number of shares of Common Stock. Additionally,
consideration will be given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
 
                                 LEGAL MATTERS
 
     The validity of issuance of the Common Stock offered hereby will be passed
upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Robert Duggan, a partner with Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., also is the Secretary of the Company. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Greenberg Traurig, P.A., Miami, Florida.
 
                                    EXPERTS
 
     The financial statements of Artificial Life as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Wolf & Company, P.C., Boston, Massachusetts, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance where a copy of the document has been filed as an exhibit to
the Registration Statement, reference is made to the exhibit so filed. The
Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, registration statements and certain
other filings made with the Commission through its Electronic
                                       54
56
 
Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's Word Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
 
     The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants,
and will make available quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law or by Nasdaq.
 
                                       55
57
 
                         INDEX TO FINANCIAL STATEMENTS
PAGE
                                                              ----
Independent Auditors' Report................................  F-2
Financial Statements:
  Balance Sheets as of December 31, 1996 and 1997, and June
     30, 1998 (unaudited)...................................  F-3
  Statements of Operations for the years ended December 31,
     1995, 1996 and 1997, and for the six months ended June
     30, 1997 (unaudited) and 1998 (unaudited)..............  F-4
  Statements of Changes in Stockholders' Equity for the
     years ended December 31, 1995, 1996 and 1997, and for
     the six months ended June 30, 1998 (unaudited).........  F-5
  Statements of Cash Flows for the years ended December 31,
     1995, 1996 and 1997, and for the six months ended June
     30, 1997 (unaudited) and 1998 (unaudited)..............  F-6
  Notes to Financial Statements.............................  F-7
F-1
58
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Artificial Life, Inc.
Boston, Massachusetts
 
     We have audited the accompanying balance sheets of Artificial Life, Inc.
(formerly Neurotec International Corp.) as of December 31, 1996 and 1997, and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Artificial Life, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
 
                                          Wolf & Company, P.C.
 
Boston, Massachusetts
September 10, 1998, except for
  Note 2 as to which the date is
  September 22, 1998 and
  Note 8 as to which the date
  is September 23, 1998.
 
                                       F-2
59
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                                 BALANCE SHEETS
DECEMBER 31,
                                                              ----------------------     JUNE 30,
                                                                1996         1997          1998
                                                              --------    ----------    -----------
                                                                                        (UNAUDITED)
ASSETS
Current assets:
  Cash......................................................  $ 30,139    $   22,382    $  551,591
  Accounts receivable, trade (Note 1).......................        --       273,187        26,062
  Due from officer/stockholder (Note 3).....................        --            --       153,916
  Due from former parent and affiliates (Note 3)............   251,502       243,499            --
  Refundable income taxes (Note 4)..........................    18,868         6,336       103,507
  Prepaid expenses and other current assets.................    33,141        59,442        11,056
                                                              --------    ----------    ----------
         Total current assets...............................   333,650       604,846       846,132
                                                              --------    ----------    ----------
Property and equipment:
  Furniture and fixtures....................................   176,128       176,128       177,435
  Computer equipment........................................   235,151       277,344       278,335
  Leasehold improvements....................................   159,334       159,334       159,334
  Office equipment..........................................    58,696        59,435        59,435
                                                              --------    ----------    ----------
                                                               629,309       672,241       674,539
  Less accumulated depreciation and amortization............   173,829       340,029       393,260
                                                              --------    ----------    ----------
                                                               455,480       332,212       281,279
                                                              --------    ----------    ----------
Other assets:
  Net deferred tax asset (Note 4)...........................    51,591        49,225        49,225
  Deposits and other assets (Note 7)........................    44,610        98,219        93,623
                                                              --------    ----------    ----------
                                                                96,201       147,444       142,848
                                                              --------    ----------    ----------
                                                              $885,331    $1,084,502    $1,270,259
                                                              ========    ==========    ==========
                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Note payable to former parent.............................  $ 77,922    $       --    $       --
  Accounts payable..........................................   120,539       195,159       195,491
  Due to officer/stockholder................................        --        27,015            --
  Deferred revenue..........................................        --       116,667            --
  Accrued expenses (Note 9).................................    52,176        95,252       238,017
  Net deferred tax liability (Note 4).......................     9,279         3,929         3,929
                                                              --------    ----------    ----------
         Total current liabilities..........................   259,916       438,022       437,437
                                                              --------    ----------    ----------
Note payable -- officer/stockholder (Note 3)................        --            --       500,000
                                                              --------    ----------    ----------
Commitments and contingencies (Note 5)
Stockholders' equity (Notes 7 and 8):
  Voting common stock, $.01 par value; 19,000,000 shares
    authorized, 6,967,213 shares issued and outstanding.....    69,672        69,672        69,672
  Non-Voting common stock, $.01 par value; 1,000,000 shares
    authorized, 53,278 shares issued and outstanding........        --            --           533
  Additional paid-in capital................................   430,328       430,328       611,162
  Retained earnings (deficit)...............................   125,415       146,480      (348,545)
                                                              --------    ----------    ----------
         Total stockholders' equity.........................   625,415       646,480       332,822
                                                              --------    ----------    ----------
                                                              $885,331    $1,084,502    $1,270,259
                                                              ========    ==========    ==========
See accompanying notes to financial statements.
 
                                       F-3
60
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                            STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,         SIX MONTHS ENDED JUNE 30,
                                       ------------------------------------   -------------------------
                                          1995         1996         1997         1997          1998
                                       ----------   ----------   ----------   -----------   -----------
                                                                                     (UNAUDITED)
Revenues (Note 1 and 3):
  Software license agreements........  $       --   $       --   $  233,333   $  116,667    $  116,667
  Application services...............   1,216,716    2,789,878    1,347,089      914,461       332,713
  Cancellation fee income............          --           --      189,938           --            --
                                       ----------   ----------   ----------   ----------    ----------
         Total revenues..............   1,216,716    2,789,878    1,770,360    1,031,128       449,380
                                       ----------   ----------   ----------   ----------    ----------
Operating expenses:
  Selling, general and
    administrative...................     967,271    1,101,109    1,048,897      623,693       596,620
  Engineering........................     827,471      656,086      512,267      301,518       249,789
  Research and development...........          --           --           --           --       128,103
  Depreciation and amortization......      39,734      137,300      167,962       82,997        54,112
                                       ----------   ----------   ----------   ----------    ----------
         Total operating expenses....   1,834,476    1,894,495    1,729,126    1,008,208     1,028,624
                                       ----------   ----------   ----------   ----------    ----------
Income (loss) from operations........    (617,760)     895,383       41,234       22,920      (579,244)
Other income (expenses):
  Foreign exchange gain (loss).......     (27,386)      10,319       (5,706)       3,579            --
  Interest expense...................      (7,582)     (24,996)      (5,247)      (3,399)       (6,781)
                                       ----------   ----------   ----------   ----------    ----------
Income (loss) before provision
  (benefit) for income taxes.........    (652,728)     880,706       30,281       23,100      (586,025)
Provision (benefit) for income taxes
  (Note 4)...........................    (256,872)     337,362        9,216        7,030       (91,000)
                                       ----------   ----------   ----------   ----------    ----------
Net income (loss)....................  $ (395,856)  $  543,344   $   21,065   $   16,070    $ (495,025)
                                       ==========   ==========   ==========   ==========    ==========
Basic and diluted net income (loss)
  per share (Note 2).................  $     (.07)  $      .08   $       --   $       --    $     (.07)
Weighted average shares outstanding
  used in per share calculation......   5,573,770    6,967,213    6,967,213    6,967,213     6,969,568
See accompanying notes to financial statements.
                                       F-4
61
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK (NOTE 7)
                                    -------------------------------------
                                          VOTING            NON-VOTING      ADDITIONAL   RETAINED
                                    -------------------   ---------------    PAID-IN     EARNINGS
                                     SHARES     AMOUNT    SHARES   AMOUNT    CAPITAL     (DEFICIT)
                                    ---------   -------   ------   ------   ----------   ---------
Balance at December 31, 1994......  1,393,443   $13,934       --    $ --     $ 86,066    $ (22,073)
Net Loss..........................         --        --       --      --           --     (395,856)
Issuance of Common Stock..........  5,573,770    55,738       --      --      344,262           --
                                    ---------   -------   ------    ----     --------    ---------
Balance at December 31, 1995......  6,967,213    69,672       --      --      430,328     (417,929)
Net income........................         --        --       --      --           --      543,344
                                    ---------   -------   ------    ----     --------    ---------
Balance at December 31, 1996......  6,967,213    69,672       --      --      430,328      125,415
Net income........................         --        --       --      --           --       21,065
                                    ---------   -------   ------    ----     --------    ---------
Balance at December 31, 1997......  6,967,213    69,672       --      --      430,328      146,480
Net loss (unaudited)..............         --        --       --      --           --     (495,025)
Issuance of common stock..........         --        --   53,278     533      180,834           --
                                    ---------   -------   ------    ----     --------    ---------
Balance at June 30, 1998..........  6,967,213   $69,672   53,278    $533     $611,162    $(348,545)
                                    =========   =======   ======    ====     ========    =========
See accompanying notes to financial statements.
                                       F-5
62
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                            STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,        SIX MONTHS ENDED JUNE 30,
                                               ---------------------------------   -------------------------
                                                 1995        1996        1997         1997          1998
                                               ---------   ---------   ---------   -----------   -----------
                                                                                          (UNAUDITED)
Cash flows from operating activities:
  Net income (loss)..........................  $(395,856)  $ 543,344   $  21,065    $  16,070     $(495,025)
  Adjustments to reconcile net income (loss)
    to net cash provided (used) by operating
    activities:
    Depreciation and amortization............     39,734     137,300     167,962       82,997        54,112
    Unrealized foreign exchange gain.........     (4,071)     (5,790)         --       (9,078)           --
    Deferred income taxes....................   (256,872)    214,560      (2,984)          --            --
    (Increase) decrease in deposits and other
      assets.................................    (42,471)     (5,345)    (55,371)      (1,800)        3,715
    (Increase) decrease in due from former
      parent and affiliates..................     59,515    (223,234)      8,003       63,476       243,499
    (Increase) decrease in accounts
      receivable, trade......................         --          --    (273,187)    (201,648)      247,125
    (Increase) decrease in refundable income
      taxes..................................    (30,258)     11,390      12,532        7,030       (97,171)
    (Increase) decrease in prepaid expenses
      other current assets...................    (32,378)       (763)    (26,301)     (33,323)       48,386
    Increase (decrease) in accounts payable
      and accrued expenses...................    579,625    (421,910)    117,696      121,857       143,097
    Increase (decrease) in deferred
      revenue................................         --          --     116,667           --      (116,667)
    Increase (decrease) in due to/from
      officer/stockholder....................         --          --      27,015           --      (180,931)
                                               ---------   ---------   ---------    ---------     ---------
    Net cash provided (used) by operating
      activities.............................    (83,032)    249,552     113,097       45,581      (149,860)
                                               ---------   ---------   ---------    ---------     ---------
Cash flows from investing activities:
  Purchases of property and equipment........   (386,833)   (242,476)    (42,932)     (34,263)       (2,298)
                                               ---------   ---------   ---------    ---------     ---------
Cash flows from financing activities:
  Repayment of note payable to former
    parent...................................         --          --     (77,922)          --            --
  Proceeds from note payable --
    officer/stockholder......................         --          --          --           --       500,000
  Proceeds from issuance of common stock.....    400,000          --          --           --       181,367
  Payment of subscription receivables........     50,000          --          --           --            --
                                               ---------   ---------   ---------    ---------     ---------
Net cash provided (used) by financing
  activities.................................    450,000          --     (77,922)          --       681,367
                                               ---------   ---------   ---------    ---------     ---------
Net increase (decrease) in cash..............    (19,865)      7,076      (7,757)      11,318       529,209
Cash at beginning of period..................     42,928      23,063      30,139       30,139        22,382
                                               ---------   ---------   ---------    ---------     ---------
Cash at end of period........................  $  23,063   $  30,139   $  22,382    $  41,457     $ 551,591
                                               =========   =========   =========    =========     =========
Supplemental disclosure of cash flow
  information:
  Income taxes paid..........................  $   8,327   $ 131,440   $      --    $      --     $   2,000
  Interest paid..............................      7,582      24,996       5,247        3,399         6,781
See accompanying notes to financial statements.
                                       F-6
63
 
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                         NOTES TO FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
     (ALL INFORMATION WITH RESPECT TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
 
1.  ORGANIZATION, RISKS AND UNCERTAINTIES
 
  NATURE OF OPERATIONS
 
     Artificial Life, Inc. ("Artificial Life" or the "Company") develops,
markets and supports "intelligent" software robots ("bots"). The Company's bots,
known as "SmartBots," are software programs that the Company designs to automate
and simplify time-consuming and complex business-related Internet functions such
as Web navigation, direct marketing, user profiling, information gathering,
messaging, knowledge management, sales response and call center automation. The
Company recently changed its primary business focus from software consulting to
the development, marketing and sale of its Alife suite of SmartBot software
products. Accordingly, the Company is at an early stage of development in its
new business strategy, and is subject to a number of the risks inherent in
establishing a new business. To address these risks, the Company must, among
other things, complete development of its SmartBot software products, enter into
strategic partnership, marketing and distribution arrangements, respond to
competitive developments, and attract, retain and motivate qualified personnel.
 
     In addition, because the Company's emerging online agent-based software
products business will require significant infusions of additional capital,
results of operations to date are not reflective of the Company's future results
of operations. The Company's decision to become a provider of software robot
products is predicated on the assumption that the demand for such products will
be large enough to permit the Company to operate profitably. There can be no
assurance that the Company's assumption will be correct or that the Company will
be able to successfully compete as a provider of such products. If the Company's
assumption is not accurate, or if the Company is unable to compete as a provider
of online agent-based software products, the Company's business, prospects,
financial condition and results of operations will be materially adversely
affected.
 
     The Company's management has recently obtained funds to support its
operations through a combination of sources including a long-term loan from a
stockholder and private placements of Common Stock. (See Notes 3 and 7.) The
Company is also pursuing additional resources through an initial public
offering. (See Note 7.)
 
     In 1995 and 1996, the Company was a wholly-owned subsidiary of Neurotec
Hochtechnologie GmbH, a German corporation. During 1995, all of the Company's
revenue was derived from various contracts with the Company's then parent
company and its affiliates. In 1996, approximately 91% of the Company's revenues
was derived from the Company's then parent company.
 
     During 1997, Eberhard Schoneburg, the Company's President, Chief Executive
Officer and Chairman and a minority stockholder of the Company's former parent
company, entered into an agreement with the former parent company to sell his
interest in the former parent company to the two remaining stockholders and
contemporaneously purchase all of the outstanding shares of Neurotec
International Corp. (the "Management Buyout"). In connection with the Management
Buyout, the Company agreed not to compete in any manner with the former parent
company in Europe through the period ended December 31, 1998. Subsequent to the
Management Buyout, the Company changed its name to Artificial Life, Inc.
 
     In 1997, approximately 60% of the Company's revenue was derived from
various contracts with the Company's former parent company and its affiliates.
As a result of the Management Buyout and the Company's changing its primary
business focus from software consulting to the development,
 
                                       F-7
64
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
marketing and sale of its Alife suite of SmartBot software products, the Company
is not anticipating any future revenue to be derived from its former parent (see
Note 3).
 
  MAJOR CUSTOMER
 
     During 1997, the Company recognized revenue from one customer amounting to
approximately $710,000, representing 40% of its total revenues. During the six
months ended June 30, 1998, the substantial majority of the Company's revenue
was derived from this same customer. Accounts receivable, trade were due
entirely from this customer at December 31, 1997 and June 30, 1998.
 
  MANAGEMENT ESTIMATES
 
     The process of preparing financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. These
estimates and assumptions involve the areas of collection of receivables,
contract costs, depreciation and amortization and certain accruals, among
others. Actual results could differ from those estimates.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  UNAUDITED INTERIM FINANCIAL INFORMATION
 
     The interim financial statements of the Company at June 30, 1998 and for
the six months ended June 30, 1997 and 1998, included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
financial statements. In the opinion of management, the accompanying unaudited
interim financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 1998, and the results of its operations and its cash flows
for the six months ended June 30, 1997 and 1998.
 
  PROPERTY AND EQUIPMENT
 
     Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is calculated using the straight-line method over the
following useful lives:
CLASSIFICATION                       ESTIMATED USEFUL LIVES
             --------------                       ----------------------
Furniture and fixtures                                    7 years
Computer equipment                                       3-5 years
Leasehold improvements                     Shorter of useful life or lease term
Office equipment                                          5 years
Expenditures for maintenance, repairs and minor renewals are charged to
expense as incurred. Betterments and major renewals are capitalized.
 
                                       F-8
65
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  COMPUTER SOFTWARE COSTS
 
     Costs of developing software which are incurred beyond the point of
demonstrated technological feasibility are capitalized and, after the product is
available for general release to customers, such costs are amortized based on
the greater of the charge resulting from the straight-line method over a
three-year period or the proportion of current sales to estimated future
revenues of the product. As of June 30, 1998, no software development costs have
been capitalized by the Company as such costs were immaterial.
 
  REVENUE RECOGNITION
 
     The Company recognizes revenue from marketing computer software programs as
follows:
 
        Revenues from the sale of initial "software license agreements" for
        computer programs and related services are recognized upon the delivery
        of the software.
 
        Development and application services contract revenues and related costs
        are recognized upon the completion of the contract or certain phases as
        defined in each agreement.
 
     There are no significant future costs associated with any of the Company's
revenue transactions. Development costs which are not required to be
capitalized, marketing and installation costs are charged to earnings as
incurred. No software development costs have been capitalized by the Company as
such costs are immaterial.
 
  RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all
changes in stockholders' equity during the period except those resulting from
investments by, or distributions to, stockholders. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
 
     In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
97-2 had no impact on the Company's Financial Statements.
 
                                       F-9
66
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  COMPUTATION OF NET INCOME (LOSS) PER SHARE
 
     The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. The provision and disclosure
requirements for SFAS No. 128 were required to be adopted for interim and annual
periods ending after December 15, 1997, with restatement of earnings per share
for prior periods. In accordance with SFAS No. 128, basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period and the weighted average
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants (using the Treasury Stock method); common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive. All common equivalent shares of the Company are not dilutive.
Therefore, diluted earnings per share is the same as basic earnings per share.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock issued for
nominal consideration, prior to the anticipated effective date of an IPO, are
required to be included in the calculation of basic and diluted net loss per
share, as if they were outstanding for all periods presented. To date, the
Company has not had any stock issuances for nominal consideration.
 
  STOCK-BASED COMPENSATION
 
     The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its employee stock options plans.
There are no effects on reported net income (loss) and earnings per share based
on the fair value of options and shares as prescribed by SFAS 123.
 
  STOCK DIVIDEND, REVERSE STOCK SPLIT AND CHANGES IN AUTHORIZED STOCK
 
     On June 10, 1998, the Company declared a dividend of 339 shares of common
stock for each share of common stock held to stockholders of record on June 10,
1998. On September 22, the Company effected a 1-for-2.44 reverse stock split and
amended the total authorized shares of Voting Common Stock to 19,000,000 shares
and Non-Voting Common Stock to 1,000,000 shares. All references in the financial
statements to shares, share prices, per share amounts, stock options and
authorized shares have been retroactively adjusted for the stock dividend,
reverse stock split and change in authorized stock. (See Note 8).
 
  INCOME TAXES
 
     Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax basis of assets and liabilities.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. A deferred tax asset is
recorded for any net operating loss, capital loss and tax credit carryforward
for income tax purposes, to the extent their realization is more likely than
not. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities will be adjusted through the provision for income taxes.
 
                                      F-10
67
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  RELATED PARTY TRANSACTIONS
 
     The Company had transactions with its former parent company and a
wholly-owned subsidiary of the former parent company, MediaCenter GmbH
("MediaCenter"), and a stockholder of the former parent company as follows:
 
          a) The Company provided contract services to the former parent company
     and to a stockholder of the former parent company on which it recorded
     revenue of $1,216,716, $2,542,642 and $864,177 for the years ended December
     31, 1995, 1996 and 1997. Certain contracts for services are denominated in
     Deutsche Marks ("DM").
 
          b) The Company received advances from the former parent company in the
     amount of DM120,000. The advances were due on September 30, 1997 with
     interest at 8.5%. The note payable of $77,922 recorded on the balance sheet
     at December 31, 1996 is based on the exchange rate on that date. Interest
     expense on these advances amount to $7,582, $2,029 and $5,247 for the years
     ended December 31, 1995, 1996 and 1997, respectively. The advances were
     repaid in 1997, see below.
 
          c) The former parent company charged the Company for various expenses
     paid on the Company's behalf and the Company charged the former parent
     company and MediaCenter for various expenses paid by the Company on their
     behalf. Outstanding amounts were non-interest bearing.
 
     During 1997, in connection with the Management Buyout and the Company's
changing its primary business focus from software consulting to the development,
marketing and sale of its Alife suite of SmartBot software products, the Company
discontinued performing services for its former parent company and its
affiliates. At that time, the Company had in process several contracts for
services to be provided to the former parent company and outstanding accounts
receivable from the former parent of $160,000. In addition, the Company owed the
former parent $42,016 in accounts payable and accrued expenses, and $77,922 in
notes payable. In December of 1997, the Company and the former parent negotiated
a settlement agreement whereby the former parent agreed to forgive all
outstanding liabilities owed by the Company and make a cash payment of $230,000
in full settlement of all outstanding accounts receivable and all of its
contractual obligations to the Company. The transaction resulted in the
recognition of cancellation fee income of $189,938 in 1997. The $230,000 payment
was received in full in January 1998.
 
     During 1997, the Company's President and Chairman opted to forego
approximately 68% of his salary amounting to approximately $164,000.
 
                                      F-11
68
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Amounts due from the former parent company, net and affiliates at December
31, 1996 and 1997 consists of the following:
1996                       1997
                                    -----------------------    -----------------------
                                                                           SHAREHOLDER
                                     FORMER                     FORMER      OF FORMER
                                     PARENT     MEDIACENTER     PARENT       PARENT
                                    --------    -----------    --------    -----------
Settlement Agreement..............  $     --      $    --      $230,000      $    --
Contract services.................   213,370           --            --       13,499
Reimbursements receivable.........    29,752       45,204            --           --
Reimbursements payable............   (35,168)          --            --           --
Interest payable..................    (1,656)          --            --           --
                                    --------      -------      --------      -------
          Total...................  $206,298      $45,204      $230,000      $13,499
                                    ========      =======      ========      =======
On June 29, 1998, the Company issued a note payable to an
officer/stockholder in the amount of $500,000. The note is unsecured and bears
interest at 10%. Payment of principal and accrued interest is due on January 1,
2000. (See Note 7).
 
     The Company pays expenses on behalf of and provides cash advances to an
officer/ stockholder from time to time. Amounts outstanding are non-interest
bearing and due on demand.
 
4.  INCOME TAXES
 
     The income tax provision (benefit) consists of:
1995         1996       1997
                                                  ---------    --------    -------
Current:
  Federal.......................................  $      --    $ 75,124    $ 6,700
  State.........................................         --      47,678      5,500
                                                  ---------    --------    -------
                                                         --     122,802     12,200
                                                  ---------    --------    -------
Deferred (prepaid):
  Federal.......................................   (240,766)    201,107     (2,797)
  State.........................................    (16,106)     13,453       (187)
                                                  ---------    --------    -------
                                                   (256,872)    214,560     (2,984)
                                                  ---------    --------    -------
                                                  $(256,872)   $337,362    $ 9,216
                                                  =========    ========    =======
The difference between actual income tax expense and expected income tax
expense as computed by applying the U.S. federal income tax rate of 34% to
income before income taxes is explained as follows:
1995         1996       1997
                                                  ---------    --------    -------
Expected income tax provision (benefit).........  $(221,928)   $299,440    $10,296
State taxes, net of federal income tax
  benefit.......................................    (10,630)     40,346      3,506
Surtax exemption................................         --          --     (5,753)
Other...........................................    (24,314)     (2,424)     1,167
                                                  ---------    --------    -------
  Provision (benefit) for income taxes..........  $(256,872)   $337,362    $ 9,216
                                                  =========    ========    =======
F-12
69
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
          The tax effects of temporary differences that give rise to the
     deferred tax assets and deferred tax liabilities at December 31, 1996 and
     1997, are presented below:
1996       1997
                                                         -------    -------
Deferred tax assets:
  Start-up costs capitalized for income tax purposes...  $69,205    $46,499
  Vacation accrual not deductible for income tax
     purposes..........................................    3,114      4,182
  Property and equipment...............................       --      2,726
                                                         -------    -------
                                                          72,319     53,407
  Valuation allowance on deferred tax asset............       --         --
                                                         -------    -------
                                                          72,319     53,407
                                                         -------    -------
Deferred tax liabilities:
  Property and equipment...............................   17,614         --
  Prepaid rent deducted for income tax purposes........    8,422      8,111
  Unrealized foreign exchange gains....................    3,971         --
                                                         -------    -------
                                                          30,007      8,111
                                                         -------    -------
     Net deferred tax asset............................  $42,312    $45,296
                                                         =======    =======
There was no change in the valuation allowance on deferred tax assets in
1996 or 1997.
 
     The provision for income taxes for the six-month periods ended June 30,
1997 and 1998 are computed based on the 1997 actual effective tax rate of 30.4%
and estimated 1998 effective tax rate of 15.5%, respectively.
 
5.  COMMITMENTS
 
  CONSORTIUM AGREEMENT
 
     Effective October 10, 1995, the Company entered into a consortium agreement
with the Massachusetts Institute of Technology ("MIT"). Under the agreement, MIT
will conduct research projects for the "Things That Think Consortium." The
Consortium is an international association of corporate members who have joined
"to address the future of computation as it is increasingly imbedded in things
other than computers." The term of the agreement is for five years through
October 9, 2000. The agreement 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 agreement. The Company was sharing
50% of this cost with its former parent through June 1997. (See Note 3).
 
     On August 6, 1997, the Company obtained a suspension of the contract until
February 5, 1998, at which time the contract resumed under its original terms.
The Company will be solely responsible for the $125,000 annual cost through
October 9, 2000. Total costs incurred by the Company in connection with the
agreement amounted to $60,625, $62,500, and $32,598 for the years ended December
31, 1995, 1996 and 1997, respectively, and $32,598 and $62,500 for the six month
periods ended June 30, 1997 and 1998, respectively.
 
                                      F-13
70
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  LEASES
 
     The Company leases office and other space and various office equipment
under various noncancelable leases. Future minimum annual lease payments,
exclusive of additional operating costs, are as follows:
YEAR ENDING
                      DECEMBER 31,
                      ------------
1998...................................................  $221,372
  1999...................................................   205,725
  2000...................................................   205,352
  2001...................................................    17,113
                                                           --------
                                                           $649,562
                                                           ========
Rent expense for the years ended December 31, 1995, 1996 and 1997 amounted
to approximately $117,100, $231,300 and $228,300, respectively, and for the six
months ended June 30, 1997 and 1998 amounted to approximately $133,800 and
$120,200, respectively.
 
  EMPLOYMENT CONTRACTS
 
     The Company has employment agreements with all of its executive officers.
The agreements are generally one to three years in length and provide for
minimum salary levels. These agreements include severance payments under certain
conditions of approximately one half to three times each officer's annual
compensation. In addition the chief executive officer of the Company is entitled
to receive an annual incentive bonus of 3% of the Company's profits from
operations.
 
6.  PROFIT SHARING PLAN
 
     Effective October 1, 1995, the Company implemented a 401(k) profit sharing
plan for the benefit of all employees. Employees are eligible to participate
after twelve months of service and may contribute up to 15% of their
compensation subject to statutory limitations. The Company matches 50% of the
first 3% of compensation.
 
     Profit sharing expense for the years ended December 31, 1995, 1996 and 1997
amounted to $3,028, $10,260 and $11,968, respectively, and for the six months
ended June 30, 1997 and 1998 amounted to $6,504 and $6,677, respectively.
 
7.  STOCKHOLDERS' EQUITY
 
  PUBLIC OFFERING
 
     In August 1998, the Company executed a letter of intent to proceed with a
proposed initial public offering of the Company's stock (IPO). If the IPO is
consummated under the terms presently anticipated, the underwriters managing the
offering will have the right to appoint one member of the Board of Directors
after the closing of the IPO. The right to have a representative on the
Company's board extends for the term of the Warrant (defined below). The Company
has agreed to deliver a warrant (the "Warrant") to the underwriters at the
closing of the IPO equal to ten percent of the total number of shares sold
pursuant to the IPO. The Warrant is exercisable any time after one year from the
date of closing for a period of four years at a price equal to 120% of the
offering price per share. Included in deposits and other assets at June 30, 1998
is a $30,000 deposit paid to the underwriters in connection with the IPO.
 
                                      F-14
71
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
  COMMON STOCK
 
     At June 30, 1998 the Company had 19,000,000 authorized shares of common
stock, par value $.01, and 1,000,000 authorized shares of non-voting common
stock, par value $.01, of which 6,967,213 shares and 53,278 shares,
respectively, were outstanding. The non-voting common stock is convertible into
voting Common Stock on a one-for-one basis. Upon consummation of the Company's
proposed initial public offering, all shares of non-voting common stock will be
converted into shares of common stock.
 
     In June 1998, the Company sold 53,278 shares of non-voting common stock and
the majority stockholder of the Company sold 409,836 shares of voting common
stock through private placements to foreign investors overseas. The shares were
sold for $3.66 per share. Expenses incurred in connection with the private
placements amounted to $13,633. As a result, the Company received net proceeds
of $181,367.
 
     This stock was unregistered and was subject to restrictions on resale in
the United States pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended. In the event of a public offering of the Company's stock,
the stockholders may request the Company to register such shares for inclusion
in the public offering. Such request is subject to certain limitations which may
be imposed by the managing underwriter of the Company's public offering. The
holders of the voting common stock have agreed, among other things, to vote the
shares in a manner consistent with any votes cast by the chairman of the
Company. This agreement will terminate upon consummation of the IPO.
 
     Subsequent to the sale of stock by the majority stockholder, the Company
received a loan of $500,000 from the stockholder. (See Note 3).
 
  STOCK OPTIONS
 
     On April 1, 1998, the Company adopted the 1998 Equity Incentive Plan (the
"Plan") which provides for the issuance of both non-statutory and incentive
stock options to employees, officers, directors and consultants of the Company.
At that time the Company reserved 409,811 shares of common stock to be issued
under the Plan. Incentive stock options for 69,525 shares of common stock were
granted on May 1, 1998 with an initial exercise price of $3.66 per share, the
estimated fair market value on that date. The exercise price increases by $3.66
per share per quarter until the second anniversary of the date of grant at which
time the options are to expire.
 
     On June 30, 1998, the Plan was amended to increase the shares reserved for
issuance under the Plan to a total of 778,688 shares; 340,164 shares of voting
common stock and 438,524 shares of non-voting common stock. All options issued
prior to June 30, 1998 were for voting common stock. Effective with the
amendment, the Company granted non-statutory stock options for 184,426 shares of
voting common stock and 362,701 shares of non-voting common stock with an
exercise price of $3.66 per share expiring on July 1, 1999. On June 30, 1998,
the Company also amended the terms of the incentive stock options issued to two
individuals on May 1, 1998 for a total of 32,884 shares of common stock to
provide that the exercise price for such options is to remain at $3.66 per share
over the life of the option.
 
                                      F-15
72
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the status of the Company's stock options as of June 30, 1998
and the changes during the period then ended is presented below.
WEIGHTED
                                                                   AVERAGE
                                                     SHARES     EXERCISE PRICE
                                                     -------    --------------
Outstanding at beginning of period.................       --        $  --
Granted -- price equals fair value.................  616,652         3.66
Exercised..........................................       --           --
Canceled...........................................       --           --
                                                     -------        -----
Outstanding at end of period.......................  616,652        $3.66
                                                     =======        =====
Options exercisable at end of period...............  616,652
                                                     =======
Options available for future grants................  162,036
                                                     =======
The following table summarizes information about stock options outstanding
at June 30, 1998:
OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------------------------------
   RANGE OF        NUMBER           WEIGHTED AVERAGE        WEIGHTED-AVERAGE
EXERCISE PRICE   OUTSTANDING   REMAINING CONTRACTUAL LIFE    EXERCISE PRICE
--------------   -----------   --------------------------   ----------------
$3.66          616,652             1.09 years                $3.66
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. Compensation cost for the Company's
Plan determined consistent with Statement of Financial Accounting Standards No.
123 is not material to the Company's financial statements.
 
8.  SUBSEQUENT EVENT
 
     On September 23, 1998, the Company sold 824,000 shares of voting common
stock for $5.00 per share through private placements to foreign investors.
Expenses incurred in connection with the private placements amounted to $84,368,
resulting in net proceeds of $4,035,632 being received by the Company.
 
     The stock was unregistered and was subject to restrictions on resale in the
United States pursuant to Regulation S promulgated under the Securities Act of
1933, as amended. In the event of a public offering of the Company's stock, the
holders of 20% of the voting stock may request the Company to register such
shares for inclusion in the public offering. Such request is subject to certain
limitations which maybe imposed by the managing underwriter of the Company's
public offering, The holders of the stock have agreed, among other things, to
vote the shares in a manner consistent with any votes cast by the Chairman of
the Company. This agreement will terminate upon consummation of the IPO.
 
                                      F-16
73
                             ARTIFICIAL LIFE, INC.
                    (FORMERLY NEUROTEC INTERNATIONAL CORP.)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
 
9.  ACCRUED EXPENSES
 
     Accrued expenses at December 31, 1996 and 1997 and June 30, 1998 consist of
the following:
DECEMBER 31,
                                                     ------------------    JUNE 30,
                                                      1996       1997        1998
                                                     -------    -------    --------
Accrued salaries...................................  $ 3,526    $ 3,657    $146,690
Accrued vacations..................................   14,288     13,089      15,019
Accrued and withheld payroll.......................   17,876     56,082       8,395
Accrued professional fees..........................   15,500     15,000          --
Accrued consortium fee (Note 5)....................       --         --      62,500
Other accrued expenses.............................      986      7,424       5,413
                                                     -------    -------    --------
  Total accrued expenses...........................  $52,176    $95,252    $238,017
                                                     =======    =======    ========
Included in accrued salaries at June 30, 1998 is $120,000 due to the
President and Chief Executive Officer for salary, the payment of which was
voluntarily deferred by the officer. The amounts were paid subsequent to June
30, 1998.
 
                                      F-17
74
 
             ------------------------------------------------------
             ------------------------------------------------------
 
  NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
 
                            ------------------------
 
                               TABLE OF CONTENTS
PAGE
                                            ----
Prospectus Summary........................    3
Risk Factors..............................    7
Use of Proceeds...........................   17
Dividend Policy...........................   17
Capitalization............................   18
Dilution..................................   19
Selected Financial Data...................   20
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations..............................   22
Business..................................   28
Management................................   40
Certain Transactions......................   45
Principal and Selling Stockholders........   46
Description of Capital Stock..............   47
Shares Eligible for Future Sale...........   50
Underwriting..............................   52
Legal Matters.............................   54
Experts...................................   54
Additional Information....................   54
Index to Financial Statements.............  F-1
UNTIL                , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
             ------------------------------------------------------
             ------------------------------------------------------
             ------------------------------------------------------
             ------------------------------------------------------
                                             SHARES
 
                             ARTIFICIAL LIFE, INC.
                                  COMMON STOCK
 
                             [ARTIFICIAL LIFE LOGO]
                            -----------------------
                                   PROSPECTUS
                            -----------------------
                             NEW YORK BROKER, INC.
 
                         NEW YORK BROKER DEUTSCHLAND AG
 
                                            , 1998
 
             ------------------------------------------------------
             ------------------------------------------------------
75
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee and the National Association of Securities Dealers, Inc.
("NASD") Filing Fee, the amounts listed below are estimates:
SEC registration fee........................................  $    4,256
Nasdaq listing fee..........................................      10,000
NASD filing fee.............................................       1,943
Blue Sky fees and expenses..................................      13,000
Printing and engraving expenses.............................     130,000
Accounting fees and expenses................................      60,000
Legal fees and expenses.....................................     450,000
Transfer agent and registrar fees and expenses..............       5,000
Underwriters' non-accountable expense.......................     386,400
Miscellaneous...............................................     139,401
                                                              ----------
          Total.............................................  $1,200,000
                                                              ==========
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") provides that the Company shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL"), each person who is
involved in any litigation or other proceeding because such person is or was a
director or officer of the Company or is or was serving as an officer or
director of another entity at the request of the Company, against all expense,
loss or liability reasonably incurred or suffered in connection therewith. The
Certificate of Incorporation provides that the right to indemnification includes
the right to be paid expenses incurred in defending any proceeding in advance of
its final disposition, provided, however, that such advance payment will only be
made upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the Company
does not pay a proper claim for indemnification in full within 60 days after a
written claim for such indemnification is received by the Company, the
Certificate of Incorporation and the Company's Bylaws authorize the claimant to
bring an action against the Company and prescribe what constitutes a defense to
such action.
 
     Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that such person is or was a director or officer of the corporation, if such
person acted in good faith and in a manner that he reasonably believed to be in,
or not opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, if he or she had no reason to believe his or
her conduct was unlawful. In a derivative action, (i.e., one brought by or on
behalf of the corporation), indemnification may be provided only for expenses
actually and reasonably incurred by any director or officer in connection with
the defense or settlement of such an action or suit if such person acted in good
faith and in a manner that he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, except that no
indemnification shall be provided if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was
 
                                      II-1
76
 
brought shall determine that the defendant is fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
 
     Pursuant to Section 102(b)(7) of the DGCL, Article Tenth of the Certificate
of Incorporation eliminates the liability of a director to the Company or its
stockholders for monetary damages for such a breach of fiduciary duty as a
director, except for liabilities arising (i) from any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) from acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, or (iv) from any transaction from
which the director derived an improper personal benefit.
 
     The Company intends to obtain insurance policies insuring the directors and
officers of the Company against certain liabilities that they may incur in their
capacity as directors and officers. Under such policies, the insurers, on behalf
of the Company, may also pay amounts for which the Company has granted
indemnification to the directors or officers.
 
     Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement and
persons who control the Company, under certain circumstances.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     In the three years preceding the filing of this Registration Statement, the
Company has sold the following securities that were not registered under the
Securities Act.
 
     (a) Issuances of Capital Stock and Warrants
 
     In November 1994 and April 1995, the Company and sold 10,000 and 40,000
shares of Common Stock, respectively (prior to a 340-for-1 stock split effected
in the form of a dividend of 339 shares for each share of the Company's Common
Stock beneficially owned on June 10, 1998 and a 1-for-2.44 reverse stock split
effected on September 22, 1998) to its sole stockholder for $10.00 per share for
total consideration of $100,000 and $400,000, respectively.
 
     In June 1998, the Company issued and sold an aggregate of 130,000 shares of
Non-Voting Common Stock (prior to a 1-for-2.44 reverse stock split effected on
September 22, 1998) to two investors for $1.50 per share in a private placement
for aggregate gross proceeds of $195,000.
 
     In September 1998, the Company issued and sold an aggregate of 824,000
shares of Common Stock to 23 investors for $5.00 per share in a private
placement for aggregate gross proceeds of $4,120,000.
 
     (b) Certain Grants and Exercises of Stock Options
 
     Pursuant to the 1998 Equity Incentive Plan, the Company had as of September
29, 1998 issued options to purchase an aggregate of 616,652 shares of Common
Stock. Options to purchase 26,083 shares of Common Stock pursuant to the
foregoing have been exercised at an exercise price of $3.66 per share and
options to purchase an aggregate of 590,569 shares of Common Stock are currently
outstanding and exercisable, at a weighted average exercise price of $3.73 per
share.
 
     The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder, or Rule
701 promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments
 
                                      II-2
77
 
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
 
ITEM 16.  EXHIBITS
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
*1.1      Form of Underwriting Agreement.
     3.1      Amended and Restated Certificate of Incorporation of the
              Registrant.
    *3.2      Form of Restated Certificate of Incorporation of the
              Registrant to be filed prior to the closing of this
              Offering.
     3.3      Bylaws of the Registrant
    *3.4      Form of Restated Bylaws of the Registrant to become
              effective immediately prior to the closing of this Offering.
    *4.1      Specimen Common Stock Certificate.
    *4.2      Specimen Common Stock Purchase Warrant.
    *5.1      Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. as to the legality of the shares being registered.
    10.1      Form of the Registrant's Employee Confidentiality and
              Inventions Agreement.
    10.2      Form of Registrant's Advisory Board Confidentiality and
              Inventions Agreement.
    10.3      Amended and Restated Executive Employment Agreement between
              the Registrant and Eberhard Schoneburg, dated as of
              September 1, 1998.
    10.4      Employment Agreement between the Registrant and Robert
              Pantano, dated as of May 1, 1998.
    10.5      Employment Agreement between the Registrant and Klaus Kater,
              dated as of May 1, 1998.
    10.6      Lease Agreement, dated February 6, 1995, between the
              Registrant and Copley Place Associates Nominee Corporation.
    10.7      Lease Amendment No. 1, dated July 27, 1995, between the
              Registrant and Copley Place Associates Nominee Corporation.
    10.8      Lease Amendment No. 2, dated February 27, 1997, between the
              Registrant and Copley Place Associates Nominee Corporation.
    10.9      Consortium Agreement, dated October 10, 1995, between the
              Registrant and Massachusetts Institute of Technology.
  *10.10      1998 Equity Incentive Plan.
   10.11      Form of Subscription Agreement, dated June 1998, between the
              Registrant, Eberhard Schoneburg and the purchaser of
              1,000,000 shares of Common Stock and the purchasers of an
              aggregate of 130,000 shares of Non-Voting Common Stock.
   10.12      Form of Subscription Agreement dated September 23, 1998
              between the Registrant and the purchasers of 824,000 shares
              of Common Stock.
   10.13      Form of Amendment and Confidential Offering Supplement,
              dated September 23, 1998.
    23.1      Consent of Wolf & Company, P.C.
   *23.2      Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. (See Exhibit 5.1).
    24.1      Power of attorney (included on the signature page hereto).
    27.1      Financial Data Schedule
    99.1      Consent of Hartmut Bergmann
---------------
* To be filed by amendment.
 
ITEM 17.  UNDERTAKINGS
 
     (a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" above, or otherwise, the
                                      II-3
78
 
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
     (b) The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
     (c) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     (d) The undersigned registrant hereby undertakes:
 
          (1) To file, during any period in which offers or sales are being
     made, a post-effective amendment to this registration statement:
 
          (i) To include any prospectus required by Section 10(a)(3) of the
     Securities Act of 1933;
 
          (ii) To reflect in the prospectus any facts or events arising after
     the effective date of the registration statement (or the most recent
     post-effective amendment thereof) which, individually or in the aggregate,
     represent a fundamental change in the information set forth in the
     registration statement. Notwithstanding the foregoing, any increase or
     decrease in volume of securities offered (if the total dollar value of
     securities offered would not exceed that which was registered) and any
     deviation from the low or high end of the estimated maximum offering range
     may be reflected in the form of prospectus filed with the Commission
     pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
     price represent no more than a 20 percent change in the maximum aggregate
     offering price set forth in the "Calculation of Registration Fee" table in
     the effective registration statement;
 
          (iii) To include any material information with respect to the plan of
     distribution not previously disclosed in the registration statement or any
     material change to such information in the registration statement;"
 
          (2) That, for the purpose of determining any liability under the
     Securities Act of 1933, each such post-effective amendment shall be deemed
     to be a new registration statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof.
 
          (3) To remove from registration by means of a post-effective amendment
     any of the securities being registered which remain unsold at the
     termination of the offering.
 
                                      II-4
79
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts, on September 29, 1998.
 
                                          ARTIFICIAL LIFE, INC.
 
                                          By: /s/ EBERHARD SCHONEBURG
 
                                            ------------------------------------
                                            Eberhard Schoneburg
                                            President and Chief Executive
                                             Officer
 
                               POWER OF ATTORNEY
 
     We the undersigned officers and directors of Artificial Life, Inc., hereby
severally constitute and appoint Eberhard Schoneburg and Robert Pantano, and
each of them singly (with full power to each of them to act alone), our true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement (or any other Registration Statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE                                  TITLE                     DATE
                     ---------                                  -----                     ----
/s/ EBERHARD SCHONEBURG                President, Chief Executive    September 29, 1998
---------------------------------------------------  Officer and Director
                Eberhard Schoneburg                  (Principal executive
                                                     officer)
 
                /s/ ROBERT PANTANO                   Chief Financial Officer       September 29, 1998
---------------------------------------------------  (Principal financial and
                  Robert Pantano                     accounting officer)
 
                 /s/ BRUNO GABRIEL                   Director                      September 26, 1998
---------------------------------------------------
                   Bruno Gabriel
 
              /s/ ELMAR WOHLGENSINGER                Director                      September 26, 1998
---------------------------------------------------
                Elmar Wohlgensinger
II-5
80
 
                                 EXHIBIT INDEX
SEQUENTIALLY
                                                                              NUMBERED
EXHIBIT NO.                           DESCRIPTION                              PAGES
-----------                           -----------                           ------------
*1.1       Form of Underwriting Agreement..............................
    3.1       Amended and Restated Certificate of Incorporation of the
              Registrant..................................................
   *3.2       Form of Restated Certificate of Incorporation of the
              Registrant to be filed prior to the closing of this
              Offering....................................................
    3.3       Bylaws of the Registrant....................................
   *3.4       Form of Restated Bylaws of the Registrant to become
              effective immediately prior to the closing of this
              Offering....................................................
   *4.1       Specimen Common Stock Certificate...........................
   *4.2       Specimen Common Stock Purchase Warrant......................
   *5.1       Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. as to the legality of the shares being registered......
   10.1       Form of the Registrant's Employee Confidentiality and
              Inventions Agreement........................................
   10.2       Form of Registrant's Advisory Board Confidentiality and
              Inventions Agreement........................................
   10.3       Amended and Restated Executive Employment Agreement between
              the Registrant and Eberhard Schoneburg, dated as of
              September 1, 1998...........................................
   10.4       Employment Agreement between the Registrant and Robert
              Pantano, dated as of May 1, 1998............................
   10.5       Employment Agreement between the Registrant and Klaus Kater,
              dated as of May 1, 1998.....................................
   10.6       Lease Agreement, dated February 6, 1995, between the
              Registrant and Copley Place Associates Nominee
              Corporation.................................................
   10.7       Lease Amendment No. 1, dated July 27, 1995, between the
              Registrant and Copley Place Associates Nominee
              Corporation.................................................
   10.8       Lease Amendment No. 2, dated February 27, 1997, between the
              Registrant and Copley Place Associates Nominee
              Corporation.................................................
   10.9       Consortium Agreement, dated October 10, 1995, between the
              Registrant and Massachusetts Institute of Technology........
 *10.10       1998 Equity Incentive Plan..................................
  10.11       Form of Subscription Agreement, dated June 1998, between the
              Registrant, Eberhard Schoneburg and the purchaser of
              1,000,000 shares of Common Stock and the purchasers of an
              aggregate of 130,000 shares of Non-Voting Common Stock......
  10.12       Form of Subscription Agreement, dated September 23, 1998,
              between the Registrant and the purchasers of 824,000 shares
              of Common Stock.............................................
  10.13       Form of Amendment and Confidential Offering Supplement,
              dated September 23, 1998....................................
   23.1       Consent of Wolf & Company, P.C. ............................
  *23.2       Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
              P.C. (See Exhibit 5.1)......................................
   24.1       Power of attorney (included on the signature page hereto)...
   27.1       Financial Data Schedule.....................................
   99.1       Consent of Hartmut Bergmann.................................
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* To be filed by amendment.