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

                                   FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

                  For the Fiscal Year Ended: December 31, 2001

[ ]      Transition Report UNDER Section 13 or 15 (d) of the Securities Exchange
         Act of 1934

For the Transition Period from _______________ to _______________

                        Commission File Number: 333-16031

                            FRONT PORCH DIGITAL INC.
        (Exact name of small business issuer as specified in its charter)

                 Nevada                                    86-0793960
----------------------------------------       -------------------------------
      (State or other jurisdiction                      (IRS employer
   of incorporation or organization)                 identification no.)

     20000 Horizon Way, Suite 120
        Mount Laurel, New Jersey                            08054
----------------------------------------       -------------------------------
(Address of principal executive offices)                  (Zip Code)

                                 (856) 439-9950
                                 --------------
                (Issuer's telephone number, including area code)

    Securities registered pursuant to             Name of each exchange on
     Section 12(b) of the Act:  None          which registered:  Not Applicable

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, par value $.001
          ------------------------------------------------------------
                                (Title of Class)

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

Yes  X    No
    ---      --

Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Revenues for the fiscal year ended December 31, 2001 were $1,132,154.

The aggregate market value of shares of the Company's common stock held by
non-affiliates as of March 28, 2002 was $14,089,000 based upon the average bid
and asked prices of the Company's common stock on the OTC Bulletin Board on
March 28, 2002. Shares of common stock held by each executive officer and
director and by each person who beneficially owns more than 5% of the
outstanding common stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.

As of March 28, 2002, there were 26,474,176 shares of common stock of the
registrant outstanding. The registrant's common stock currently trades on the
OTC Bulletin Board under the symbol "FPDI."

Transitional Small Business Disclosure Format (Check one):  Yes      No  X
                                                               ---      ---

                                        1


<PAGE>

         WHEN USED IN THIS REPORT, THE WORDS "BELIEVES", "ANTICIPATES",
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.

         THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS ARE AFFECTED BY A WIDE
VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY AND
ITS ACTUAL RESULTS, INCLUDING, BUT NOT LIMITED TO: (1) THE AVAILABILITY OF
ADDITIONAL FUNDS TO ENABLE THE COMPANY TO SUCCESSFULLY PURSUE ITS BUSINESS PLAN;
(2) THE UNCERTAINTIES RELATED TO THE EFFECTIVENESS OF THE COMPANY'S TECHNOLOGIES
AND THE DEVELOPMENT OF ITS PRODUCTS AND SERVICES; (3) THE COMPANY'S ABILITY TO
MAINTAIN, ATTRACT AND INTEGRATE MANAGEMENT PERSONNEL; (4) THE ABILITY OF THE
COMPANY TO COMPLETE THE DEVELOPMENT OF ITS PROPOSED PRODUCTS IN A TIMELY MANNER;
(5) THE COMPANY'S ABILITY TO EFFECTIVELY MARKET AND SELL ITS PRODUCTS AND
SERVICES TO CURRENT AND NEW CUSTOMERS; (6) THE COMPANY'S ABILITY TO NEGOTIATE
AND MAINTAIN SUITABLE STRATEGIC PARTNERSHIPS AND CORPORATE RELATIONSHIPS; (7)
THE INTENSITY OF COMPETITION; AND (8) GENERAL ECONOMIC CONDITIONS. AS A RESULT
OF THESE AND OTHER FACTORS, THE COMPANY MAY EXPERIENCE MATERIAL FLUCTUATIONS IN
FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY
AND ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND
STOCK PRICE.

         THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

         Front Porch Digital Inc. is a leader in the conversion, preservation
and management of analog and digital content, including text, images, audio,
graphics, video and rich media. The Company has developed proprietary software
products and performs services that convert content into digital formats for
subsequent storage and on-demand delivery in the same or other formats or
digital platforms. This software, based on proprietary and patent-pending
technology, enables a new paradigm in the way broadcasters, content owners, and
medical, education and law enforcement personnel manage their workflow - a shift
from tape-oriented warehousing to a fully-digital, instant access automated
archive. With additional expertise in providing onsite, offline data management
services for tape and optical assets, the Company believes it is uniquely
positioned to enable clients to preserve, protect and manage information assets.

DIGITAL MEDIA SOLUTION

         The Company has developed proprietary and patent-pending technologies
and methodologies that address the large and rapidly expanding market for
converting, managing and distributing digital audio, video and other rich media
content. Management believes its end-to-end software-based solution is unique in
the industry as it enables the large-scale conversion of analog or digital video
to a broadcast quality, standards-based digital format for storage and
re-purposing using only a single capture of content. The Company's solution is
an adaptable and scalable system that simplifies the client's workflow, reduces
production costs and enables new revenue streams.

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<PAGE>

         Compared to traditional hardware-based production models that are
costly and difficult to scale and that typically require multiple captures of
the source material to convert content, the Company's software-based production
model decouples the processes of capture, compression, indexing, archiving and
delivery. Once content is captured, it is encoded into a broadcast quality
digital master that can be converted into one or many formats of the client's
choice on demand, without any additional captures from the source material. With
content digitized and stored in a digital media archive system, clients gain the
ability to catalog, index, browse, format, archive and distribute content easily
and cost-effectively via multiple digital delivery platforms, including
broadband, Internet/intranet, broadcast/cable/satellite television, ATV/HDTV and
DVD. Through compression and other process techniques, the Company's solution
also minimizes clients' digital media storage requirements.

         The Company believes the inevitable movement toward the digitization of
content will significantly increase the demand for services and software that
enable the conversion of content to formats that are viable for digital storage
and distribution. According to Perey Research, the entire streaming media
market, which includes content conversion (capture, hardware and software
infrastructure), network access and transport services, and related services,
such as installation and support, will reach $22 billion per year by 2004.
Several factors spanning industry segments, applications and horizontal and
vertical markets are driving growth in the digital marketplace, including:

o  Technological change and media obsolescence.
o  Demand for new applications.
o  Entertainment and media.
o  E-Learning / Distance learning.
o  Streaming media.
o  Demand for Broadband and Video-on-Demand (VOD).
o  Document and Image Management.

Management believes these factors provide a significant opportunity for the
Company to convert non-digitized content to digital formats that may then easily
be accessed, browsed, indexed, managed and distributed, as well as to
redistribute current content that is already in a digitized format.

ENTERPRISE DATA MEDIA SOLUTION

         The Company's enterprise data media solutions (EDMS) group has over ten
years experience in performing large-scale tape and optical data archive,
conversion and storage engagements for Fortune 1000 companies and governmental
agencies. The EDMS group differentiates itself by developing software solutions
that enable conversions to be completed in a highly-automated and cost-effective
manner either on the client's premises or offsite in the Company's secure
production facility. Performing offline conversions, which is believed to be a
unique competency of the Company, avoids over-burdening a client's IT systems
and employees, and accelerates the conversion process, providing reduced costs
and improved productivity. The EDMS group has further reverse-engineered data
storage and compression algorithms for numerous Fortune 1000 companies that
would otherwise be dependent on proprietary, and thus frequently very costly,
vendor solutions.

         The EDMS group has also developed particular expertise and core
competencies in the management of data within three key applications that depend
heavily on information accessibility, availability, protection and distribution:
check imaging, medical imaging and document management, as well as the
extraction and migration of data stored on optical platters.

         Representative customers of the EDMS group have included Bank of
America, Fleet Bank, PNC Bank, State of Washington, US Census Bureau, Zurich
Insurance, First Union Financial, Intel, State of Ohio, University of Colorado
and Wells Fargo.


                                        3
<PAGE>

         It is estimated that over 85% of the cumulatively stored data in the
world today is in non-digitized formats, such as film, microfiche or analog
tape. Further, driven by a rapid increase in information gathering, as well as
the need for quicker access tools for the collection, retrieval, analysis and
management of this information, companies that have previously used film,
microfiche and analog audio, video, and tape, are increasingly digitizing and
storing their data in digital formats. Other significant market drivers
accelerating the movement towards the digitization of information include
shortened technology lifecycles and device obsolescence, the eminent degradation
of storage media and regulatory requirements, as well as the potential risk of
system failures causing downtime or data loss.

The movement toward the digitization of data creates an enormous increase in the
demand for digital storage. International Data Corporation (IDC) forecasts that
spending for worldwide storage services will exceed $40 billion in 2003.
Management believes these trends provide a significant opportunity for the
Company.

BUSINESS STRATEGY

         The Company's strategy is to establish itself as a leading product and
service provider in the emerging market for digital information asset
management, including the conversion and formatting of text, images, audio,
graphics and video from any format to any other format, for access via any
digital platform, including broadband, Internet, DVD and HDTV.

         The Company seeks to capitalize on its proprietary technologies and the
breadth of its service offerings, which it believes are the most comprehensive
offered by any digital information asset management company, to become the
preferred provider of information management products and services to large
corporate and governmental agencies worldwide. To accomplish its goals, the
Company intends to execute the following:

      o     Adapt its enterprise data media service offerings and package future
            digital media products and services for distribution primarily
            through strategic partners via licensing and/or reseller agreements.
            Supporting collateral materials, product training programs and
            customer service and support systems are being developed in
            conjunction with the service offerings to support the Company's
            distribution strategy.

      o     Extend migration and conversion service offerings to generate
            recurring revenue streams by providing ongoing digital information
            asset management services. These products and services will be
            offered directly by the Company or indirectly through partners
            and/or through licensing programs.

      o     Rapidly develop distribution channels by expanding strategic
            alliance partnerships that leverage the partners' established market
            presences, leading to accelerated revenue growth and extended sales
            opportunities to both the Company and the partner.

      o     Orient strategic partners, selected on the basis of synergistic
            products and services, toward selected tier one systems integrators,
            hardware manufacturers, entertainment, media, content management,
            storage, software companies and other organizations. Management
            believes strategic partners will want to resell the Company's
            products and services because they enhance the partner's value
            proposition to customers and extend the partner's revenue potential.

      o     Add sales and marketing teams to support the Company's partnering
            strategy and to execute direct selling activities in selected
            vertical markets.

      o     Develop comprehensive marketing, promotional and other cooperative
            sales support programs on a corporate-wide and direct-channel basis.
            In conjunction with these programs, the Company is developing
            product-positioning strategies to support market penetration of the
            Company's products and services and adoption of its intellectual
            property as an industry standard.


                                        4
<PAGE>

      o     Foster public awareness of both the Company and the significant
            issues associated with digital asset management by co-sponsoring
            seminars, symposia and industry events, and presenting original
            materials at user conferences, technical symposia and standards
            forums.

      o     Scale internal delivery capabilities by adding certified project
            managers or, in some cases, strategic partners with delivery and
            project management service capabilities and resources. Partners with
            these capabilities will likely be used in establishing initial
            distribution channels outside the United States.

      o     Launch initial digital media products and continue to develop highly
            flexible, software driven products. Unlike competing hardware-based
            products, the Company's software-based solutions easily accommodate
            new features, are re-configurable to conform to other system
            interfaces and are believed to be less costly to produce, deliver
            and operate.

      o     Continue to develop intellectual property assets to support domestic
            and international expansion through enhanced product offerings. The
            Company intends to disseminate its intellectual property within a
            protected but open environment to encourage the adoption of its
            intellectual property as an industry standard.

RESEARCH AND DEVELOPMENT

         The Company maintains a research and software development staff that
designs and develops the Company's new products and services. The Company
believes that by performing most of its own software development, it can more
quickly and cost-effectively introduce new and innovative technologies and
services. In addition, the Company believes it will be better equipped to
incorporate customer preferences into its development plans.

         The Company utilizes and builds upon existing intellectual property in
digital media management and distribution and digital multimedia areas. In the
area of digital media software, the Company is working on the development of
original intellectual property tools that address application programming
interfaces (APIs) for tape media, optical disk, tape and optical libraries and
autoloaders, tape images on disk, tape and disk operational classes, components
and test utilities. The Company is also working on the development of digital
audiovisual software and storage and streaming applications covering DVD,
Internet/Intranet, digital cable, broadcast digital television, datacasting and
wireless transmission.

         The Company intends to create products that are complementary to the
products of its strategic partners and to provide core technologies that have
not been applied to products in other fields. In all cases, the Company will
attempt to develop products that are standards based, have a proven strong
market need and are based on the following architectural principles:

      o     Software Paradigm - Avoids high capital costs and is flexible,
            scalable and easily automated, adaptable, re-configurable and
            upgradeable.

      o     Modularity - All processes associated with capture, compression,
            storage and distribution are de-coupled, allowing for distributed
            processing, easier maintenance and upgrades.

      o     Platform Independence - Offer key core technologies and software
            that utilize vendor-independent hardware platforms.

      o     Process Functionality - Provide products that promote an automated
            and seamless interchange of data among the various processes from
            conversion through distribution.


                                        5
<PAGE>

         Developing new technology, products and services is complex and
involves uncertainties. There can be no assurance that the Company's development
efforts will be successful.

         For the year ended December 31, 2001, the Company incurred $657,000 of
research and development expenses. For the period ended December 31, 2000, the
Company incurred $296,000 of research and development expenses.

MARKETING AND DISTRIBUTION

         The Company's solutions are primarily targeted toward tier one
enterprises in nine target market segments worldwide. The Company intends to
focus its direct sales forces on the leading organizations in these sectors and
will attempt to develop a significant indirect marketing channel to reach the
middle and lower tier segments. The Company's business strategy is based on
building global sales channels, with a focused approach on partnering with media
manufacturers and suppliers, storage and server hardware manufacturers and
vendors, master resellers and value-added distributors and systems integrators.

         The Company intends to pursue co-marketing relationships with regional
distribution partners to drive regional and local market penetration, or
market-specific regional marketing partners to drive vertical market
penetration. With partners, the Company will attempt to foster public awareness
by co-sponsoring seminars, sponsoring symposia and industry events, and
presenting original material at user conferences, technical symposia and
standards forums.

CUSTOMERS

         The Company's recently-acquired EDMS group has an established customer
base of over 600 worldwide companies and government agencies. Combined with the
customer base of the recently introduced Digital Media Solution the Company's
customers span a broad spectrum of disciplines, including financial
institutions, utilities, engineering, manufacturing, energy, entertainment,
education, law enforcement, and governmental agencies.

         In 2001, revenue from a large national bank accounted for 46% of the
Company's total revenue, while Storage Technology Corporation ("Storagetek") and
a third customer accounted for 17% and 16%, respectively. In 2000, revenue from
StorageTek accounted for 46% of the Company's total revenue, and two other
customers each accounted for 14%. Revenue from these customers are not
considered to be significant recurring sources of revenue for the Company.

PATENTS, TRADEMARKS AND LICENSES

         The Company currently does not hold any issued patents. However, the
Company is pursuing patents on key enabling architectures, algorithms and
processes that encompass fundamental technologies associated with the
compression, storage and transcoding of digital data formats. The Company
regards its technology as proprietary and will attempt to protect its technology
through patents, copyrights, trade secret laws, restrictions on disclosure and
other methods.

         Although the Company intends to continue to apply for patents, there
can be no assurance that such patents will be issued or that, when issued, they
will cover all aspects of the product or system to which they relate or that
they will not be infringed upon by third parties. Management believes the
Company's success depends more on its ability to maintain state-of-the-art
technology and to market its products on a price-competitive and value-added
basis than on any legal protection that patents may provide.

         The Company relies on trade secrets, know-how and other unpatented
proprietary information in its business. Certain key employees of the Company
are required to enter into confidentiality and non-competition agreements.
However, there is no assurance that these agreements would be enforceable if
they are breached or, if enforced, that they would adequately protect the
Company or provide an adequate remedy for the damages that may be caused by such
a breach.


                                        6
<PAGE>

COMPETITION

         The markets for the Company's products and services are becoming
increasingly competitive. The Company believes that its ability to compete
depends on a number of factors, both within and outside of its control. These
factors include, among others, the functionality, price and performance of the
Company's products and services relative to its competitors' offerings, customer
satisfaction and customer support capabilities, the breadth of product lines and
support services and general economic and business conditions. The Company
expects additional companies to begin offering similar products and services.
Many of these companies have significantly greater financial resources than the
Company.

         The Company expects its competitors to continue to improve the design
and performance of their products. Competitors may develop future generations of
competitive products that will offer superior price or performance features or
technologies that may render the Company's products or services less competitive
or obsolete. Increased competitive pressures could also lead to lower prices for
the Company's products or services, thereby adversely affecting the Company's
business and results of operations.

         The Company's primary competition comes from customers' in-house IT
departments, which may choose a "do-it-yourself" approach. Management expects
that in-house competition will continue to be significant. There are, however,
other vendors and service providers that compete with the Company. However,
management believes the solutions currently offered by these vendors are limited
in scope and fragmented relative to the products and services offered by the
Company.

EMPLOYEES

         As of March 29, 2002, the Company employed 25 persons on a full-time
basis, of which four were executive management, three were in finance and
administration, four were in sales and marketing, seven were in research and
development, and seven were in engineering and delivery.

         None of the Company's employees is subject to a collective bargaining
agreement and the Company is not aware of any efforts to unionize any employees.
The Company believes its labor relations are good.

DEVELOPMENT OF BUSINESS

         On May 2, 2000, the Company acquired 100% of the outstanding equity
securities of Front Porch Digital Inc., a Delaware corporation formed in
February 2000 ("Front Porch"). Because the Company conducted no business
operations and had only nominal assets prior to such acquisition, this
transaction is commonly referred to as a "reverse acquisition" in which all of
the capital stock of Front Porch was effectively exchanged for a controlling
interest in the Company, which was a publicly-held "shell" corporation. In
connection with that transaction, the Company changed its name to Front Porch
Digital Inc.

         In October 2000, the Company acquired the media services group of
StorageTek. In connection with this acquisition, the Company acquired
intellectual property, fixed assets and the majority of the personnel of such
group. This acquisition enabled the Company to commence operations in its
current line of business.


                                        7
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

         The Company's executive offices are located in Mount Laurel, New Jersey
where the Company leases 4,000 square feet of office space through September
2006. The New Jersey site also includes the digital media solutions group and
research and development facilities, as well as most of the infrastructure
functions, including financial accounting, purchasing, and facilities and
information management systems. The Company also leases 23,000 square feet of
office and production space in Houston, Texas through August 2004 for the
Enterprise Data Media Solutions group and delivery service operations.

         At December 31, 2001, aggregate lease payments under the Mount Laurel,
New Jersey and Houston, Texas leases through the end of the lease terms were
$220,000 and $307,000, respectively.

ITEM 3. LEGAL PROCEEDINGS

The Company is not subject to any material legal proceedings.

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

None

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock is currently quoted on the OTC Bulletin
Board under the symbol "FPDI." Prior to May 2, 2000, the date on which the
reverse acquisition with Front Porch occurred, the Company's common stock traded
under the symbol EICM and there was no active market for trading of the
Company's common stock. The following table sets forth the high and low bid
prices for the Company's common stock for each fiscal quarter beginning May 2000
through December 31, 2001 as reported by the National Quotation Bureau.

         The prices set forth below represent interdealer quotations, without
retail markup, markdown or commission and may not be reflective of actual
transactions.

          Period ended December 31, 2000                HIGH BID    LOW BID
                                                        --------    -------
          Second Quarter (beginning on May 2, 2000)      $7.75       $1.00
          Third Quarter ..............................    9.31        3.44
          Fourth Quarter .............................    6.19        3.22

          Year ended December 31, 2001

          First Quarter ..............................   $4.19       $2.97
          Second Quarter .............................    3.98        1.83
          Third Quarter ..............................    2.95        1.05
          Fourth Quarter .............................    1.50        0.40


                                        8
<PAGE>

         At December 31, 2001, there were 475 record holders of the Company's
common stock. This number excludes any estimate by the Company of the number of
beneficial owners of shares held in street name, the accuracy of which cannot be
guaranteed.

         The Company has not paid cash dividends on any class of common equity
since formation and the Company does not anticipate paying any dividends on its
outstanding common stock in the foreseeable future.

         For those investors who participated in the Company's initial private
placement during 2000, in November 2001, the Company offered for each share
purchased in that private placement, a two-year warrant to purchase one share of
common stock at $.50 per share in exchange for the agreement of such investors
to restrict the transfer of the original shares through October 31, 2002. During
2002, 1,089,550 warrants were issued in conjunction with this offer.

         For those investors who participated in the Company's private placement
during 2001, in November 2001, the Company offered for each share and warrant
purchased in that private placement, an additional 1.666 shares of the Company's
unregistered common stock in exchange for the return and cancellation of one
warrant. During 2002, 645,575 shares were issued and 387,500 warrants were
canceled in conjunction with this offer.

         In March 2002, the Company issued 100,000 shares of unregistered common
stock to Jean Reiczyk, the Company's former Chairman and Chief Executive Officer
in lieu of salary and in satisfaction of amounts owed to him.

         In March 2002, in conjunction with the termination of the consulting
agreement with the Armand Group, Inc. the Company has agreed to issue 100,000
shares of unregistered common stock to the Armand Group, Inc.

         In March 2002, the Company issued 400,000 shares of unregistered common
stock to an individual investor upon which the Company received aggregate
proceeds of $50,000.

         In March and April 2002, the Company issued $500,000 aggregate
principal amount of convertible secured notes to two investors. The notes have a
one year term, bear interest at the rate of 7% per annum, which is payable on a
quarterly basis, and are secured by all assets of the Company. The notes are
convertible into a number of shares of common stock of the Company equal to 14%
of the outstanding shares of common stock at any time at the option of the note
holders, subject to certain anti-dilution adjustments for the one-year term.


                                        9
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE
PERIOD ENDED DECEMBER 31, 2000

         Prior to May 2, 2000, the Company generated no significant revenue and
accumulated no significant assets. On May 2, 2000, the Company acquired 100% of
the outstanding equity securities of Front Porch. This transaction was commonly
referred to as a "reverse acquisition" in which all of the capital stock of
Front Porch was effectively exchanged for a controlling interest in the Company,
which was a publicly-held "shell" corporation. For financial reporting purposes,
Front Porch was considered the acquirer in such transaction. As a result, the
historical operating results of the Company for any period prior to May 2, 2000
are not presented. The following information includes the results of operations
of Front Porch for the period beginning February 1, 2000.

         The following discussion and analysis of financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that offset the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. These estimates are based on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

         REVENUE. Total revenue for the current year of $1.1 million is an
increase of $933,000, or 468%, compared to total revenue of $199,000 for the
period ended December 31, 2000. This increase is attributable to the revenue
generated from the provision of data and video conversion services, which has
increased $743,000, or 599%, over the year ago period due to several data
conversion engagements that began in the third and fourth quarters of 2001. In
addition, revenue from the sale of software and related products for the current
year has increased $190,000, or 253%, over the year ago period due to the
introduction of the Company's suite of video software solutions late in the
third quarter of 2001. Substantially all of the Company's revenue has been
derived from customers in the United States.

         GROSS MARGIN. The gross margin of $175,000, or 20% of service revenue,
generated from the provision of data and video conversion services during the
current year was below the Company's anticipated gross margin due to the excess
capacity that existed within the Company's service delivery function through the
middle of the third quarter of 2001, when several new data conversion
engagements began, increasing the utilization of this function. As a result, the
gross margin from these conversion services as a percentage of service revenue
for the first and second quarters of 2001 was negative (107%) compared to 65%
for the third and fourth quarters of 2001. The negative gross margin of
$(83,000), or (67%) of service revenue, generated from the provision of data and
video conversion services during the year ago period was primarily attributable
to one significant project that was implemented using a new methodology which
resulted in additional development time.

         For the year ended December 31, 2001, sales of software and related
products resulted in gross margins of $141,000, or 53% of product revenue,
compared to $28,000, or 37%, for the period ended December 31, 2000. This
increase is due to the introduction of the Company's suite of video software
solutions late in the third quarter of 2001. The Company plans to increase
substantially its sales of software and related products, and therefore expects
expenses in this category also to increase substantially.


                                       10
<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the year ended December 31, 2001 were $5.3
million compared to $2.6 million for the period ended December 31, 2000. The
increase in these expenses was primarily related to SG&A expenses of the media
services operations, which was acquired in October 2000, the addition of several
key senior managers, and the creation of a sales and marketing department. SG&A
expenses for the year ended December 31, 2001 consisted of $3.6 million for
salaries and related benefits for employees not directly related to the
production of revenue, $583,000 in professional fees, $456,000 for general
office expenses, $315,000 for travel, and $307,000 of facilities costs. SG&A
expenses for the period ended December 31, 2000 consisted of $1.3 million for
salaries and related benefits for employees not directly related to the
production of revenue, $516,000 in professional fees, $350,000 for general
office expenses, $186,000 for travel, $135,000 for leased equipment and $127,000
of facilities costs. Should the Company secure additional funding, it plans to
increase its sales and marketing efforts and, to a lesser extent, to continue to
build its infrastructure and, therefore, expects expenses in this category to
increase significantly.

         RESEARCH AND DEVELOPMENT. The Company maintains a software development
staff that designs and develops the Company's new products and services. The
Company believes that by performing most of its own software development, it can
more quickly and cost-effectively introduce new and innovative technologies and
services. In addition, the Company believes it will be better equipped to
incorporate customer preferences into its development plans. During the fourth
quarter of 2000, the Company began to devote more resources to the development
of software tools and products that facilitate the conversion and migration of
data from legacy media to current technology, convert analog content to multiple
digital formats, and manage and reformat digital content on demand. As a result,
research and development expenses have increased to $657,000 for the year ended
December 31, 2001 from $296,000 for the period ended December 31, 2000.

         DEPRECIATION AND AMORTIZATION. Amortization expense consists of
amortization of the excess cost of the media services operations over the fair
value of the net assets acquired and other intangible assets. Depreciation
expense consists of depreciation of furniture, equipment, software and
improvements. Depreciation and amortization expense was $2.5 million for the
year ended December 31, 2001 and $405,000 for the period ended December 31,
2000. The increase in these expenses was primarily attributable to the
additional assets acquired in conjunction with the acquisition of the media
services operations in October 2000. In addition, during the fourth quarter of
2001, the Company revised its estimate of expected future cash flows from
operations of the acquired business and recorded a charge of $865,000 to reflect
the excess cost over fair value of assets acquired at its estimated fair value.

         EVALUATION OF INTANGIBLES. The Company periodically evaluates the value
and future benefits of its intangibles. The Company assesses recoverability from
future operations using cash flows from operations of the related acquired
business as a measure. Under this approach, the carrying value would be reduced
if the Company's best estimate of expected future cash flows of the related
business, discounted using the current risk-free rate, would be less than the
carrying amount of the intangibles over the remaining amortization period. In
the fourth quarter of 2001, the Company revised its estimate of expected future
cash flows from operations of the acquired business and recorded a charge of
$865,000 to reflect the excess cost over fair value of assets acquired at its
estimated fair value. For the period ended December 31, 2000, there was no
adjustment to the carrying amount of intangibles resulting from these
evaluations.


                                       11
<PAGE>

         CONSULTING EXPENSES. For the period ended December 31, 2000, total
consulting expense of $4.8 million consisted of a non-cash charge of $1.2
million recorded in connection with the issuance of 964,362 shares of common
stock, $3.1 million recorded in connection with the issuance of warrants to
purchase 3,324,696 shares of common stock of the Company, and $524,000 incurred
under a consulting agreement. This consultant rendered no consulting services
during the year ended December 31, 2001.

         INTEREST EXPENSE. Interest expense was $18,000 for the year ended
December 31, 2001 compared to $41,000 for the period ended December 31, 2000.
Interest expense represented interest on notes payable for money borrowed during
2000. The Company received $800,000 from these notes, of which $600,000 was
repaid during 2000. The outstanding balance on these notes was $200,000 as of
December 31, 2001 and 2000.

         OTHER EXPENSES. During 2000, the Company purchased 300,000 shares of
convertible preferred stock and warrants to purchase 100,020 shares of common
stock in a recently established technology company for $300,000. This technology
company was unable to obtain sufficient capital and ceased operations during
2001. During the period ended December 31, 2000 the Company wrote off this
investment of $300,000, which is included in other expenses in the statement of
operations.

         Other expenses for 2000 also included a break-up fee and legal
expenses, aggregating $245,000, which was incurred in connection with a proposed
acquisition. The Company terminated this proposed acquisition during 2000 and no
additional costs have been incurred in connection with this transaction.

         LOSS FROM OPERATIONS. During the year ended December 31, 2001, the
Company incurred a loss from operations of $8.1 million. The loss was primarily
the result of $5.3 million in selling, general and administrative expenses
previously discussed. These expenses were incurred to continue the Company's
technology development and begin marketing the Company's new suite of video
software solutions.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2001, the Company had $393,000 of cash and cash
equivalents. Issuance of common stock has been a principal source of liquidity
for the Company. In July 2001, the Company completed a private placement of 30.3
units, each unit consisting of 25,000 shares of unregistered common stock and
warrants to purchase 25,000 shares of unregistered common stock at an exercise
price of $3.00 per share. These warrants expire on June 30, 2004. The Company
received aggregate proceeds of $1.5 million from this offering.

         In March 2002, the Company completed a private placement of 400,000
shares of unregistered common stock. The Company received aggregate proceeds of
$50,000 from this offering.

         In March and April 2002, the Company issued $500,000 aggregate
principal amount of convertible secured notes to two investors. The notes have a
one year term, bear interest at the rate of 7% per annum, which is payable on a
quarterly basis, and are secured by all assets of the Company. The notes are
convertible into a number of shares of common stock of the Company equal to 14%
of the outstanding shares of common stock at any time at the option of the note
holders, subject to certain anti-dilution adjustments for the one-year term. The
note holders were granted certain rights for the registration of these shares
under the Securities Act of 1933, as amended, which requires the Company to
register these shares on the earlier of April 2003, or upon the filing of
certain registration statements by the Company. The notes contain restrictions,
which, among others, prohibit the Company from issuing new debt, paying
creditors in excess of specified amounts, or prepaying the notes without the
consent of the note holders. In the event the Company raises $2.5 million of
equity capital, the Company may deposit into an escrow account an amount equal
to the outstanding principal and interest on the notes, at which time all
restrictions and liens on the assets of the Company will be released. Upon the
sale or liquidation of substantially all of the assets of the Company, or a
business combination in which a majority of the issued and outstanding Common
Stock of the Company is transferred, the note holders are entitled to receive
all outstanding principal and interest on the notes and a liquidation preference
equal to three times the amount of such outstanding principal and interest.


                                       12
<PAGE>

         The Company is in the early stages of executing its business strategy
and expects to begin numerous new engagements during the next 12 months. This
expansion is contingent upon several factors, including available cash
resources, the price of its products and services relative to its competitors,
and general economic and business conditions, among others.

         The current level of cash flows from operating activities are not
sufficient to enable the Company to continue to operate and to execute its
business strategy. As a result, the Company is seeking additional capital. In
the interim, the Company is managing its investments in infrastructure based on
its cash position and the near term cash flow generated from operations. The
Company anticipates having sufficient cash to continue operations into the third
quarter of 2002. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company's actual financial results
may differ materially from the stated plan of operations. Factors which may
cause a change from the Company's plan of operations vary, but include, without
limitation, decisions of the Company's management and board of directors not to
pursue the stated plan of operations based on its reassessment of the plan, and
general economic conditions. If the Company is successful in raising additional
capital, the Company anticipates that its operating expenses will increase over
the next 12 months as it accelerates execution of its business strategy. There
can be no assurance that additional capital will be available on terms that are
acceptable to the Company. Additionally, there can be no assurance that the
Company's business will generate cash flows at or above current levels.
Accordingly, the Company may choose to defer capital expenditure plans and
extend vendor payments for additional cash flow flexibility.

         During the year ended December 31, 2001, the gross margin generated
from the provision of data and video conversion services was below the Company's
anticipated gross margin due to the excess capacity that existed within the
Company's service delivery function through the middle of the third quarter of
2001. The Company currently has several engagements in progress and a pipeline
of potential business that Management believes will close during 2002. As a
result, the Company expects gross margins from the provision of conversion
services to increase during 2002.

         The Company expects capital expenditures to be approximately $1.0
million during the next twelve months. It is expected that the Company's
principal uses of cash will be to provide working capital and to finance capital
expenditures and for other general corporate purposes, including financing its
marketing strategy. The amount of spending in each respective area is dependent
upon the total capital available to the Company.

         As of December 31, 2001, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $569,000 and current assets of $826,000.
These assets were primarily derived from operations and the private placement
completed by the Company in July 2001. Long-term assets of $6.6 million
consisted of the excess of cost over fair value of the media services assets
acquired during 2000 of $3.7 million, software and intellectual property of $1.6
million and property and equipment of $1.2 million.

         Current liabilities of $3.2 million at December 31, 2001 consisted of
$1.1 million of accounts payable; $779,000 of deferred revenue, which consisted
of deposits and progress payments received on engagements currently in progress;
$474,000 of accrued expenses; $352,000 of accrued expenses to employees, of
which $168,000 was payable to an employee upon the closing of an offering that
raises gross proceeds of at least $5 million; $200,000 of notes payable due on
demand, $160,000 for the current portion of a note payable to an employee that
was assumed upon the acquisition of the media services operations and $146,000
of accrued vacation.

         The Company's working capital deficit was $2.4 million as of December
31, 2001 for the reasons described above.


                                       13
<PAGE>

         The Company used net cash of $2.9 million in operating activities
during the year ended December 31, 2001 and $2.2 million in operating activities
during the period ended December 31, 2000, primarily as a result of the net loss
incurred during the periods.

         The Company used net cash of $686,000 in investing activities during
the year ended December 31, 2001, of which $395,000 was used for capital
expenditures and $261,000 was used for the development of the Company's suite of
video software solutions. During the period ended December 31, 2000, the Company
used $813,000 in investing activities, of which $500,000 was used for capital
expenditures and $300,000 was used for an investment in a technology company
that has since ceased operations.

         Financing activities provided net cash of $1.5 million during the year
ended December 31, 2001 and $5.5 million during the period ended December 31,
2000, primarily due to the successful completion of private placements in July
2001 and October 2000, respectively.

FINANCIAL INSTRUMENTS

         A summary of the Company's estimated required payments for financial
instruments as of December 31, 2001 are presented below:

                                 2002      2003      2004      2005      2006
                               --------  --------  --------  --------  --------
Total debt                     $360,000  $160,000  $424,000      $-0-      $-0-
Operating lease obligations     180,000   167,000   124,000    51,000    38,000
                               --------  --------  --------  --------  --------
                               $540,000  $327,000  $548,000   $51,000   $38,000
                               ========  ========  ========  ========  ========

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets. The provisions of this statement
become effective for the Company beginning January 1, 2002 and are required to
be applied to all goodwill and other intangible assets recognized in the
Company's financial statements at the date of adoption. At that time, goodwill
will no longer be amortized, but will be tested for impairment annually.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of this statement would be reported as resulting
from a change in accounting principle. During the first half of 2002, the
Company will perform the first of the required impairment tests of goodwill. The
Company has not yet determined what effect, if any, this initial test will have
on the Company's financial position or results of operations. As a result of the
adoption of SFAS No. 142, all amortization of goodwill as a charge to earnings
($791,000 in 2001) will be eliminated.

ITEM 7. FINANCIAL STATEMENTS

         The report of independent auditors and the Company's financial
statements and associated notes are included in Part III, Item 13. of this
report beginning on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None


                                       14
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The following sets forth the name, age and position of each director
and executive officer of the Company as of March 29, 2002:

NAME               AGE    POSITION(S)
---------------    ---    -----------------------------
Donald Maggi       42     Chief Executive Officer and Director
Jay Yogeshwar      39     President and Chief Technology Officer
Kenneth Lynch      36     Controller and Chief Financial Officer
Giancarlo Gaggero  63     Senior Vice President of Media Technologies
Kenneth Beaudry    43     Senior Vice President of Worldwide Sales and Services
Daniel Coetsier    46     Director


All directors serve for one year and until their successors are elected and
qualified and, unless otherwise noted, have served as a director during the
entire fiscal year ended December 31, 2001 through the date of this report. All
officers serve at the pleasure of the Board of Directors. There are no family
relationships among any of the officers and directors.

MANAGEMENT AND BOARD OF DIRECTORS

Information concerning the executive officers and directors of the Company is
set forth below.

DONALD MAGGI. Mr. Maggi, a consultant to the Company, has been acting Chief
Executive Officer of the Company since December 2001 and a Director of the
Company since May 2000. Since February 1998, Mr. Maggi has been President and
principal shareholder of Intertainment, Inc., an interactive entertainment
service company that creates marketing and promotional opportunities for various
Fortune 500, entertainment and technology companies. From 1995 to December 1997,
Mr. Maggi was Vice President of Left Bank Organization, an entertainment
company.

DR. JAY YOGESHWAR. Dr. Yogeshwar has been President of the Company since October
2001 and Chief Technology Officer of the Company since October 2000. Dr.
Yogeshwar was a founder and the Chairman of the Board and Chief Executive
Officer of Front Porch, and became Chairman and Chief Executive Officer of the
Company in May 2000 in connection with the acquisition of Front Porch by the
Company. From 1996 to February 2000, Dr. Yogeshwar was Chief Executive Officer
and principal shareholder of Front Porch Video, Inc., a provider of system
design services to the digital media marketplace.

KENNETH LYNCH. Mr. Lynch has been Chief Financial Officer of the Company since
February 2002 and Controller of the Company since January 2001. From February
1997 to January 2001, Mr. Lynch was a Manager and Senior Manager with Ernst &
Young LLP.

DR. GIANCARLO GAGGERO. Dr. Gaggero has been Senior Vice President of Media
Technologies of the Company since October 2000. From December 1998 to October
2000, Dr. Gaggero was an Advisor to the Media Services Group of StorageTek,
which was acquired by the Company in October 2000. From 1987 to December 1998,
Dr. Gaggero was president and owner of Data Strategies International, Inc., a
software engineering and consulting company that was acquired by StorageTek in
December 1998.

KENNETH BEAUDRY. Mr. Beaudry has been Senior Vice President of Worldwide Sales
and Services of the Company since October 2000. From December 1997 to October
2000, Mr. Beaudry was Vice President, North American Professional and Technical
Services of StorageTek. From December 1995 to December 1997, Mr. Beaudry was
Director of Sales and Services, in the Western Region of StorageTek. Prior to
December of 1995, Mr. Beaudry was Regional Vice President of Support Services
for the Western Region for StorageTek.


                                       15
<PAGE>

DANIEL COETSIER. Mr. Coetsier has been a Director of the Company since December
2000. Since March 2001, Mr. Coetsier has been President of European Operations
at ManagedStorage International. From March 2000 to March 2001, Mr. Coetsier was
the President of ManagedStorage International. From December 1997 to March 2000,
Mr. Coetsier was General Manager of the European Solutions Business Group of
StorageTek. From June 1996 to November 1997, Mr. Coetsier was a Managing
Director of AT&T Corporation in its Added Value Services Business group. From
October 1995 to May 1996, Mr. Coetsier was a Program Director of AT&T
Corporation within the Added Value Services Business group.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10 percent shareholders are
required by the Securities and Exchange Commission to furnish the Company with
copies of all Section 16(a) forms they file.

         Based solely upon its review of the copies of such forms furnished to
it during the year ended December 31, 2001, and representations made by certain
persons subject to this obligation that such filings were not required to be
made, the Company believes that all reports required to be filed by these
individuals and persons under Section 16(a) were filed in a timely manner,
except for the Form 5 reports as follows (all such transactions have since been
reported to the SEC on Form 5 reports filed in March, 2002): Form 5 reports for
Jean Reiczyk (former Chairman of the Board of Directors and Chief Executive
Officer), Dr. Giancarlo Gaggero, Saeed Karim (former President and Chief
Operating Officer), Timothy Petry (former Chief Financial Officer), Kenneth
Beaudry, Dr. Jay Yogeshwar and Daniel Coetsier.

         Except as disclosed, the Company is not aware of any transactions in
its outstanding securities by or on behalf of any director, executive officer or
10 percent holder, which would require the filing of any report pursuant to
Section 16(a) during the year ended December 31, 2001 that has not been filed
with the Securities and Exchange Commission.


                                       16
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The following Summary Compensation Table sets forth compensation paid
by the Company for services rendered to each person who served as the Company's
Chief Executive Officer during the years ended December 31, 2001, 2000 and 1999,
and to the Company's four most highly compensated executive officers during the
years ended December 31, 2001, 2000 and 1999 other than the Chief Executive
Officer. The Company appointed Donald Maggi as acting Chief Executive Officer,
effective December 1, 2001. Jean Reiczyk served as Chairman and Chief Executive
Officer from October 3, 2000 through November 30, 2001.

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                          Long Term
                                                                                         Compensation
                                                           Annual Compensation              Awards
                                                 ------------------------------------    ------------
                                                                            Other         Securities
                                                                            Annual        Underlying        All Other
                                      Fiscal      Salary      Bonus      Compensation      Options/       Compensation
                                       Year        ($)         ($)            ($)          SARs (#)            ($)
                                      ------     --------    ---------   ------------    ------------     ------------
<S>                         <C>     <C>         <C>        <C>           <C>              <C>            <C>
Donald Maggi                   /1/     2001          $-0-         $-0-           $-0-              -0-            $-0-
  Chief Executive                      2000          $-0-         $-0-           $-0-              -0-            $-0-
  Officer                              1999          $-0-         $-0-           $-0-              -0-            $-0-

Jean Reiczyk                   /2/     2001      $ 86,667         $-0-           $-0-          636,188            $-0-
  Chairman and CEO                     2000          $-0-         $-0-           $-0-              -0-            $-0-
                                       1999          $-0-         $-0-           $-0-              -0-            $-0-

Jay Yogeshwar                  /3/     2001      $149,958         $-0-           $-0-           15,950            $-0-
  President/CTO                        2000      $104,167     $376,271           $-0-              -0-            $-0-
                                       1999          $-0-         $-0-           $-0-              -0-            $-0-

Susan M. Grant                /4/      2001          $-0-         $-0-           $-0-              -0-            $-0-
  President\CEO                        2000          $-0-         $-0-           $-0-              -0-            $-0-
                                       1999          $-0-         $-0-           $-0-              -0-            $-0-

Saeed Karim                    /5/     2001      $150,000         $-0-           $-0-          177,762        $194,000
  President\COO                        2000       $30,000         $-0-           $-0-          500,000            $-0-
                                       1999          $-0-         $-0-           $-0-              -0-            $-0-

Timothy Petry                  /6/     2001          $-0-         $-0-           $-0-              -0-            $-0-
  Chief Financial                      2000          $-0-         $-0-           $-0-              -0-            $-0-
  Officer                              1999          $-0-         $-0-           $-0-              -0-            $-0-

Giancarlo Gaggero              /7/     2001      $141,875      $50,000           $-0-           15,950            $-0-
  Sr VP Media                          2000       $32,981         $-0-       $211,899          250,000            $-0-
  Technologies                         1999          $-0-         $-0-           $-0-              -0-            $-0-

Kenneth Beaudry                /8/     2001      $159,333      $11,646           $-0-           17,013            $-0-
  Sr VP Worldwide                      2000       $26,667         $-0-           $-0-          400,000            $-0-
  Sales & Services                     1999          $-0-         $-0-           $-0-              -0-            $-0-
</TABLE>
---------------------


                                       17
<PAGE>

/1/   Mr. Maggi was appointed acting Chief Executive Officer effective December
1, 2001. Mr. Maggi is a shareholder in Intertainment, Inc. which is a consultant
to the Company. Mr. Maggi is not compensated directly by the Company. For the
year ended December 31, 2001, total consulting fees paid to Intertainment, Inc.
was $10,000. Intertainment, Inc. received no fees during 2000 or 1999.

/2/   Mr. Reiczyk is a member of Equity Pier LLC and prior to May 1, 2001 was a
consultant to the Company and was not compensated directly by the Company. For
the period ended December 31, 2000, total consulting expense of $4.8 million
paid to Equity Pier consisted of the non-cash charge of $1.2 million recorded in
connection with the issuance of 964,362 shares of common stock, the $3.1 million
expense recorded in connection with the issuance of warrants to purchase
3,324,696 shares of common stock of the Company, and $524,000 incurred under a
consulting agreement. Mr. Reiczyk's employment contract with the Company, which
became effective during 2001, provided for an annual salary of $250,000, and
options to purchase shares of the Company's common stock. Mr. Reiczyk resigned
from the Company effective November 30, 2001.

/3/   Dr. Yogeshwar served as Chief Executive Officer of the Company beginning
on May 2, 2000 upon the acquisition of Front Porch, until October 2, 2000.

/4/   Ms. Grant was the Chief Executive Officer of the Company prior to the
acquisition of Front Porch on May 2, 2000.

/5/   Mr. Karim's employment with the Company began in October 2000. The amount
set forth under "All Other Compensation" consists of $194,000 that was accrued
to Mr. Karim upon his resignation as President and Chief Operating Officer of
the Company in October 2001. See "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" below for additional details of
Mr. Karim's "All Other Compensation."

/6/   Mr. Petry is a shareholder in the Armand Group, which, prior to March 1,
2002, was a consultant to the Company. Mr. Petry was not compensated directly by
the Company. For the year ended December 31, 2001, total consulting fees paid to
the Armand Group was $178,216. In addition, options to purchase 519,947 shares
of common stock of the Company were granted to the Armand Group in 2001 as
compensation for the services of Mr. Petry. See "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" below for
additional details of the consulting agreement with the Armand Group. For the
period ended December 31, 2000, total consulting fees paid to the Armand Group
was $255,000. The Armand Group received no fees during 1999.

/7/   Dr. Gaggero's employment with the Company began in October 2000. The
Company has a note payable to Data Strategies International, Inc ("DSI") of
$955,862. DSI is a corporation controlled by Dr. Gaggero. This note is payable
based on a percentage of the Company's revenue, ranging between 2% and 3%, not
to exceed $955,862. In the event the Company exits the media conversion business
prior to December 31, 2004, the remaining balance of this note is payable on
demand. During the period ended December 31, 2000, Dr. Gaggero received $211,899
as payment on this note, which has been included in other annual compensation
shown above. No payments were made on this note by the Company during 2001.

/8/   Mr. Beaudry's employment with the Company began in November 2000.

EMPLOYEE BONUS PLAN

         In March 2001, the Board of Directors adopted the Front Porch Digital
Inc. Employee Bonus Plan ("the Bonus Plan") to promote the interests of the
Company and its shareholders by permitting the Company to award bonuses in cash
or in shares of its Common Stock to key employees in order to reward such
employees for their successful efforts in attaining objectives beneficial to the
growth and profitability of the Company and to retain their services. The
Company has reserved 2,000,000 shares, subject to adjustment, of Common Stock
for issuance under the Bonus Plan. The Bonus Plan will terminate on March 31,
2006, except that the Board of Directors may terminate the Bonus Plan (except
with respect to any outstanding bonus awards) at an earlier date.


                                       18
<PAGE>

         The Bonus Plan will be administered by either the Board of Directors or
the Compensation Committee of the Board. Members of the Compensation Committee
will be eligible to receive bonuses only if such bonuses are granted by the
Board of Directors.

         The Board of Directors or the Compensation Committee will have the
authority to determine which key employees shall be awarded bonuses; the amounts
of bonuses and the number of shares of Common Stock, if any, to be awarded; and
all other terms and combinations of performance measurement criteria, which may
differ as to various key employees or attainment of certain performance levels.
The Board of Directors or the Compensation Committee will decide whether
performance criteria have been met, whether and when to award bonuses, time
payment of bonuses, and whether to pay bonuses in cash or in Common Stock or any
combination thereof. The determinations of the Board of Directors or the
Compensation Committee, as the case may be, on these matters shall be
conclusive. The number of shares of Common Stock to be awarded as a bonus will
be equal in value to a fixed cash amount, with the value of such Common Stock
computed at the higher of (a) the fair market value of the Common Stock to be
awarded on date of award, or (b) the par value of the Common Stock to be
awarded.

         Any eligible employee whose employment has terminated for any reason
other than death prior to the end of the bonus measurement period may remain
eligible for a full or prorated bonus, or may forfeit his bonus in its entirety,
in accordance with such terms as may be set for such bonus from time to time by
the Board of Directors or the Compensation Committee. Bonuses payable will be
paid to the estate of designee of any eligible employee who has died after
termination of employment but before payment of the bonus award. In the event
that any eligible employee's employment is terminated either (i) for cause, or
(ii) without the consent of the Company, his eligibility for a bonus under the
Bonus Plan shall terminate in whole immediately upon termination of employment.
If an eligible employee dies while he is employed by the Company or any of its
subsidiaries, his estate or designee shall be eligible to receive a prorated
bonus. Bonus rights are not transferable otherwise than by will or the laws of
descent and distribution.

         No bonus award of Common Stock may be made under the Plan unless and
until the shares subject to such award have been listed, registered and
qualified upon any applicable securities exchange or under any applicable state
or federal law, including without limitation, the Securities and Exchange Act of
1933, as amended, and the consent or approval of any governmental regulatory
body, necessary or desirable as a condition of, or in connection with, the award
or issuance of shares hereunder has been obtained.

EQUITY INCENTIVE PLAN

         In May 2000, the Company adopted the Front Porch Digital Inc. 2000
Equity Incentive Plan (the "Option Plan") for the purpose of attracting,
retaining and maximizing the performance of executive officers and key employees
and consultants. The Company has reserved 6,000,000 shares of Common Stock for
issuance under the Option Plan. The Option Plan has a term of ten years. The
Option Plan provides for the grant of "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
non-statutory stock options, stock appreciation rights and restricted stock
awards. The Option Plan is administered by a Compensation Committee of the Board
of Directors (the "Compensation Committee"). The exercise price for
non-statutory stock options may be equal to or more or less than 100 percent of
the fair market value of shares of Common Stock on the date of grant. The
exercise price for incentive stock options may not be less than 100 percent of
the fair market value of shares of Common Stock on the date of grant (110
percent of fair market value in the case of incentive stock options granted to
employees who hold more than ten percent of the voting power of the Company's
issued and outstanding shares of Common Stock).


                                       19
<PAGE>

Options granted under the Option Plan may not have a term of more than a
ten-year period (five years in the case of incentive stock options granted to
employees who old more than ten percent of the voting power of the Company's
Common Stock) and generally vest over a three-year period. Options generally
terminate three months after the optionee's termination of employment by the
Company for any reason other than death, disability or retirement, and are not
transferable by the optionee other than by will or the laws of descent and
distribution.

         The Option Plan also provides for grants of stock appreciation rights
("SARs"), which entitle a participant to receive a cash payment, equal to the
difference between the fair market value of a share of Common Stock on the
exercise date and the exercise price of SAR. The exercise price of any SAR
granted under the Option Plan will be determined by the Board of Directors in
its discretion at the time of the grant. SARs granted under the Option Plan may
not be exercisable for more than a ten-year period. SARs generally terminate one
month after the grantee's termination of employment by the Company for any
reason other than death, disability or retirement. Although the Board of
Directors has the authority to grant SARs, it does not have any present plans to
do so.

         Restricted stock awards, which are grants of shares of Common Stock
that are subject to a restricted period during which such shares may not be
sold, assigned, transferred, made subject to a gift, or otherwise disposed of,
or mortgaged, pledged or otherwise encumbered, may also be made under the Option
Plan. At this time, the Board of Directors has not granted, and does not have
any plans to grant, restricted shares of Common Stock.

         The following table lists individual grants of stock options made
during the Company's last completed fiscal year as compensation for services
rendered as an officer of the Company:

                     OPTION / SAR GRANTS IN LAST FISCAL YEAR
                                INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
                        Number of
                       Securities        % of Total Options
                       Underlying            Granted to
                        Options             Employees in      Exercise price   Market Price   Expiration
     Name              Granted(#)          Fiscal Year /1/       ($/Share)     on Grant Date     Date
----------------      ------------       ------------------   --------------   -------------  ----------
<S>                  <C>           <C>  <C>                  <C>              <C>            <C>
Jean Reiczyk            500,000     /2/        36.2%              $4.00           $3.19         9/30/10
                        125,000     /2/         9.1%              $2.00           $3.19         9/30/10
                         11,188     /3/         .8%                $.70           $1.40         9/30/04

Jay Yogeshwar            15,950     /3/         1.2%               $.64           $1.28         9/30/04

Saeed Karim             100,000     /3/         7.2%              $2.00           $1.23        10/31/02
                         66,667     /3/         4.8%              $4.00           $1.23        10/31/02
                         11,095     /3/         .8%                $.76           $1.52         9/30/04

Timothy Petry             -0-       /4/

Giancarlo Gaggero        15,950     /3/         1.2%               $.64           $1.28         9/30/04

Kenneth Beaudry          17,013     /3/         1.2%               $.64           $1.28         9/30/04
</TABLE>
----------------


                                       20
<PAGE>

/1/   Based upon options to purchase a total of 1,381,197 shares granted by the
Company to employees and directors of the Company during the year ended December
31, 2001.

/2/   One third of these options were scheduled to vest and become exercisable
on each of October 1, 2001, 2002 and 2003. These options were forfeited upon the
resignation of Mr. Reiczyk in November 2001.

/3/   These options vested and became exercisable immediately.

/4/   Mr. Petry is a shareholder in the Armand Group, which, prior to March 1,
2002, was a consultant to the Company. Mr. Petry was not compensated directly by
the Company. During 2001, the Armand Group was granted options to purchase
400,000 shares of common stock of the Company with an exercise price of $4.00
per share and options to purchase 100,000 shares of common stock of the Company
with an exercise price of $2.00 per share. The market price of the Company's
common stock was $3.19 on the date these options were granted. At the time of,
and in connection with the termination of this consulting agreement, options to
purchase 66,667 shares of the Company's common stock at $2.00 per share and
options to purchase 266,667 shares of the Company's common stock at an exercise
price of $4.00 per share had vested. These options will expire on May 29, 2002.
The remaining options were forfeited. The Armand Group was also granted options
to purchase an additional 19,947 shares of common stock of the Company with an
exercise price of $.64. These options vested and became exercisable immediately,
and expire September 30, 2004. The market price of the Company's common stock
was $1.28 on the date these options were granted.

         AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2001
                       AND DECEMBER 31, 2001 OPTION VALUES

<TABLE>
<CAPTION>
                                                            Number of Securities          Value of Unexercised
                                                           Underlying Unexercised             In-the-money
                                                                Options at                     options at
                               Shares         Value           December 31, 2001             December 31, 2001
                             Acquired on    Realized           Exercisable/                   Exercisable/
Name                        Exercise (#)      ($)              Unexercisable                Unexercisable /1/
-----------------           ------------    --------      ------------------------      -----------------------
<S>                        <C>             <C>           <C>                           <C>
Don Maggi                       -0-           -0-                160,000/0                     $65,600/$0
Jean Reiczyk                    -0-           -0-                 11,188/0                      $2,694/$0
Jay Yogeshwar                   -0-           -0-                 15,950/0                      $4,996/$0
Saeed Karim                     -0-           -0-                177,762/0                      $2,449/$0
Timothy Petry /2/               -0-           -0-                   0/0                           $0/$0
Giancarlo Gaggero               -0-           -0-              99,283/166,667                   $4,996/$0
Kenneth Beaudry                 -0-           -0-             150,346/266,667                   $5,329/$0
</TABLE>
-----------------------

/1/   Potential unrealized value is calculated as the fair market value at
December 31, 2001 ($.91 per share on the OTC-BB), less the option exercise
price, times the number of shares.

/2/   Mr. Petry is a shareholder in the Armand Group, which, prior to March 1,
2002, was a consultant to the Company. Mr. Petry was not compensated directly by
the Company. As of December 31, 2001, the number of securities underlying
unexercised options held by the Armand Group consisted of options to purchase
186,613 shares of the Company's common stock, which were exercisable, and
options to purchase 333,334 shares of the Company's common stock, which were not
exercisable. As of December 31, 2001, the value of unexercised in-the-money
options held by the Armand Group consisted of $6,248 relating to options that
were exercisable and $-0- relating to options that were not exercisable. During
2001, no shares were acquired on exercise by the Armand Group.


                                       21
<PAGE>

COMPENSATION OF DIRECTORS

         The Company's policy is to grant outside directors of the Company
(non-employees, non-consultants) options to purchase 10,000 shares of common
stock per year for each year during which they serve as a director. The exercise
price of such options is 100% of the fair market price on the date of grant.
Actual out-of-pocket expenses incurred by outside directors in the performance
of services for the Company are reimbursed.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS

         Certain of the Company's executive officers whose compensation is
required to be reported in the Summary Compensation Table are parties to written
employment agreements with the Company as follows:

         JAY YOGESHWAR. The Company entered into a three-year employment
agreement with Jay Yogeshwar on December 1, 2000. Under the terms of this
agreement, Dr. Yogeshwar currently serves as President and Chief Technology
Officer of the Company. The Company will pay Dr. Yogeshwar an annual base salary
of $150,000 during the term of this agreement. Dr. Yogeshwar is eligible to
receive bonus compensation of $168,000 payable within thirty days of the closing
date of an equity offering in which the Company receives gross proceeds of at
least $5,000,000. Dr. Yogeshwar is also eligible for additional bonuses at the
discretion of the Board of Directors.

         GIANCARLO GAGGERO. The Company entered into a three-year employment
agreement with Giancarlo Gaggero on October 11, 2000. Under the terms of the
agreement, Dr. Gaggero currently serves as Senior Vice President of Media
Technologies of the Company. The Company will pay Dr. Gaggero an annual base
salary of $150,000 during the term of this agreement. Dr. Gaggero is eligible to
receive bonus compensation of 40% of his base salary if certain goals are
achieved; provided, however, that the minimum annual bonus will not be less than
$50,000. Dr. Gaggero was also granted options to purchase 250,000 shares of the
Company's common stock at $2.00 per share. These options vest in three equal
annual installments, with the first installment vesting on October 11, 2001, and
expire October 11, 2005.

         KENNETH BEAUDRY. On October 31, 2000, the Company entered into a
three-year employment agreement with Kenneth Beaudry. Under the terms of the
agreement, Mr. Beaudry currently serves as Senior Vice President of Worldwide
Sales and Services of the Company. The Company will pay Mr. Beaudry an annual
base salary of $160,000 during the term of this agreement. Mr. Beaudry also is
eligible to receive bonus compensation of 40% of his base salary if certain
goals are achieved, and to receive an additional bonus for achievements in
excess of certain goals. Mr. Beaudry was also granted options to purchase
100,000 shares of the Company's common stock at $2.00 per share and 300,000
shares of the Company's common stock at $4.00 per share. These options vest in
three equal annual installments, with the first installment vesting on November
1, 2001, and expire November 5, 2005.

         TIMOTHY PETRY. On May 1, 2001, the Company entered into a one-year
consulting agreement with Timothy Petry, on behalf of the Armand Group, which
agreement was terminated by the Company effective February 28, 2002. Mr. Petry
is a shareholder in the Armand Group and was not compensated directly by the
Company. Under the terms of the agreement, Mr. Petry served as Chief Operating
Officer and Chief Financial Officer of the Company. The Company paid the Armand
Group a monthly consulting fee of $15,633 during the term of this agreement. The
Armand Group was also granted options to purchase 100,000 shares of the
Company's common stock at $2.00 per share and options to purchase 400,000 shares
of the Company's common stock at $4.00 per share. At the time of, and in
connection with, the termination of this agreement, options to purchase 66,667
shares of the Company's common stock at $2.00 per share and options to purchase
266,667 shares of the Company's common stock at an exercise price of $4.00 per
share had vested. These options will expire on May 29, 2002.


                                       22
<PAGE>

         JEAN REICZYK. The Company entered into a three-year employment
agreement with Jean Reiczyk effective May 1, 2001. Under the terms of the
agreement, Mr. Reiczyk was to receive an annual salary of $250,000, and options
to purchase shares of the Company's common stock. Mr. Reiczyk resigned from the
Company effective November 30, 2001 and the contract has been terminated.

         SAEED KARIM. In October 2001, the Company and Saeed Karim, its then
President, Chief Operations Officer and a Director, entered into a separation
agreement and release. Under the terms of the agreement, Mr. Karim is to receive
shares of common stock of the Company worth $14,000 and the continuation of
medical benefits for Mr. Karim and his spouse for a period not to exceed one
year. In addition, unvested options to purchase 100,000 shares of the Company's
common stock at $2.00 per share and options to purchase 66,667 shares of the
Company's common stock at $4.00 per share were vested. These options will expire
on October 31, 2002. In the event the Company elects to reprice any equivalent,
currently outstanding employee stock options, or to cancel any such employee
stock options and issue new employee stock options in exchange, the options
vested under this agreement will also be repriced or exchanged. As part of this
agreement, the Company has retained Mr. Karim as a consultant to the Company
beginning October 31, 2001 and ending on the date on which Mr. Karim has
obtained full-time employment, but not before April 30, 2002 or after October
31, 2002. In consideration of the consulting services provided, the Company will
pay Mr. Karim $15,000 per month in cash or common stock at the option of the
Company. During the time that Mr. Karim is being paid as a consultant, Mr. Karim
has agreed not to compete directly or indirectly with the Company and not to
solicit or encourage any employee of the Company to leave the employ of the
Company.


                                       23
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information as of March 29, 2002
regarding beneficial stock ownership of (i) all persons known to the Company to
be beneficial owners of more than 5% of the outstanding common stock of the
Company; (ii) each director of the Company and the executive officers of the
Company whose compensation is required to be reported in Item 10 of this Report,
and (iii) all officers and directors of the Company as a group. Each of the
persons in the table below has sole voting power and sole dispositive power as
to all of the shares shown as beneficially owned by them, except as otherwise
indicated.

                           Beneficial Stock Ownership
                              As of March 29, 2002

<TABLE>
<CAPTION>
                                                             Number of Shares     Percent of
                                                              Beneficially        Outstanding
Name                    Address                                 Owned /1/         Shares /2/
---------------         ----------------------------         ----------------     -----------
<S>                    <C>                                  <C>                  <C>
Storage                 One StorageTek Drive                      6,512,351            24.2%  /3/
 Technology             Louisville, CO  80028
 Corporation

Equity Pier LLC         1140 Pearl Street                         5,094,116            17.0%  /4/
                        Boulder, CO  80301

Jean Reiczyk            Case postale 55                           5,205,304            17.4%  /5/
                        CH 1239 Collex
                        Switzerland

Jay Yogeshwar           Front Porch Digital Inc.                  2,048,950             7.7%  /6/
                        20000 Horizon Way, Suite 120
                        Mount Laurel, NJ  08054

Rice Opportunity Fund   666 Dundee Rd. Suite 1901                 2,520,000             8.7%  /7/
LLC                     Northbrook, IL 60062

Irl Nathan              8235 Douglas Ave. Suite 1100              1,800,000             6.4%  /8/
                        Dallas, TX 75225

Saeed Karim                                                         182,762                *  /9/

Timothy Petry                                                       375,468             1.4%  /10/

Giancarlo                                                           102,508                *  /11/
 Gaggero

Kenneth Beaudry                                                     152,346                *  /12/

Donald Maggi                                                        160,000                *  /13/

Daniel Coetsier                                                      10,000                *  /14/


All Executive Officers and Directors as a Group                    9,244,596           29.9%
(10 persons)
</TABLE>
-------------------------------
*     Constitutes less than 1%


                                       24
<PAGE>

/1/   Includes any options or warrants to purchase shares that are presently
exercisable or exercisable within 60 days.

/2/   All percentages are calculated based upon a total of 26,474,176 shares
outstanding as of March 29, 2002, plus, in the case of the individual or entity
for which the calculation is made, that number of options or warrants owned by
such individual or entity that are presently exercisable or exercisable within
60 days.

/3/   Represents 6,088,636 shares owned of record by Storage Technology
Corporation and 423,715 additional shares that Storage Technology Corporation
has the right to receive if 1,450,000 shares owned by certain shareholders are
not repurchased by the Company.

/4/   Represents 1,644,420 shares owned of record by Equity Pier LLC and
presently exercisable warrants to purchase 125,000 shares at $3.00 per share and
3,324,696 shares at $2.00 per share.

/5/   Represents 100,000 shares held directly and 1,644,420 shares held
indirectly through Equity Pier LLC. Also includes presently exercisable options
to purchase 11,188 shares at $.70 per share held directly; and presently
exercisable warrants to purchase 125,000 shares at $3.00 per share, and warrants
to purchase 3,324,696 shares at $2.00 per share which become exercisable as of
March 1, 2002, held indirectly through Equity Pier LLC. Mr. Reiczyk is a member
of Equity Pier LLC.

/6/   Represents 2,033,000 shares owned of record by Dr. Yogeshwar and presently
exercisable options to purchase 15,950 shares at $.64 per share.

/7/   Represents the shares issuable upon the conversion of $300,000 aggregate
principal amount of notes, which is presently convertible.

/8/   Represents the shares issuable upon the conversion of $200,000 aggregate
principal amount of notes, which is presently convertible.

/9/   Represents 5,000 shares owned of record by Mr. Karim and presently
exercisable options to purchase 100,000 shares at $2.00 per share, 66,667 shares
at $4.00 per share and 11,095 shares at $.76 per share.

/10/  Represents 22,188 shares held directly, and presently exercisable options
to purchase 19,947 shares at $.64 per share, 66,666 shares at $2.00 per share
and 266,667 shares at $4.00 per share, held indirectly through the Armand Group.
Mr. Petry is a shareholder of the Armand Group.

/11/  Represents 3,225 shares owned of record by Dr. Gaggero and presently
exercisable options to purchase 15,950 shares at $.64 per share and 83,333
shares at $2.00 per share.

/12/  Represents 2,000 shares owned of record by Mr. Beaudry and presently
exercisable options to purchase 17,013 shares at $.64 per share, 33,333 shares
at $2.00 per share and 100,000 shares at $4.00 per share.

/13/  Represents presently exercisable options and warrants to purchase 160,000
shares at $.50 per share.

/14/  Represents presently exercisable options to purchase 10,000 shares at
$4.00 per share.


                                       25
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During 2000, the Company leased computer equipment on a month-to-month
basis from Formal System America (FSAI). Rent expense on this lease was $120,000
for the period ended December 31, 2000. This lease was terminated in December
2000. The Company also leased office space from FSAI on a month-to-month basis
through November 2001. Rent expense on this lease was $118,000 for the year
ended December 31, 2001 and $122,000 for the period ended December 31, 2000.
Certain shareholders of FSAI are also shareholders of the Company.

         In June 2000, the Company retained the Armand Group to provide
financial consulting and investment banking advisory services to the Company,
including providing the services of a member of the firm as the Company's Chief
Financial Officer and Chief Operating Officer. On February 28, 2002, the Company
terminated the consulting agreement with the Armand Group. During 2001 and 2000,
the Company paid the Armand Group $188,000 and $55,000 respectively, in
consulting fees and $200,000 in 2000 in connection with the acquisition of the
media services operations. A shareholder in the Armand Group is also a
shareholder of the Company.

         In August 2000, the Company issued to Equity Pier LLC ("Equity Pier"),
4,635,866 shares of common stock. Of these shares, 964,362 were issued in
consideration of consulting services previously rendered by Equity Pier to the
Company. These consulting services included the implementation of corporate
policies, attracting key senior managers, establishing corporate headquarters
and assisting in the development of the Company's business strategy. As a
result, the Company recorded a non-cash charge to consulting expense of
$1,157,000 in the third quarter of 2000. The remaining 3,671,504 shares issued
to Equity Pier were issued in consideration of a nominal cash payment and a
promissory note from Equity Pier in the principal amount of approximately
$4,400,000. The Company also entered into a consulting agreement with Equity
Pier pursuant to which Equity Pier agreed to render consulting services to the
Company for the 45-month period beginning October 1, 2000 in consideration of
fixed monthly payments by the Company. The services to be provided under this
agreement included the continuation of those objectives discussed previously, as
well as the integration and transition of the media services operations into the
Company, creation of the Board of Directors, formation of strategic alliances
and participation in the sales process, among others. In February 2001, as a
result of the Company's reduced need for the consulting services of Equity Pier,
and in recognition of the services already provided by Equity Pier, the Company
and Equity Pier formalized a plan to terminate the consulting agreement. In
addition, (i) Equity Pier agreed to return 3,324,696 shares of common stock of
the Company as payment of the remaining balance on the promissory note, which
was deemed to be satisfied in full, and (ii) the Company issued warrants to
Equity Pier to purchase an aggregate of 3,324,696 shares of common stock of the
Company for a purchase price of $2.00 per share as compensation for consulting
services performed during 2000. These warrants became exercisable in March 2002
and expire in February 2006.


                                       26
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)   Financial Statements:

                                                                           Page

Balance Sheet as of December 31, 2001                                       F-1

Statement of Operations                                                     F-2
for the year ended December 31, 2001 and for the period from
February 1, 2000 (commencement of operations) to December 31, 2000

Statement of Stockholders' Equity                                           F-3
for the year ended December 31, 2001 and for the period from
February 1, 2000 (commencement of operations) to December 31, 2000

Statement of Cash Flows                                                     F-4
for the year ended December 31, 2001 and for the period from
February 1, 2000 (commencement of operations) to December 31, 2000

Notes to Financial Statements                                               F-5

Report of Independent Auditors                                              F-23


                                       27
<PAGE>

The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission:

(a)(2)   Exhibits

   Exhibit
   Number      Title of Document
   -------     -----------------------------------------------------------------
     2.1       Agreement  and Plan of  Reorganization  dated  as of May 2,  2000
               among  the  Company,   Susan  M.  Grant,   Front  Porch  and  the
               Stockholders  of Front Porch  (incorporated  by  reference to the
               exhibit  of the same  number  filed with the  Company's  Form 8-K
               filed on May 16, 2000).

     3.1       Articles   of   Incorporation   dated  as  of  April   10,   1995
               (incorporated  by  reference  to the  exhibit of the same  number
               filed with the Company's Form SB-2  registration  statement filed
               on November 13, 1996).

     3.2       Certificate of Amendment to the Articles of  Incorporation  dated
               as of August 22, 1996  (incorporated  by reference to the exhibit
               of  the  same  number   filed  with  the   Company's   Form  SB-2
               registration statement filed on November 13, 1996).

     3.3       Certificate of Amendment to Articles of Incorporation dated as of
               March 12, 1998  (incorporated  by  reference to Exhibit 3.1 filed
               with the Company's Form 8-K filed on March 27, 1998).

     3.4       Certificate of Amendment to Articles of Incorporation dated as of
               April 12, 2000  (incorporated  by reference to the exhibit of the
               same number filed with the  Company's  Form 10-KSB report for the
               period ended December 31, 2000 filed on April 2, 2001).

     3.5       Certificate of Amendment to Articles of Incorporation dated as of
               May 1, 2000  (incorporated  by  reference to Exhibit 2 filed with
               the  Company's  Form 10-QSB report for the quarter ended June 30,
               2000 filed on August 15, 2000).

     3.6       By-Laws of the Company dated as of May 8, 1995  (incorporated  by
               reference  to the  exhibit  of the  same  number  filed  with the
               Company's Form SB-2 registration  statement filed on November 13,
               1996).

     4.1       Form of 7%  Convertible  Secured  Note dated as of March 28, 2002
               and April 10, 2002.

     4.2       Security Agreement dated as of March 28, 2002 between the Company
               and Rice Opportunity Fund LLC and Irl Nathan.

    10.1       Registration Rights Agreement dated as of October 10, 2000 by and
               between   the  Company   and   Storage   Technology   Corporation
               (incorporated  by  reference  to  Exhibit  10.2  filed  with  the
               Company's Form 8-K filed on October 26, 2000).

    10.2       Employment  Agreement  dated as of October 11,  2000  between the
               Company and  Giancarlo  Gaggero  (incorporated  by  reference  to
               Exhibit 10.3 filed with the  Company's  Form 8-K filed on October
               26, 2000).

    10.3       Employment  Agreement  dated as of October 30,  2000  between the
               Company and Kenneth Beaudry (incorporated by reference to exhibit
               10.5 filed with the Company's  Form 10-QSB report for the quarter
               ended September 30, 2000 filed on November 14, 2000).

    10.4       Employment  Agreement  dated as of December  1, 2000  between the
               Company and Jay Yogeshwar  (incorporated  by reference to exhibit
               10.8 filed with the  Company's  Form 10-KSB report for the period
               ended December 31, 2000 filed on April 2, 2001).


                                       28
<PAGE>

(a)(2)   Exhibits (continued)

   Exhibit
   Number      Title of Document
   -------     -----------------------------------------------------------------
    10.5       2000 Equity Incentive Plan dated as of May 2, 2000  (incorporated
               by reference to exhibit 10.9 filed with the Company's Form 10-KSB
               report for the period  ended  December 31, 2000 filed on April 2,
               2001).

    10.6       Employee Bonus Plan dated as of March 20, 2001  (incorporated  by
               reference to exhibit 10.10 filed with the  Company's  Form 10-KSB
               report for the period  ended  December 31, 2000 filed on April 2,
               2001).

    10.7       Registration  Rights  Agreement  dated  as of  October  10,  2000
               between  the  Company  and  Equity  Pier  LLC   (incorporated  by
               reference to exhibit 10.11 filed with the  Company's  Form 10-KSB
               report for the period  ended  December 31, 2000 filed on April 2,
               2001).

    10.8       Separation  Agreement and Release dated as of October 31, 2001 by
               and between the Company and Saeed Karim.

    23.1       Consent of Ernst & Young LLP

------------------------------

    (b) Current Reports on Form 8-K or 8-K/A

The Company  filed a Current  Report on Form 8-K dated March 1, 2002  announcing
the termination of its consulting  agreement with the Armand Group, Inc. and the
concurrent  resignations  of Timothy  Petry as an officer  and  director  of the
Company, and the resignation of Jean Reiczyk, Thomas Sweeney and Robert Kocol as
directors of the Company.


                                       29
<PAGE>

                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                       Front Porch Digital Inc.

                                       By:      /s/ Donald Maggi
                                           -------------------------------------
                                           Donald Maggi
                                           Chief Executive Officer
                                           Dated April 10, 2002

In accordance  with the  Securities  Exchange Act of 1934,  this report has been
signed below by the  following  persons on behalf of the  registrant  and in the
capacities and on the dates indicated.

Signature/Date                              Title
--------------                              -----
/s/ Donald Maggi                            Director
------------------------------              and Chief Executive Officer
Donald Maggi                                (principal executive officer)
April 10, 2002


/s/ Kenneth Lynch                           Chief Financial Officer (principal
------------------------------              financial and accounting officer)
Kenneth Lynch
April 10, 2002

/s/ Daniel Coetsier                         Director
------------------------------
Daniel Coetsier
April 10, 2002


                                       30
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                            Front Porch Digital Inc.

                                  Balance Sheet

                                December 31, 2001
<TABLE>
<S>                                                             <C>
ASSETS
Current assets:
    Cash and cash equivalents                                      $    393,439
    Accounts receivable                                                 175,249
    Other current assets                                                257,391
                                                                   ------------
Total current assets                                                    826,079

Property and equipment, net                                           1,239,809

Software development costs                                              261,245

Software and intellectual property, net of accumulated
    amortization of $284,000                                          1,366,284
Excess cost over fair value of net assets acquired, net of
    accumulated amortization of $1,810,000                            3,740,801
Other assets                                                             32,044
                                                                   ------------
Total assets                                                       $  7,466,262
                                                                   ============

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
    Current portion of note payable--employee                      $    160,000
    Notes payable                                                       200,000
    Accounts payable                                                  1,092,384
    Accrued expenses                                                    473,790
    Accrued expenses--employee                                          352,000
    Accrued vacation                                                    146,202
    Deferred revenue                                                    779,200
                                                                   ------------
Total current liabilities                                             3,203,576

Note payable--employee, net of current portion                          583,963

Stockholders' equity:
    Preferred stock, nonvoting, $.001 par value,
       5,000,000 shares authorized, none issued or outstanding             --
    Common stock, $.001 par value; 50,000,000 shares authorized,
       25,655,120 shares issued and outstanding                          25,655
    Additional paid-in capital                                       20,353,532
    Accumulated deficit                                             (16,700,464)
                                                                   ------------
Total stockholders' equity                                            3,678,723
                                                                   ------------
Total liabilities and stockholders' equity                         $  7,466,262
                                                                   ============
</TABLE>


SEE ACCOMPANYING NOTES.                                                      F-1
<PAGE>

                            Front Porch Digital Inc.

                            Statements of Operations


<TABLE>
<CAPTION>
                                                                    FEBRUARY 1,
                                                                       2000
                                                                 (COMMENCEMENT OF
                                                    YEAR ENDED    OPERATIONS) TO
                                                   DECEMBER 31,    DECEMBER 31,
                                                       2001            2000
                                                   ------------    ------------
<S>                                              <C>               <C>
Revenues:
   Products                                        $    264,904    $     75,024
   Services                                             697,534          31,698
   Services--affiliate                                  169,716          92,449
                                                   ------------    ------------
                                                      1,132,154         199,171

Cost of revenue:
   Products                                             124,346          46,832
   Services                                             692,242         207,611
                                                   ------------    ------------
                                                        816,588         254,443
                                                   ------------    ------------
Gross margin (loss)                                     315,566         (55,272)

Selling, general and administrative expenses          5,295,704       2,636,583
Research and development                                656,607         296,261
Depreciation                                            574,684         152,415
Amortization                                          1,892,024         252,638
Consulting fees                                            --         4,773,331
                                                   ------------    ------------
                                                      8,419,019       8,111,228
                                                   ------------    ------------

Loss from operations                                 (8,103,453)     (8,166,500)

Other income (expense):
   Interest income                                       37,673         135,841
   Interest expense                                     (18,135)        (40,875)
   Other expense                                           --          (545,015)
                                                   ------------    ------------
                                                         19,538        (450,049)
                                                   ------------    ------------
Net loss                                           $ (8,083,915)   $ (8,616,549)
                                                   ============    ============

Weighted average number of common shares
    outstanding--basic and diluted                   25,008,310      17,630,291
                                                   ============    ============

Loss per common share--basic and diluted           $       (.32)   $       (.49)
                                                   ============    ============
</TABLE>


SEE ACCOMPANYING NOTES.                                                      F-2
<PAGE>

                            Front Porch Digital Inc.

                       Statements of Stockholders' Equity

     Year ended December 31, 2001 and for the period from February 1, 2000
               (commencement of operations) to December 31, 2000

<TABLE>
<CAPTION>
                                                         COMMON STOCK
                                                  -----------------------   ADDITIONAL     SUBSCRIPTION  ACCUMULATED  STOCKHOLDERS'
                                                      SHARES      AMOUNT  PAID-IN CAPITAL   RECEIVABLE     DEFICIT       EQUITY
                                                  -------------------------------------------------------------------------------
<S>                                              <C>           <C>       <C>              <C>           <C>          <C>
Capitalization of Front Porch Digital
    Inc.--February 1, 2000                          9,440,000    $ 9,440   $      --           $(9,240)  $      --     $       200
Recapitalization of Front Porch Digital Inc.        6,400,000      6,400          --              --            --           6,400
Stock option compensation costs                          --         --         180,835            --            --         180,835
Warrants issued in connection with notes payable         --         --          51,000            --            --          51,000
Common stock issued for cash at $2.00 per share,
    net of issuance costs                           2,925,800      2,926     5,418,014            --            --       5,420,940
Contributed shares from shareholders for
    capital restructuring                          (1,613,639)    (1,614)        1,614            --            --            --
Common stock issued to Equity Pier for
    consulting services                             1,311,170      1,311     1,572,093            --            --       1,573,404
Warrants issued to Equity Pier for
    consulting services                                  --         --       3,091,967            --            --       3,091,967
Common stock issued to Storage Technology
    Corporation for acquisition of media
    services operations                             6,088,636      6,089     7,300,274            --            --       7,306,363
Reduction of subscription receivable                     --         --            --             9,240          --           9,240
Net loss                                                 --         --            --              --      (8,616,549)   (8,616,549)
                                                   ----------    -------   -----------          ----     ------------  -----------
Balance, December 31, 2000                         24,551,967     24,552    17,615,797            --      (8,616,549)    9,023,800
Stock option compensation costs                          --         --         934,418            --            --         934,418
Common stock and warrants issued for cash,
    net of issuance costs                             757,500        757     1,460,972            --            --       1,461,729
Common stock issued to employees and consultants      239,664        240       292,391            --            --         292,631
Exercise of options and warrants                      105,989        106        49,954            --            --          50,060
Net loss                                                 --         --            --              --      (8,083,915)   (8,083,915)
                                                   ----------    -------   -----------          ----     ------------  -----------
Balance, December 31, 2001                         25,655,120    $25,655   $20,353,532          $ --     $(16,700,464)   3,678,723
                                                   ==========    =======   ===========          ====     ============  ===========
</TABLE>


SEE ACCOMPANYING NOTES.                                                      F-3
<PAGE>

                            Front Porch Digital Inc.

                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                            FEBRUARY 1, 2000
                                                                                            (COMMENCEMENT OF
                                                                          YEAR ENDED          OPERATIONS)
                                                                          DECEMBER 31,      TO DECEMBER 31,
                                                                             2001                2000
                                                                   ----------------------------------------
<S>                                                               <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                 $(8,083,915)         $(8,616,549)
Adjustments to reconcile net loss to net cash used in operating
    activities:
       Depreciation and amortization                                       2,466,708              405,053
       Non-cash issuance of common stock to related party                         --            1,157,234
       Non-cash issuance of common stock to employees and
          consultants                                                        292,631                   --
       Non-cash reduction of subscription receivable                              --              345,338
       Investment writedown                                                       --              300,000
       Non-cash consulting expense to related party                               --            3,091,967
       Stock option compensation cost                                        934,418              180,835
       Changes in operating assets and liabilities, net of
          acquisitions:
             Increase in accounts receivable                                (175,249)                  --
             Decrease (increase) in accounts receivable--affiliate           222,410             (222,410)
             Increase in other current assets                               (180,749)             (41,018)
             Increase in accounts payable                                    610,976              481,408
             Increase in accrued expenses                                     97,749              347,481
             Increase in accrued expenses--employee                           84,000              268,000
             Increase in accrued vacation                                     72,248               73,954
             Increase in deferred revenue                                    779,200                   --
             Other                                                             2,311               (3,068)
                                                                   ----------------------------------------
Net cash used in operating activities                                     (2,877,262)          (2,231,775)
                                                                   ----------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                                        (395,490)            (499,756)
Software development costs                                                  (261,245)                  --
Acquisition of business, net of cash acquired                                     --              (13,254)
Purchase of investment                                                            --             (300,000)
Other investing activities                                                   (28,880)                  --
                                                                   ----------------------------------------
Net cash used in investing activities                                       (685,615)            (813,010)
                                                                   ----------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable                                                        --              800,000
Repayment of note payable                                                         --             (600,000)
Repayment of note payable--employee                                               --             (211,900)
Proceeds from issuance of common stock                                     1,511,789            5,501,212
                                                                   ----------------------------------------
Net cash provided by financing activities                                  1,511,789            5,489,312
                                                                   ----------------------------------------

Net (decrease) increase in cash and cash equivalents                      (2,051,088)           2,444,527
Cash and cash equivalents at beginning of period                           2,444,527                   --
                                                                   ----------------------------------------
Cash and cash equivalents at end of period                               $   393,439          $ 2,444,527
                                                                   ========================================
</TABLE>


SEE ACCOMPANYING NOTES.                                                      F-4
<PAGE>

                            Front Porch Digital Inc.

                          Notes to Financial Statements

                                December 31, 2001


1. ORGANIZATION AND BASIS OF PRESENTATION

Front Porch  Digital Inc. (the  "Company") is in the emerging  market of digital
information  asset  management.  The  Company  utilizes  a suite of  proprietary
products and services that enable the conversion of analog and digital  content,
including  text,  images,  audio,  graphics,  video and rich  media,  into other
digital formats or platforms.  Incorporating  software-based  methodologies  and
intellectual  property  throughout its offerings  allows content to be captured,
converted,  managed  and  distributed  in  digital  form  efficiently  and  cost
effectively.

The Company's customers are primarily located within the United States.

On May 2, 2000, the Company, formerly Empire Communications, Inc., and Front
Porch Digital Inc., a Delaware corporation which was formed on February 1, 2000
("Front Porch"), executed an Agreement and Plan of Reorganization pursuant to
which 100% of Front Porch's stock was effectively exchanged for a controlling
interest in a publicly held "shell" corporation that concurrently changed its
name to Front Porch Digital Inc. This transaction is commonly referred to as a
"reverse acquisition." For financial accounting purposes, this transaction has
been treated as the issuance of stock for the net monetary assets of the
Company, accompanied by a recapitalization of Front Porch, with no goodwill or
other intangible assets recorded.

For financial  reporting  purposes,  Front Porch is considered  the acquirer and
therefore the historical  operating results of Empire  Communications,  Inc. are
not presented.  The accompanying  financial  information includes the results of
operations  and cash flows of Front Porch for the period  beginning  February 1,
2000 (commencement of operations).

On October 10, 2000, the Company acquired its media services  operations,  which
performs  conversions  and  migrations  of  legacy  analog  data,  such as text,
documents,  microfiche and images, to digitized data on tape and disk. Operating
results  from the  media  services  operations  are  included  in the  Company's
operating results beginning October 11, 2000.


                                                                             F-5
<PAGE>

                    Notes to Financial Statements (continued)


1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

The financial  statements  of the Company have been prepared on a  going-concern
basis,  which  contemplates  the  realization  of assets and  liabilities in the
normal course of business.  Accordingly, the financial statements do not include
any adjustments that might be necessary should the Company be unable to continue
in existence.  In 2001, the Company incurred losses and negative cash flows from
operating activities of $8.1 million and $2.9 million, respectively. The Company
has incurred  losses since  commencement  of  operations  in its current line of
business and expects losses to continue in 2002.  Further, at December 31, 2001,
the Company has a working capital deficit of $2.4 million.  These factors create
significant  uncertainty  about the  Company's  ability to  continue  as a going
concern.

During 2001, the Company  focused on completing the  development of its products
and service offerings that facilitate the distribution of digital video content.
The Company also began  marketing  its suite of data and video  solutions to the
marketplace  and was awarded  several new contracts  during the third and fourth
quarters of 2001. The Company has implemented cash saving measures including the
deferral of payment of certain  expenses.  Management of the Company  recognizes
that  additional  resources  will be required to continue as a going concern and
has been  seeking  additional  sources  of  capital  (See Note  16).  Management
believes that these actions will enable the Company to obtain sufficient cash to
continue as a going concern.  However, there can be no assurance that sufficient
additional  capital  will be  available  on  terms  that are  acceptable  to the
Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company  considers  all highly  liquid debt  instruments  with a maturity of
three months or less when purchased,  and investments in money market  accounts,
to be cash equivalents.  Cash and cash equivalents consist of cash on hand, cash
in money market funds and demand deposit accounts.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.  Depreciation  and  amortization  are
computed  on the  straight-line  basis over the  estimated  useful  lives of the
related assets as follows:  computer equipment and software--three years, office
furniture and equipment--seven years, leasehold improvements--four to ten years.


                                                                             F-6
<PAGE>

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTANGIBLES

Amortization of software and intellectual property and the excess cost over fair
value of net assets acquired is calculated using the  straight-line  method over
seven years. The Company periodically evaluates the value and future benefits of
its intangibles.  The Company  assesses  recoverability  from future  operations
using cash flows from operations of the related acquired  business as a measure.
Under this  approach,  the carrying value would be reduced if the Company's best
estimate of expected future cash flows of the related business, discounted using
the  current  risk-free  rate,  would be less  than the  carrying  amount of the
intangibles  over the remaining  amortization  period.  In the fourth quarter of
2001,  the  Company  revised its  estimate  of  expected  future cash flows from
operations of the acquired business and recorded a charge of $865,000 to reflect
the excess cost over fair value of assets  acquired at its estimated fair value.
This  amount has been  included  in  amortization  expense  in the  accompanying
financial statements for the year ended December 31, 2001.

REVENUE RECOGNITION

The Company  recognizes  revenue  when  persuasive  evidence  of an  arrangement
exists,  delivery and acceptance has occurred, the fee is fixed or determinable,
and collectibility is reasonably assured.

Revenue from product sales is recognized  upon shipment and the passage of title
to the customer.

Revenue under service  contracts is recognized when services have been performed
and accepted, or on the percentage of completion method of accounting, depending
on the nature of the project. The extent of progress toward completion under the
percentage of  completion  method is measured by using the number of sites under
the contract that have been completed.

Revenue from  software  licenses is  recognized  at the inception of the license
term. Revenue for post-contract  software maintenance and support  arrangements,
which are marketed  separately,  is recorded on a  straight-line  basis over the
support period for multi-year contracts and at the inception of contracts of one
year or less.


                                                                             F-7
<PAGE>

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

Revenue from sales  transactions,  which have multiple  elements such as product
sales,  service  contracts  and software  licenses,  is allocated to the various
elements based on the relative fair value of each of the elements. Fair value is
based on the sales price of the element when sold separately.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes costs in developing software products upon determination
that  technological  feasibility has been  established for the product,  if that
product is to be sold, leased or otherwise marketed. Costs incurred prior to the
establishment  of   technological   feasibility  are  charged  to  research  and
development  expense.  When the  product is  available  for  general  release to
customers,  capitalization is ceased, and such previously  capitalized costs are
amortized over the remaining estimated economic useful life of the product,  not
to  exceed to three  years.  As of  December  31,  2001,  $261,000  of  software
development costs have been capitalized.

INCOME TAXES

The Company  utilizes the liability method to determine the provision for income
taxes,  whereby  deferred tax assets and  liabilities  are  determined  based on
differences  between financial reporting and tax bases of assets and liabilities
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the differences are expected to reverse.

PER SHARE DATA

The  Company  reports  its  earnings  (loss)  per share in  accordance  with the
Statement of Financial  Accounting  Standards No. 128,  "Accounting for Earnings
Per Share" ("FAS 128").  Basic loss per share is  calculated  using the net loss
divided by the  weighted  average  common  shares  outstanding.  Shares from the
assumed  conversion  of  outstanding  warrants  and options are omitted from the
computations of diluted loss per share because the effect would be antidilutive.


                                                                             F-8
<PAGE>

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FINANCIAL INSTRUMENTS

The  carrying  value  of  short-term   financial   instruments,   such  as  cash
equivalents,   accounts  receivable,  accounts  payable  and  accrued  expenses,
approximates  their  fair  value  based on the  short-term  maturities  of these
instruments.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions affecting the reported amounts of assets and liabilities and the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

STOCK-BASED COMPENSATION

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting  for Stock  Issued to  Employees,"  and related  interpretations  in
accounting for its employee  stock options  because the  alternative  fair value
accounting provided for under Financial  Accounting Standards Board Statement of
Financial  Accounting  Standard  (SFAS) No.  123,  "Accounting  for Stock  Based
Compensation,"  requires  the use of  option  valuation  models  that  were  not
developed for use in valuing employee stock options. The effect of applying SFAS
No. 123's fair value method to the  Company's  stock-based  award results in pro
forma net loss that is not  materially  different  from the amount  reported and
loss per share that is the same as the  amount  reported.  Pro forma  results of
operations  may not be  representative  of the  effects on reported or pro forma
results of operations for future years.

The Company accounts for equity  instruments issued to non-employees in exchange
for goods or services  using the fair value method and records  expense based on
the values determined.


                                                                             F-9
<PAGE>

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK

The Company sells its products and services  throughout the United  States.  The
Company  performs  periodic  credit  evaluations  of  its  customers'  financial
condition and  generally  does not require  collateral.  Credit losses have been
within management's expectations. For the year ended December 31, 2001, revenues
from three customers, each exceeding 10% of total revenue,  aggregated 46%, 17%,
and 16%,  respectively.  Accounts  receivable  from the Company's  third largest
customer was $95,000 as of December 31, 2001.  For the period ended December 31,
2000,  revenues  from three  customers,  each  exceeding  10% of total  revenue,
aggregated 46%, 14%, and 14%, respectively.  The Company was a subcontractor for
its largest customer during 2000,  which owned 25% of the Company's  outstanding
common stock as of December 31, 2000.

PENDING ACCOUNTING CHANGES

In July 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standard (SFAS) No. 142,  "Goodwill and Other  Intangible
Assets."  This  statement  addresses  financial  accounting  and  reporting  for
acquired goodwill and other intangible  assets. The provisions of this statement
become effective for the Company  beginning  January 1, 2002 and are required to
be  applied  to all  goodwill  and other  intangible  assets  recognized  in the
Company's financial  statements at the date of adoption.  At that time, goodwill
will no  longer  be  amortized,  but will be  tested  for  impairment  annually.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial  application of this statement would be reported as resulting
from a change  in  accounting  principle.  During  the first  half of 2002,  the
Company will perform the first of the required impairment tests of goodwill. The
Company has not yet determined what effect,  if any, this initial test will have
on the Company's financial position or results of operations. As a result of the
adoption of SFAS No. 142, all  amortization  of goodwill as a charge to earnings
($791,000 in 2001) will be eliminated.

3. ACQUISITION

On October 10, 2000, the Company acquired  substantially  all of the assets used
in the media services operations of Storage Technology Corporation (StorageTek).
In addition, the Company assumed certain liabilities and obligations,  including
a note payable to an employee.  The consideration  paid by the Company consisted
of $262,000 in cash and 6,088,636 shares of common stock of the Company.


                                                                            F-10
<PAGE>

                    Notes to Financial Statements (continued)


3. ACQUISITION (CONTINUED)

The acquisition  was accounted for using the purchase  method and,  accordingly,
the aggregate purchase price,  including transaction fees and expenses, has been
allocated  based on the fair value of the assets  acquired  and the  liabilities
assumed.

The unaudited pro forma  information  set forth below assumes the acquisition of
the media  services  operations had occurred at the beginning of the period from
February  1, 2000  (commencement  of  operations)  to  December  31,  2000.  The
unaudited pro forma information is presented for informational purposes only and
is not  necessarily  indicative of the results of operations that actually would
have been achieved had the acquisition been consummated at that time:

          Revenues                                       $  1,640,000
          Net loss                                        (10,371,000)
          Basic and diluted loss per share                       (.59)

4. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2001, consist of:

          Computer equipment                                $1,321,596
          Software                                             224,557
          Leasehold improvements                               332,565
          Office furniture and equipment                        53,114
                                                            ----------
                                                             1,931,832
          Less accumulated depreciation                        692,023
                                                            ----------
                                                            $1,239,809
                                                            ==========

5. NOTES PAYABLE

During 2000,  the Company  received  $800,000 in proceeds from  unsecured  notes
payable. These notes accrue interest at 9% and are payable on demand. In October
2000, the Company repaid $600,000 of the principal amount of the notes.


                                                                            F-11
<PAGE>

                    Notes to Financial Statements (continued)


5. NOTES PAYABLE (CONTINUED)

In conjunction  with the acquisition  discussed in Note 3, the Company assumed a
non-interest-bearing note payable to an employee in the amount of $956,000. This
note is  payable  based on a  percentage  of  revenue  from the  media  services
operations,  ranging  between 2% and 3% per year, to be payable in full no later
than  December 31,  2004.  In the event the Company  exits the media  conversion
business  prior to December  31,  2004,  the  remaining  balance of this note is
payable on demand.  At December 31, 2001, the  outstanding  balance on this note
was $743,963.

6. OTHER EXPENSES

In February 2000,  the Company  reached an agreement in principle to acquire the
outstanding  shares of capital stock of Formal Systems  America Inc.  (FSAI),  a
corporation formerly engaged in the software  re-engineering  business.  Certain
shareholders  of  FSAI  are  also  shareholders  of  the  Company.  The  Company
subsequently  terminated  the proposed  acquisition  of FSAI and agreed to pay a
breakup fee and legal  expenses,  aggregating  $245,000,  which are  included in
other expenses for the period ended December 31, 2000.

In May 2000,  the Company  purchased  300,000  shares of  convertible  preferred
stock,  par value $.01, and warrants to purchase  100,020 shares of common stock
in a recently  established  technology  company for  $300,000.  This  technology
company was unable to obtain  sufficient  capital and ceased  operations  during
2001. The Company has written off this investment of $300,000, which is included
in other expenses for the period ended December 31, 2000.

7. INCOME TAXES

At December 31, 2001, the Company has available for federal and state income tax
purposes,  net operating loss  carryforwards of approximately  $8.2 million that
expire  between 2007 and 2021.  The  utilization of the above net operating loss
carryforwards is subject to significant  limitations  under the tax codes due to
changes in ownership, and portions may expire prior to utilization.


                                                                            F-12
<PAGE>

                    Notes to Financial Statements (continued)


7. INCOME TAXES (CONTINUED)

Significant  components of the  Company's  deferred tax asset as of December 31,
2001 are as follows:

          Deferred tax assets:
              Accrued expenses and other                  $ 1,550,000
              Start-up costs                                1,023,000
              Amortization                                    529,000
              Net operating loss carryforwards              3,098,000
                                                          -----------
          Total deferred tax assets                         6,200,000
          Valuation allowance for deferred tax assets      (6,200,000)
                                                          -----------
          Net deferred tax assets                         $      --
                                                          ===========

Management has recorded a valuation  allowance  against the entire  deferred tax
asset,  as management does not consider the realization of this asset to be more
likely than not. The  increase in the  valuation  allowance  during 2001 and the
period ended December 31, 2000 was $2,937,000 and $3,263,000, respectively.

8. RETIREMENT PLAN

The  Company   adopted  a  401(k)  plan  effective   January  1,  2001  covering
substantially all of its employees.  Eligible employees may contribute up to 20%
of compensation subject to certain limitations. The Company is obligated to make
contributions  to the  plan  equal  to 3% of the  compensation  of all  eligible
participants.  Retirement  plan expense for the year ended December 31, 2001 was
$75,000.

9. STOCKHOLDERS' EQUITY

In  August  2000,  certain  founding  shareholders  of  Front  Porch  agreed  to
restructure the capital of the Company by contributing an aggregate of 1,613,639
shares of common  stock of the  Company  and  forfeiting  options or warrants to
purchase an aggregate of 6,250,000 shares of common stock of the Company.

In October 2000,  the Company  completed a private  placement of 117.032  units,
each unit consisting of 25,000 shares of unregistered  common stock. The Company
received  from such  offering  aggregate  net  proceeds  of $5.4  million  after
deducting  offering costs of $431,000,  of which $47,000 was paid to an employee
of the Company as  compensation  for  services in  conjunction  with the private
placement.


                                                                            F-13
<PAGE>

                    Notes to Financial Statements (continued)


9. STOCKHOLDERS' EQUITY (CONTINUED)

In July 2001, the Company completed a private placement of 30.3 units, each unit
consisting  of 25,000  shares of  unregistered  common  stock  and  warrants  to
purchase  25,000  shares of  unregistered  common stock at an exercise  price of
$3.00 per share.  These warrants  expire on June 30, 2004. The Company  received
aggregate proceeds of $1.5 million from this offering.

For those investors who participated in the Company's  initial private placement
during 2000, in November 2001, the Company  offered for each share  purchased in
that private placement, a two-year warrant to purchase one share of common stock
at $.50 per share in exchange for the  agreement  of such  investors to restrict
the  transfer of the original  shares  through  October 31,  2002.  During 2002,
1,089,550 warrants will be issued in conjunction with this offer.

In addition, for each of the investors who participated in the Company's private
placement  during 2001, in November 2001, the Company offered for each share and
warrant purchased in that private  placement,  an additional 1.666 shares of the
Company's  common  stock in  exchange  for the  return and  cancellation  of one
warrant. During 2002, 645,575 shares will be issued and 387,500 warrants will be
canceled in conjunction with this offer.

10. STOCK OPTION PLAN

In May 2000, the Company  established an Equity Incentive Plan that provides for
the granting of options to key  employees,  officers and certain  individuals to
purchase  shares of the  Company's  common  stock.  The  Equity  Incentive  Plan
provides  for the  issuance  of up to  6,000,000  shares  of common  stock  upon
exercise of the  options.  The Company has reserved  6,000,000  shares of common
stock to satisfy the requirements of the Equity Incentive Plan. Options intended
to be incentive  stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended,  and nonqualified options may be granted under
the Equity Incentive Plan. Outstanding incentive stock options granted under the
Equity  Incentive Plan vest over three years beginning on the first  anniversary
of the grant  date and are  exercisable  for a period of not more than ten years
from the date of grant. In addition,  the Company has granted nonqualified stock
options to certain employees of the Company. Such options have been granted with
an exercise  price below market at the date of grant,  vest  immediately or over
three  years  beginning  on the first  anniversary  of the grant  date,  and are
exercisable  for a period of three to five years.  The Company has also  granted
nonqualified  stock options to certain directors and consultants.  These options
have been granted with an exercise price at or below market at


                                                                            F-14
<PAGE>

                    Notes to Financial Statements (continued)


10. STOCK OPTION PLAN (CONTINUED)

the date of grant,  vest  immediately,  and are  exercisable for a period of not
more  than  nine  years.   During  2001,  the  Company   recognized  expense  of
approximately  $557,000  related  to stock  options  granted  to  employees  and
directors,  and $377,000  related to stock options granted to consultants  under
this plan. During 2000, the Company recognized expense of approximately $181,000
related to stock options granted to employees and directors under this plan.

A summary of the Company's stock option activity,  and related information is as
follows:

                                                               WEIGHTED AVERAGE
                                                      SHARES   EXERCISE PRICE
                                                    --------------------------
          Options outstanding, February 1, 2000           --     $     --
          Options granted                            4,245,000       1.85
          Options forfeited/canceled                (2,300,000)       .50
                                                                 ----------
          Options outstanding, December 31, 2000     1,945,000       3.45
          Options exercised                             (5,989)       .01
          Options granted                            1,908,093       3.28
          Options forfeited/canceled                (1,545,000)      3.63
                                                                 ----------
          Options outstanding, December 31, 2001     2,302,104   $   3.19
                                                                 ==========

          Exercisable at December 31, 2000              20,000   $    .50

          Exercisable at December 31, 2001             975,438   $   3.00


The weighted  average  exercise price for options  granted during the year ended
December 31, 2001 was $2.58,  $3.81,  and $1.58 for options whose exercise price
(i) equals, (ii) exceeds, or (iii) is less than the market price of the stock on
the grant date, respectively.

The weighted  average exercise price for options granted during the period ended
December 31, 2000 was $1.16,  $4.00,  and $3.17 for options whose exercise price
(i) equals, (ii) exceeds, or (iii) is less than the market price of the stock on
the grant date, respectively.

                                                                            F-15


<PAGE>

                    Notes to Financial Statements (continued)


10. STOCK OPTION PLAN (CONTINUED)

A summary of the status of options outstanding at December 31, 2001 follows:

                                         WEIGHTED AVERAGE
                                            REMAINING
   EXERCISE PRICE         OPTIONS        CONTRACTUAL LIFE         OPTIONS
     PER SHARE           OUTSTANDING         IN YEARS            EXERCISABLE
-------------------------------------------------------------------------------
    $ .45 - 1.39            114,603             2.5                114,603
     2.00 - 2.90            796,667             4.0                303,334
     4.00                 1,390,834             6.3                557,501


11. EMPLOYEE BONUS PLAN

In March 2001,  the Board of  Directors  adopted the Front  Porch  Digital  Inc.
Employee  Bonus Plan ("the Bonus Plan") to promote the  interests of the Company
and its  shareholders  by permitting  the Company to award bonuses in cash or in
shares of its common stock to key  employees  in order to reward such  employees
for their successful  efforts in attaining  objectives  beneficial to the growth
and  profitability of the Company and to retain their services.  The Company has
reserved  2,000,000  shares,  subject to  adjustment,  of its  common  stock for
issuance  under the Bonus Plan. The Bonus Plan will terminate on March 31, 2006,
except that the Board of  Directors  may  terminate  the Bonus Plan (except with
respect to any outstanding  bonus awards) at an earlier date. As of December 31,
2001, no shares have been issued under this plan.


                                                                            F-16
<PAGE>

                    Notes to Financial Statements (continued)


12. WARRANTS

In connection with the Plan of Reorganization  (the "Plan"), on May 2, 2000, the
Company  issued  warrants in exchange for  identical  fully  vested  outstanding
warrants of Front Porch, which enable the holders to:

(i)   purchase an aggregate of 6,000,000 shares of unregistered  common stock of
      the Company at an exercise price of $0.50 per share.  In connection with a
      capital  restructuring  of the Company  during  2000,  3,000,000  of these
      warrants  have  been  forfeited.  These  warrants  became  exercisable  on
      December 1, 2001 and expire on February 23, 2005. During 2001,  100,000 of
      these warrants were exercised.  The holders of these warrants were granted
      certain rights for the  registration  under the Securities Act of 1933, as
      amended,  of the  shares  of common  stock of the  Company  issuable  upon
      exercise of the warrants;

(ii)  purchase an aggregate of 300,000  shares of  unregistered  common stock of
      the Company at an exercise  price of $1.00 per share.  These warrants were
      issued in connection  with notes payable  issued by Front Porch and expire
      on December 31, 2005;

(iii) purchase an aggregate of 1,100,000 shares of unregistered  common stock of
      the Company at an exercise price of $0.50 per share.  In connection with a
      capital  restructuring  of the  Company  during  2000,  950,000  of  these
      warrants have been forfeited.  These warrants become  exercisable in three
      equal  annual  installments  commencing  on February 1, 2001 and expire on
      February 1, 2005.


                                                                            F-17
<PAGE>

                    Notes to Financial Statements (continued)


12. WARRANTS (CONTINUED)

In connection  with the issuance of the notes payable  during 2000 (Note 5), the
Company  issued  warrants  that enable the lenders to purchase an  aggregate  of
800,000 shares of unregistered  common stock of the Company for a purchase price
of $1.00 per share. 300,000 of these warrants were issued prior to the execution
of the Plan.  These  warrants  expire on December  31,  2005.  The  statement of
operations  for the period ended  December  31, 2000  reflects the amount of the
accretion of these notes to their face value in the amount of $51,000.

In  connection  with the  private  placement  during  2000 (Note 9), the Company
issued warrants to placement  agents as compensation  for the placement  agents'
services  that  enable  them to  purchase  an  aggregate  of  129,500  shares of
unregistered  common  stock of the  Company  for a  purchase  price of $2.40 per
share. These warrants expire on October 31, 2005. The holders of 28,250 of these
warrants were granted certain rights for the  registration  under the Securities
Act of 1933, as amended,  of the shares of common stock of the Company  issuable
upon exercise of the warrants.

In  connection  with the  private  placement  during  2001 (Note 9), the Company
issued  warrants to  purchase an  aggregate  of 757,500  shares of  unregistered
common stock at an exercise price of $3.00 per share.  These warrants  expire on
June 30, 2004.


                                                                            F-18
<PAGE>
                    Notes to Financial Statements (continued)


12. WARRANTS (CONTINUED)

At December 31, 2001, the Company had the following warrants outstanding for the
purchase of its common stock:

<TABLE>
<CAPTION>
     DESCRIPTION                    EXPIRATION DATE      NUMBER OF SHARES ISSUABLE   EXERCISE PRICE
-------------------------------------------------------------------------------------------------------
<S>                                <C>                  <C>                         <C>
Issued to original
   Front Porch shareholders           May 2, 2005                 2,900,000              $ .50
                                   February 1, 2005                 150,000              $ .50
Issued in connection
   with notes payable               December 31, 2005               800,000              $1.00
Issued in connection with
   a private placement              October 31, 2005                129,500              $2.40
                                     June 30, 2004                  757,500              $3.00
Issued to Equity Pier in
   exchange for consulting
   services (Note 14)              February 28, 2006              3,324,696              $2.00
                                                         ---------------------------
Total warrants outstanding                                        8,061,696
                                                         ===========================
</TABLE>


                                                                            F-19
<PAGE>

                    Notes to Financial Statements (continued)


13. COMMITMENTS

The  Company  has  noncancelable  operating  leases  for  facilities  and office
equipment   that  expire  through  2006.   Future  minimum   rentals  due  under
noncancelable operating leases, as of December 31, 2001 are as follows:

         Year ending December 31
                  2002                                  $180,000
                  2003                                   167,000
                  2004                                   124,000
                  2005                                    51,000
                  2006                                    38,000
                                                        --------
                                                        $560,000
                                                        ========

Rental expense under operating leases, not including  month-to-month leases with
related parties, was $164,000 and $29,000 in 2001 and 2000, respectively.

The  Company  has  entered  into  employment  contracts  with four of its senior
employees  for  periods of three to four years,  expiring no later than  October
2004.  Under the agreements,  the covered  individuals are entitled to specified
salaries  over  the  contract  periods.   The  total  estimated  future  minimum
obligation under these contracts as of December 31, 2001 was $1,728,000.

14. CONSULTING AGREEMENT WITH EQUITY PIER LLC

In August 2000, the Company  issued to Equity Pier LLC (Equity Pier),  4,635,866
shares of common stock of the Company.  Of these shares,  964,362 were issued in
consideration of consulting  services  previously rendered by Equity Pier to the
Company. The fair value of these shares of $1,157,000 was recorded as a non-cash
charge to consulting expense in the accompanying statement of operations for the
period ended  December 31, 2000. The remaining  3,671,504  shares were issued in
consideration  of a nominal cash payment and a promissory  note from Equity Pier
in the principal amount of approximately $4.4 million.

The Company also entered into a  consulting  agreement  whereby  Equity Pier had
agreed to render  consulting  services to the Company  for the  45-month  period
beginning  October 1, 2000 in  consideration  of fixed  monthly  payments by the
Company.  Total consulting  expense recognized for the period ended December 31,
2000 under this agreement was approximately $524,000.


                                                                            F-20
<PAGE>

                    Notes to Financial Statements (continued)


14. CONSULTING AGREEMENT WITH EQUITY PIER LLC (CONTINUED)

In February  2001, as a result of the Company's  reduced need for the consulting
services of Equity Pier and in recognition of the services  already  provided by
Equity Pier,  the Company and Equity Pier  formalized  a plan to  terminate  the
consulting  agreement.  In addition,  (i) Equity Pier agreed to return 3,324,696
shares of common stock of the Company as payment of the remaining balance on the
promissory  note  which is now  deemed  to be  satisfied  in full,  and (ii) the
Company  issued  warrants to Equity Pier to purchase an  aggregate  of 3,324,696
shares of common stock of the Company for a purchase price of $2.00 per share as
compensation for consulting  services  performed  during 2000. As a result,  the
Company has taken a non-cash charge to consulting  expense of approximately $3.1
million  for the  period  ended  December  31,  2000 in  connection  with  these
warrants. These warrants become exercisable in March 2002 and expire in February
2006.  The return of common stock in  satisfaction  of the  promissory  note was
recorded by the Company in the December 31, 2000 balance sheet.

The former Chairman and Chief Executive  Officer of the Company is also a member
of Equity Pier.

15. RELATED PARTY TRANSACTIONS

During 2000, the Company leased  computer  equipment on a  month-to-month  basis
from FSAI. Rent expense on this lease was $120,000 for the period ended December
31, 2000.  This lease was  terminated in December  2000. The Company also leased
office space from FSAI on a  month-to-month  basis through  November 2001.  Rent
expense on this lease was  $118,000  for the year ended  December  31,  2001 and
$122,000 for the period ended December 31, 2000.  Certain  shareholders  of FSAI
are also shareholders of the Company.

The Company retained an investment banking firm to provide financial  consulting
and investment banking advisory services to the Company, including providing the
services of a member of the firm as the Company's  Chief  Financial  Officer and
Chief Operating  Officer.  During 2001 and 2000, the Company paid the investment
banking firm $188,000 and $55,000 of consulting fees, respectively, and $200,000
in 2000 in connection with the acquisition of the media services  operations.  A
shareholder in the investment  banking firm is also a shareholder  and executive
officer of the Company.


                                                                            F-21
<PAGE>

                    Notes to Financial Statements (continued)


16. SUBSEQUENT EVENTS

In March and April 2002, the Company issued $500,000 aggregate  principal amount
of convertible  secured notes to two investors.  The notes have a one year term,
bear  interest  at the rate of 7% per annum,  which is  payable  on a  quarterly
basis,  and are secured by all assets of the Company.  The notes are convertible
into a number  of  shares of  common  stock of the  Company  equal to 14% of the
outstanding  shares  of  common  stock  at any  time at the  option  of the note
holders, subject to certain anti-dilution adjustments for the one-year term. The
note holders were granted  certain rights for the  registration  of these shares
under the  Securities  Act of 1933,  as amended,  which  requires the Company to
register  these  shares on the  earlier  of April  2003,  or upon the  filing of
certain registration  statements by the Company. The notes contain restrictions,
which,  among  others,  prohibit  the  Company  from  issuing  new debt,  paying
creditors in excess of specified  amounts,  or prepaying  the notes  without the
consent of the note  holders.  In the event the Company  raises $2.5  million of
equity  capital,  the Company may deposit into an escrow account an amount equal
to the  outstanding  principal  and  interest  on the  notes,  at which time all
restrictions  and liens on the assets of the Company will be released.  Upon the
sale or  liquidation  of  substantially  all of the assets of the Company,  or a
business  combination in which a majority of the issued and  outstanding  Common
Stock of the Company is  transferred,  the note  holders are entitled to receive
all outstanding principal and interest on the notes and a liquidation preference
equal to three times the amount of such outstanding principal and interest.

In March 2002, the Company issued 400,000 shares of unregistered common stock to
an individual  investor upon which the Company  received  aggregate  proceeds of
$50,000.


                                                                            F-22
<PAGE>

                         Report of Independent Auditors

Board of Directors and Stockholders
Front Porch Digital Inc.

We have audited the accompanying balance sheet of Front Porch Digital Inc. as of
December 31,  2001,  and the related  statements  of  operations,  stockholders'
equity,  and cash flows for the year ended  December 31, 2001 and for the period
from February 1, 2000  (commencement  of operations) to December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 Front Porch Digital Inc. at
December 31, 2001,  and the results of its operations and its cash flows for the
year  ended  December  31,  2001  and for  the  period  from  February  1,  2000
(commencement of operations) to December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred  losses and negative cash flows from  operating  activities
since commencement of operations in its current line of business.  Further,  the
Company has a working  capital  deficit of $2.4  million at December  31,  2001.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 1. The financial  statements do not include any adjustments to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.


                                       /s/ Ernst & Young  LLP

January 31, 2002
except for Note 16, as to
which the date is April 10, 2002


                                                                            F-23