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, 2002

[ ]      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        No  X
    ---       ---

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, 2002 were $4,897,000.

The aggregate market value of shares of the Company's common stock held by
non-affiliates as of April 28, 2003 was $4,161,893 based upon the average bid
and asked prices of the Company's common stock on the OTC Bulletin Board on
March 31, 2003. 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 April 28, 2003, there were 41,615,648 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
                                                                --      ---


<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. (the "Company") is an industry leader in the
emerging market of digital information asset management. The Company utilizes a
comprehensive suite of proprietary products and services that enable customers
to efficiently and cost-effectively migrate data from nearly any media type and
data format to any other media type and format. Incorporating software-based
methodologies and intellectual property throughout its service offerings allows
content to be captured, converted, managed and distributed in digital form
efficiently and cost effectively. The Company's proprietary DIVArchive software
products enable customers to manage large-scale digital archives in the
entertainment industry. DIVArchive simplifies the process of preserving,
managing and accessing content.

         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, regulatory requirements, as well as the potential risk of
system failures causing downtime or data loss. The Company believes the
inevitable movement toward the digitization of data will create an enormous
increase in the demand for digital storage, which will provide a significant
opportunity for the Company to convert non-digitized data to digital formats
that may then be easily accessed, browsed, indexed, managed and distributed.

         The Company's enterprise data media solutions (EDMS) group addresses
issues relating to data archive and storage. For example, the EDMS group
pioneered a methodology for performing tape and optical data conversions in an
offline environment on the customer's premise. Performing offline conversions,
which is believed to be a unique competence in the industry, avoids significant
additional loads from being placed on customers' frequently over-burdened
systems. The EDMS group is further able


                                       2
<PAGE>

to identify and, if necessary, reverse-engineer the multitude of data storage
and compression algorithms encountered during the conversion process,
particularly in the optical storage arena. The EDMS group has proven performance
in these and other data conversion and migration services, as evidenced by its
experience in completing large-scale projects for numerous Fortune 1000
companies.

         The Company's digital media group, which addresses the issues relating
to digital content management, has developed intellectual property (IP) that
enables the large-scale conversion and migration of information stored in any
legacy system and format to any applicable digital format using only a single
capture of content. When compared to hardware-based systems, the Company
believes its software-based solution adds flexibility and significantly reduces
the costs associated with digital conversion. Once content is captured, it can
be converted into one or many formats of the customer's choice on demand,
without any additional captures. With content digitized and stored on digital
media, customers have the ability to catalog, index, browse, format, archive and
distribute content easily and cost-effectively. Through compression and other
process techniques, the Company's solution also minimizes customers' digital
media storage requirements.

         With the acquisition of its DIVArchive software products in August
2002, the Company's digital media group recently commenced offering a
proprietary solution for the management of large-scale digital archives for the
entertainment industry. The Company believes participants in entertainment
industry are increasingly seeking to convert non-digitized data to digital
formats that may easily be accessed, browsed, indexed, managed and distributed.

         Key characteristics of the Company's service offerings that
differentiate the Company from most of its competitors include the following:

              o An onsite, offline service capability that eliminates the need
         to use customers' hardware, software and labor resources, shortens
         project timeframes and increases customers' resource utilization and
         productivity.

              o Proprietary methodologies developed for updating tape management
         systems that facilitate the consolidation and stacking of data,
         lowering physical storage requirements and attendant costs.

              o A vendor-independent software and hardware strategy that enables
         cost-effective solutions and allows partnering with any storage or
         server vendor.

              o Significant EDMS experience in developing and delivering
         large-scale tape and optical data migration services is available
         company-wide.

              o A proprietary, software-based content conversion system that
         supports the creation of multiple audio, video or data formats using a
         single content capture, which significantly reduces time and capital
         requirements.

              o A decoupled capture, compression, conversion, storage and
         management process architecture that facilitates integration,
         accessibility and distribution of stored data independently or within
         customers' existing technology platforms.

              o A unique methodology that enables back-end audio and video
         indexing and multiple format distribution capabilities to further
         maximize product value.

              o A proprietary, software-based digital archiving solution that
         supports the management, maintenance, indexing and distribution for
         digital assets, primarily in the broadcast space.

                                       3
<PAGE>

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 its
breadth of service offerings to become the preferred provider of information
management products and services to large corporate and governmental agencies
worldwide. To accomplish its goals, management 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.
         The Company is developing supporting collateral materials, product
         training programs and customer service and support systems in
         conjunction with its 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 its partners. Strategic partners
         will be selected on the basis of synergistic products/services and the
         size and depth of their distribution channels, and will be tier one
         systems integrators, hardware manufacturers or entertainment, media,
         content management, storage, software companies and other
         organizations. Management believes strategic partners will seek to
         resell the Company's products and services to enhance their value
         proposition to customers and extend their revenue potential.

              o Develop 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.

              o Foster public awareness of both the Company and 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 additional 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.

                                       4
<PAGE>

              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.

PRODUCTS AND SERVICES

         ENTERPRISE DATA MEDIA SOLUTIONS. The Company offers a comprehensive,
integrated suite of enterprise data media solutions that can help customers
ensure information preservation, reduce cost and improve productivity without
compromising the security and integrity of their stored information. The
Company's EDMS group has performed professional services for over 600 customers
worldwide in industries that include banking and finance, power utility,
petroleum, pharmaceutical and government.

         All services offered by the EDMS group are performed offline utilizing
the Company's proprietary software and stand-alone hardware devices, at either
the customer site or at the Company's secure delivery facility. These services
can be performed for any applicable optical and/or tape media type and format.
Components of the currently available offerings include tape copy and
conversion, tape volume management, tape data assurance, and archive generation
and conversion.

         TAPE COPY AND CONVERSION SERVICES. The Company provides an end-to-end
tape copy and conversion solution that converts or migrates information from any
media type or data format to any other, enables the large-scale conversion of
analog content to digital formats and facilitates the migration of an entire
library to a new media technology. Current service offerings include:

              o Tape cloning services that produce an exact copy of any active
         tape volume onto a new tape volume of the same media type.

              o Tape duplication services that generate a bit-for-bit copy of
         any active tape volume onto a new tape volume of a different media
         type.

              o Tape volume stacking services that stack multiple tape volumes
         onto one or more new tape volumes of a different media type. The
         objective of this service is to reduce the physical size of the tape
         library, resulting in reduced costs associated with off-site storage of
         archived data.

              o Dataset stacking services that enable multiple datasets from
         multiple volume sets to be stacked onto one or more new tape volumes of
         a different media type. Selective dataset stacking can also be
         performed.

         TAPE VOLUME MANAGEMENT. The Company offers a comprehensive tape volume
management service that ensures data integrity and optimizes the available
storage capacities in new and existing tape technologies. Current service
offerings include:

              o Tape labeling and initialization - An offline process by which
         new or used tapes can be labeled and initialized to the customer's
         specification using Company-supplied hardware, software and personnel
         resources.

              o Tape Label Verification - The process by which customer-supplied
         tapes containing data are re-labeled and verified using
         Company-supplied hardware, software and personnel resources. This
         service is typically provided to customers that are preparing to
         automate their tape library environment.

         TAPE DATA ASSURANCE. The Company offers a comprehensive suite of tape
data assurance services that optimize operational performance, reduce the costs
associated with job abends and lost data due to media issues and ensure
continued readability and protection of the data stored in the customer's tape
library. Current service offerings include:

                                       5
<PAGE>

              o Tape Library Audit - A physical inspection and analysis of a
         customer's tape library and deep archive vault environment is performed
         onsite. A customer will typically request a tape library audit to
         determine the source and cause of media-related failures that
         significantly impact its data center operations, and to seek specific
         recommendations for improving the overall efficiency of its tape
         storage systems, and to improve data accessibility.

              o Tape Testing - Pre-certification and/or testing of media using
         industry-standard production tape drives to ensure ongoing reliability
         of media.

              o Degaussing and Security Erase - Services that utilize the
         Company's proprietary technology to permanently erase data that is no
         longer required. Degaussing increases the security needed for
         policy-based tape disposal or ensures efficient and optimal reuse of
         tapes.

         ARCHIVE GENERATION AND CONVERSION. The Company offers comprehensive
data migration solutions that enable customers to convert existing archives onto
new, cost-effective, high capacity tape media and generate new archives from
legacy media formats. Current service offerings include:

              o FileNet document archive conversion - Documents are extracted
         from optical platters and converted to a format for import into an
         online viewing application.

              o Check images conversion - Bank check images are extracted from
         optical cartridges or backup tapes. Each check is validated against the
         legacy system log file and both front and back images of each check are
         properly rotated and saved as a multipart, graphical file.

              o Document images conversion - Archived document images are
         extracted from optical platters, validated and converted into graphical
         files, which are then written to the customer's choice of tape media.
         An output database is generated mapping each document to the generated
         files.

         CUSTOMER SERVICE BENEFITS. The enterprise data media services offered
by the Company can potentially benefit any customer concerned with the storage
and accessibility of data on its tape and optical storage subsystems.
Duplication and conversion services have been provided by the EDMS group to over
600 customers in many vertical markets, including banking, communications,
government and services bureaus. The Company's competitive advantages include:

              o Offline processing to preserve the customer's CPU cycles.

              o Fast, economical alternative to online duplication and
         conversion.

              o Use of the Company's personnel minimizes impact to the
         customer's personnel resources.

              o Services are available at the customer site or at the Company's
         facility.

              o All necessary equipment and personnel are supplied by the
         Company.

              o Reduced per unit storage cost through economical migration path
         to newer storage technologies.

              o Proven process with nearly ten years of experience and over 20
         million tapes processed.

                                       6
<PAGE>

DIGITAL MEDIA SOLUTIONS

         The Company offers a comprehensive, integrated suite of digital media
solutions that facilitate the capture, management and distribution of digital
content. Components of these offerings include a desktop encoding system,
automated video indexing and a real-time format transcoder. In addition, the
Company offers a distributed storage and archive management solution for the
entertainment and medical industries that simplifies the process of preserving,
managing and accessing digital content.

         DESKTOP ENCODING SYSTEM. The Company's desktop encoding system features
a real-time, software-based encoding solution that allows the customer to create
high-quality compressed data formats. The desktop encoding system may be used as
a stand-alone system or as part of a larger end-to-end system for archiving and
distribution of digital content. Current features of the system include:

              o High quality, real-time software encoding that is easily
         upgraded through software patches. Additional formats can be easily
         added without downtime or having to swap out hardware components.

              o Single encode and dual encode modes - Content can be encoded
         directly to multiple formats, multiple simultaneous encodes with
         varying resolutions, bit-rates and other parameters.

              o Offline or online encoding in real-time or faster than real-time
         speeds.

              o Availability of advanced features, including the ability to
         encode to multiple formats from a single capture.

         BENEFITS OF THE DESKTOP ENCODING SYSTEM. The Company's software-based
encoding solutions can potentially benefit any customer concerned with encoding,
storing and distributing digital content. The Company's competitive advantages
include:

              o Compatible - Software-based encoding and transcoding solution
         can evolve as standards change. Other solutions often require the
         purchase of additional hardware when standards change.

              o Economical - 20-75% less expensive than comparable
         hardware-based solutions.

              o Flexible - Ability to encode to multiple formats, perform
         multiple simultaneous encodes, change resolution, bit-rates, and other
         parameters as needed. Hardware encoders cannot duplicate these
         features.

              o Upgradeable - As additional features are needed, customers can
         purchased upgrade modules.

              o Automated - Can be purchased as part of a larger end-to-end
         system utilizing process automation to communicate with the capture and
         compress system.

              o Adaptable - The object oriented software encoder can be
         interfaced with new hardware as it becomes available.

         AUTOMATED VIDEO INDEXING AND INTEGRATED BROWSING FOR WEB AND ENTERPRISE
PUBLISHING APPLICATIONS. The Company has integrated a powerful video indexing
and search engine with its software-based encoding and transcoding tools to
create a seamless workflow for archival applications. The Company's solution
enables the back-end indexing of previously captured material, as well as an
automated process for the indexing, annotation, searching and retrieving
processes. Current features of the system include:

                                       7
<PAGE>

              o Interface for back-end automated indexing of archive content.

              o Inclusion of close-captioned files for transcript-based
         indexing.

              o Interface for annotation of previously indexed files.

              o Creation of local database and update of global database for all
         content to facilitate searching and browsing of all media.

              o Ability to search and browse indexed and annotated content from
         a web interface.

         BENEFITS OF AUTOMATED VIDEO INDEXING AND INTEGRATED BROWSING FOR WEB
AND ENTERPRISE PUBLISHING APPLICATIONS. Adding indexing and searching
capabilities to any digital archive increases its value through accessibility.

              o Back-end indexing allows for automation and creates a more
         robust archive publishing system.

              o Storage of metadata for individual file elements, in addition to
         a global database describing all content, makes any individual media
         self-contained, including the ability to browse or search.

         REAL-TIME FORMAT TRANSCODER. This system features a real-time format
transcoder that will allow the customer to easily reformat digital audio-visual
data to meet a variety of digital distribution requirements. The Company's
proprietary algorithms support decoding and re-encoding of the compressed
digital content to most popular end-user formats, including:

              o MPEG -> Real Video

              o MPEG -> Windows Media

              o MPEG-1 <-> MPEG-2

              o AVI <-> MPEG

              o High Bit-rate MPEG <-> Low Bit-rate MPEG (Rate Conversion)

              o Variable Bit-Rate (VBR) <-> Constant Bit-Rate (CBR)

              o Elementary Streams <-> Program Stream Mux

              o Transport Stream <-> Elementary Stream

         BENEFITS OF REAL-TIME FORMAT TRANSCODER. The Company's real-time format
transcoder alleviates the need to perform multiple captures of video to meet
different distribution requirements. Other benefits include:

              o Parallel Transcoding - Supports conversion to multiple formats
         simultaneously.

              o Multi-threaded implementation - Takes advantage of up to 20
         instances running on multi-processor workstations.

              o Flexibility - Accommodates new features and can be re-configured
         to conform to other system interfaces.

         DIVARCHIVE STORAGE MANAGEMENT. DIVArchive is a proprietary "middleware"
software product that manages large-scale digital archives for the entertainment
industry. DIVArchive simplifies the process of preserving, managing and
accessing content, as part of a high capacity, expandable and scalable solution,
which satisfies the highest performance standards. The principal benefits
derived from DIVArchive include storage optimization, protection and control,
full life cycle management, near-line editing and partial retrieval, content
repurposing and sharing, and archives networking. Architectures can scale from
small disk-only systems to large capacity


                                       8
<PAGE>

systems using different forms of physical storage to balance response time,
performance and cost.

         DIVArchive solutions are designed for use in the broadcast market and
are being utilized for the complete management of broadcast content. The
entertainment industry is the Company's primary focus for developing the
DIVArchive solutions as the Company believes the participants in this industry
are increasingly seeking to convert non-digitized data to digital formats that
may easily be accessed, browsed, indexed, managed and distributed. The Company
believes this drive towards digitization and the requirements and standards for
HDTV/Digital television will result in significant growth in sales of the
DIVArchive solution.

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. During 2002, the
Company began negotiating technology development agreements with its channel
partners in an effort to more cost-effectively develop new products and services
to meet anticipated demand.

         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 engaged in 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 directing its efforts towards 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 also intends to exploit technologies received from its
strategic partners to create complementary products or provide core technologies
that have not been applied to products in different 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.

         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 years ended December 31, 2002 and December 31, 2001, the
Company incurred research and development expenses of $771,000 and $657,000,
respectively.

MARKETING AND DISTRIBUTION

         The Company's solutions are primarily targeted toward tier one
enterprises in two target market segments worldwide - broadcast and
entertainment, and financial services. The Company intends to focus its direct
sales forces on the leading organizations in these sectors and will attempt to
develop a significant indirect


                                       9
<PAGE>

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.

         Strategic distribution partners may include companies in a variety of
different businesses, such as media manufacturers and suppliers, storage and
server hardware manufacturers and vendors, software companies and system
integration firms, master resellers and value-added distributors (VADs). The
Company also intends to build a small but focused direct sales team capable of
making sales calls at the executive levels of partners and target customers. To
date, the Company has reached preliminary or definitive agreement regarding
channel partnerships and reseller relationships with the following companies:

BROADCAST:

              o Rainbow Network Communications, Inc., a subsidiary of
         Cablevision, Inc. ("Rainbow"), has entered into a five-year exclusive
         agreement to utilize the Company's transcoding and archiving
         middleware. This agreement also includes a technology partnership
         whereby Rainbow will fund the Company's development of new products to
         meet the needs of the broadcast, cable and satellite industries. As
         part of this agreement, the Company will retain all intellectual
         property and resale rights for work product that may be sold through
         the Company's distribution channel.

              o Communications Engineering, Inc. ("CEI") uses DIVArchive to
         manage the digital content library of one of its clients, Public
         Broadcast System.

              o Harris Communication, Inc. ("Harris") has entered into an
         agreement with the Company to utilize the Company's BitScream
         transcoder products to create a video server under Harris' Broadcast
         Automation control that incorporates Microsoft Windows Media 9 Series
         player technologies. Harris is an international communications
         equipment company focused on providing product, system and service
         solutions for commercial and government customers.

              o The Company is working with other national and international
         systems integrators and computer hardware providers to further expand
         the distribution channels available for the sale of its products and
         services worldwide.

FINANCIAL SERVICES:

              o Storage Technology Corporation ("StoregeTek") became a
         significant shareholder of the Company as part of the Company's
         acquisition of its media services group. The Company is the exclusive
         provider of professional conversion and related services to StorageTek
         and its client base and is a StorageTek IVAR in the United States.
         StorageTek offers the Company's services exclusively in the data
         migration and check imaging business.

              o JPMorgan Chase Bank ("JPM") has entered into an agreement to
         resell the Company's data migration and check imaging services to its
         customers.

CUSTOMERS

         The Company's EDMS group has performed services for over 600 companies
and government agencies worldwide. These customers span a broad spectrum of
disciplines, including financial institutions, utility companies, engineering
and manufacturing


                                       10
<PAGE>

companies, energy and oil companies, and governmental agencies. Key customers of
the EDMS group in 2002 included The Federal Reserve Bank, JPMorgan Chase Bank
and Wachovia Bank.

         The customer base of the Company's digital media group is comprised of
many large organizations in the broadcast and medical industries. Key customers
of the digital media group in 2002 included Rainbow/Cablevision, TPD/France,
Microsoft Corporation, Eastern Television/Taiwan, Public Broadcasting System,
CentralChina Television and MTV Networks-Europe.

         In 2002, revenue from a large national bank accounted for approximately
31% of the Company's total revenue and Storagetek accounted for approximately
18% of the Company's total revenue. In 2001, revenue from a large national bank
accounted for approximately 46% of the Company's total revenue, and StorageTek
and a third customer accounted for approximately 17% and 16%, respectively, of
total revenues. Revenue from these customers is 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.

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, the strength of sales force and channel partnership
relationships 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 primary competition for the Company's EDMS group comes from
in-house IT departments of potential customers, which may choose a
"do-it-yourself" approach. Management expects that in-house competition will
continue to be significant. The primary competition for the Company's digital
medial solutions group comes from other vendors and service providers that
compete with the Company, including EMC

                                       11
<PAGE>

Corporation, which offers its Avalon product line in competition with the
Company's DIVArchieve product line. However, management believes the solutions
currently offered by most of the Company's competitors are limited in scope and
fragmented relative to the products and services offered by the Company.

EMPLOYEES

         As of March 31, 2003, the Company employed 43 persons on a full-time
basis, of which five were executive management, five were in finance and
administration, 10 were in sales and marketing, 12 were in research and
development and 11 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

         The Company was incorporated in the State of Nevada on April 27, 1995
under the name "Landmark Leasing, Corp." During the period from its formation to
May 2, 2000, the Company generated no significant revenues, and accumulated no
significant assets, as it attempted to develop various business opportunities.
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"). 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, which enabled the Company to commence the operations of its EDMS group.

         In August 2002, the Company acquired the DIVArchive operations of
ManagedStorage International Inc. ("MSI") located in Toulouse, France. In
connection with this acquisition, the Company acquired intellectual property,
fixed assets and substantially all of the personnel of this business.

         On April 23, 2003, the Company sold to Eastman Kodak Company ("Kodak")
the Company's intellectual property rights relating to the DIVArchive product
applications for the medical imaging and information management market. In
connection with such sale, Kodak offered employment to substantially all of the
Company's personnel associated with the transferred assets and assumed certain
software support obligations to the Company's existing DIVArchive customers in
the medical industry.

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 EDMS
group and delivery service operations. In addition, the Company leases 730
square meters of office and production space in Toulouse, France through May
2009 which supports its European DIVArchive operations.

         At December 31, 2002, aggregate lease payments under the Mount Laurel,
New Jersey, Houston, Texas and Toulouse, France leases through the end of the
lease terms were $175,000, $192,000 and $809,000, respectively.

         The Company believes its current facilities are adequate for its
existing operations and that all of its properties are adequately covered by
insurance.

                                       12
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

         On or about March 21, 2003, Giancarlo Gaggero, a former employee of the
Company, and Data Strategies International, Inc., a company owned and controlled
by Mr. Gaggero, filed a suit against the Company in the District Court of Harris
County, Texas alleging breach by the Company of an asset purchase and related
agreements between Data Strategies and the Company and breach by the Company of
an employment agreement between Mr. Gaggero and the Company. Mr. Gaggero's
employment with the Company was terminated on March 5, 2003. The plaintiffs seek
monetary damages of approximately $253,000 plus interest and costs and a
declaration that they are excused from performance under the agreements from and
after January 2001. The Company responded to the complaint on April 17, 2003 and
requested that the case be moved from state court to federal court jurisdiction.
The Company believes certain of the claims are without merit, with respect to
which the Company intends to defend the action vigorously, and is considering
certain counterclaims against the plaintiffs. An outcome in this litigation that
is adverse to the Company, cost associated with defending the lawsuit and the
diversion of management's time and resources to defend the lawsuit could
seriously harm the Company's business and its financial condition.

          In addition to the proceeding described above, the Company is involved
in certain other disputes that arise in the ordinary course of business. The
Company believes that no current dispute will have a material adverse effect on
its financial condition or results of operations.

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

         None










                                       13
<PAGE>

                                     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, 2002 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.

Year ended December 31, 2001                     HIGH BID         LOW BID
                                                 --------         -------
   First Quarter..............................    $4.19            $2.97
   Second Quarter.............................     3.98             1.83
   Third Quarter..............................     2.95             1.05
   Fourth Quarter.............................     1.50             0.40

Year ended December 31, 2002
   First Quarter..............................    $1.20            $0.62
   Second Quarter.............................     1.18             0.54
   Third Quarter..............................     0.65             0.27
   Fourth Quarter.............................     0.58             0.26


         At March 31, 2002, there were 435 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. The purchase
agreement relating to the Company's outstanding 8% convertible promissory notes
prohibits the payment of dividends on the Company's common stock so long as such
notes remain outstanding.

         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 issued 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 (the "Convertible Notes") to two
investors. The notes had

                                       14
<PAGE>

a one year term, bore interest at the rate of 7% per annum, which was payable on
a quarterly basis, and were secured by all assets of the Company. The
Convertible Notes were 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 notes contained a beneficial conversion feature and,
accordingly, 100% of the amount was allocated to additional paid-in capital.

         In August 2002, in connection with the acquisition DIVArchive
operations from MSI, the Company issued 5,000,000 shares of unregistered common
stock to MSI. As additional consideration for the acquisition, the Company
issued 1,750,000 and 1,750,000 warrants to purchase unregistered common stock at
an exercise price per share of $2.00 and $4.00, respectively. Subsequent to the
acquisition, in April 2003, the Company issued an additional 2,500,000 shares
of unregistered common stock to MSI in accordance with the earn-out provisions
of the acquisition agreement.

         In April 2003, the Company issued $645,000 8% unsecured convertible
promissory notes (the "8% Notes") to a group of investors primarily consisting
of existing shareholders and management. See Note 16 in the Notes to
Consolidated Financial Statements and Item 6. Management's Discussion and
Analysis or Plan of Operations for further information.

         In April 2003, $250,000 aggregate principal amount of the Convertible
Notes and all accrued interest were converted into 6,785,715 shares of common
stock and the remaining $250,000 principal amount of the Convertible Notes was
exchange for 8% Notes. See Note 16 in the Notes to Consolidated Financial
Statements and Item 6. Management's Discussion and Analysis or Plan of
Operations for further information.

         As of December 31, 2002, the following equity compensation plans were
in effect:

<TABLE>
<CAPTION>
=============================================================================================================
                                    Number of securities to      Weighted average
                                    be issued upon exercise      exercise price of     Number of securities
                                    of outstanding options,    outstanding options,     remaining available
        Plan category                 warrants and rights       warrants and rights     for future issuance
=============================================================================================================
<S>                                             <C>                          <C>                <C>
Equity compensation plans                             -0-                     N/A                     -0-
  approved by security holders
=============================================================================================================
Equity compensation plans not
  approved by security holders                  1,537,807                    $2.64              6,462,193
=============================================================================================================
Total                                           1,537,807                    $2.64              6,462,193
=============================================================================================================
</TABLE>

The Company's equity incentive plans are more fully described in Note 10 and
Note 11 in the Notes to Consolidated Financial Statements.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

CRITICAL ACCOUNTING POLICIES

         The Company's significant accounting policies are described in Note 2
in Notes to the Consolidated Financial Statements. Some of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. Management believes the Company's most important
accounting policies include revenue recognition, software development costs and
concentrations of risk related to customers.

                                       15
<PAGE>

REVENUE RECOGNITION:

         Given the significant growth in revenues during 2002 as well as the
complexities and estimates involved in measuring and determining revenue in
accordance with generally accepted accounting principles, the Company's
accounting for revenue is crucial to the proper periodic reporting of revenue
and deferred revenue.

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

         The Company licenses software under license agreements and provides
professional services including training, installation, consulting, and
maintenance. License fee revenues are recognized when a license agreement has
been signed, the software product has been shipped, the fees are fixed and
determinable, collection is considered probable, and no significant vendor
obligations remain.

         The Company allocates revenue to each component of the contract based
on objective evidence of its fair value, as established by management. Because
licensing of the software generally is not dependent on the professional
services portions of the contract, the software revenue is recognized upon
delivery.

         Fees for maintenance agreements are recognized ratably over the term of
the agreement. Maintenance is generally billed in advance resulting in deferred
revenues.

         The Company provides software-related professional services. Services
are generally provided on a time and materials basis and revenue is recognized
as the services are provided.

         Revenue under service contracts is recognized when services have been
performed and accepted, or under the proportional-performance method of
accounting, depending on the nature of the project. The extent of progress
toward completion under the proportionate method of accounting is measured by
using the number of sites and/or units under the contract that have been
completed and the progress towards completion of batches in progress at period
end.

SOFTWARE DEVELOPMENT COSTS:

         As expenditures for software development are expected to increase, the
capture and measurement, as well as proper capitalization of these costs, is a
key focus of management as the proper matching of these costs with the related
revenue impacts the proper periodic reporting of revenues and related 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.

CONCENTRATION OF RISK - CUSTOMERS:

         During 2002, the Company had a significant portion of its revenue and
receivables generated from two major customers and expects that these customers
will continue to be significant during 2003. For the year ended December 31,
2002, revenues from these two customers, each exceeding 10% of total revenue,
aggregated 31% and 18%, respectively. Accounts receivable from the Company's
second largest customer was $325,823 as of December 31, 2002, which represented
approximately 18% of total trade receivables at that date.

         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. The Company was a subcontractor for its second largest
customer during 2002, which owned approximately 13.5% of the Company's
outstanding common stock as of December 31, 2002.

GENERAL

         At October 1, 2002, the beginning of the fourth quarter of 2002, the
Company's financial condition was weak due to the unavailability of sufficient
working capital and excessive operating costs, although the Company's results of
operations had been steadily improving over the prior three fiscal quarters. At
such date, the Company had in excess of $4.5 million in contract value in its
backlog, from which the Company expected to realize revenue over the next three
quarters, with approximately $2.5 million in revenue expected in the fourth
quarter of 2002. However, as a result of the shortage of working capital,
excessive costs and personnel and inefficient operations, the Company was at
risk of not being able to realize its expected revenues.

         In the fourth quarter of 2002, the Company initiated a restructuring
plan in an effort to position itself to raise the necessary working capital to
capitalize on its product and service portfolio, which has been gaining
widespread acceptance in the marketplace. The restructuring plan included:

                                       16
<PAGE>

              o Implementing cost reductions and cost control measures to limit
         new spending, including reducing headcount in the United States and
         Europe, reducing salaries and benefits costs, reducing consulting fees,
         controlling and reducing travel and entertainment costs, reducing
         facility size and costs and reducing overall general operating costs.

              o Securing additional resources in executive management and
         operations to develop and implement the restructuring plan.

              o Reducing short-term liabilities by renegotiating with its key
         vendors and other short-term creditors to settle outstanding
         obligations for reduced amounts or extending payment terms, in some
         cases beyond one year.

              o Implementing aggressive cash flow management, including
         accelerating significant cash receipts from customers in advance of due
         dates and deferring vendor payables to minimize the actual cash
         outflows of the business.

              o Re-aligning existing personnel and operations to better match
         the costs of the business with the business focus and expected results
         of operations.

              o Improving operational management, effectiveness and efficiency
         to enable the Company to deliver on its existing customer contracts in
         a timely and predictable manner.

         In April 2003, the Company successfully completed a capital raise in
the amount of $645,000 and renegotiated its most significant current liabilities
to provide the liquidity and flexibility necessary to ensure the continuance of
its operations. Management believes these steps have positioned the Company for
survival and growth, and that anticipated cash flow from operations, combined
with this additional funding, will be sufficient to enable the Company to
operate for at least the next 12 months.

          The following discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated
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.

RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 2001

         REVENUE. Total revenue for the three months ended December 31, 2002
increased $2.0 million, or 286%, to $2.7 million compared to total revenue of
$0.7 million for the three months ended December 31, 2001. This increase was
attributable to the additional revenue generated in both the media conversion
and software and related services business segments.

         GROSS MARGIN. Gross margin for the three months ended December 31, 2002
of $1.8 million, or 67% of total revenue, increased $1.5 million, or 350%,
compared to total gross margin of $0.3 million for the three months ended
December 31, 2001.

         LOSS FROM OPERATIONS. For the three months ended December 31, 2002, the
Company incurred a loss from operations of $107,000 as compared to a loss from
operations of $1.8 million for the three months ended December 31, 2001. The
significant improvement

                                       17
<PAGE>

in results of operations was due to the growth in revenue, improved gross
margins resulting from the reduction in operating expenses implemented during
2002.

RESULTS OF OPERATIONS- YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2001

         REVENUE. Total revenue for the year ended December 31, 2002 increased
$3.8 million, or 333%, to $4.9 million compared to total revenue of $1.1 million
for the year ended December 31, 2001. This increase was attributable to
increased revenue generated from the provision of data and video conversion
services in the media conversion business segment, which increased $1.9 million,
or 233%, over the year ago period. In addition, revenue from the sale of
software and related products in the software and services business segment
increased $1.8 million, or 602%, over the year ago period due to increased sales
of the Company's suite of video software solutions, which were available for
substantially all of 2002, and the acquisition of DIVArchive product suite in
August 2002.

         GROSS MARGIN. Total gross margin for the year ended December 31, 2002
of $3.3 million, or 67% of total revenue, increased $3.2 million, or 2,774%,
compared to total gross margin of $0.1 million for the year ended December 31,
2001.

         Gross margin of $1.8 million, or 64% of revenue generated from the
media conversion business segment during the year ended December 31, 2002
increased 1.8 million compared to gross margin of ($47,000) for the year ended
December 31, 2001. This increase was primarily the result of increased revenues
for these services and the timely delivery of such services to customers. In
addition, revenues scaled to a level whereby the direct costs of operations
could be supported, unlike the prior year periods during which revenue was not
adequate to cover costs of sales.

         For the year ended December 31, 2002, revenue in the software and
services business segment resulted in gross margins of $1.5 million, or 72% of
product revenue, compared to $161,000, or 53%, for the period ended December 31,
2001.

         During the year ended December 31, 2002, the gross margins generated
from its business segments met the Company's anticipated gross margin. The
Company currently has seve`ral engagements in progress and a pipeline of
potential business that Management believes will close during 2003. As a result,
the Company expects gross margins from the provision of conversion services to
remain the same or increase during 2003.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the year ended December 31, 2002 decreased
$1.0 million to $4.1 million from $5.1 million for the year ended December 31,
2001. SG&A expenses for the year ended December 31, 2002 included $1.9 million
in salaries and related benefits for employees not directly related to the
production of revenue, $774,000 in professional fees, $635,000 in general office
expenses, $356,000 in facilities costs, $292,000 for travel related costs, and
$135,000 for bad debt expense. SG&A expenses for the year ended December 31,
2001 consisted of $3.4 million for salaries and related benefits for employees
not directly related to the production of revenue, $583,000 in professional
fees, $491,000 for general office expenses, $315,000 for travel, and $307,000 of
facilities costs. The reduced SG&A expense levels in 2002 were the direct result
of the cost reductions implemented during the period. The Company expects SG&A
expenses to continue to decrease and to stabilize by the end of the second
quarter 2003 at a more optimum level for efficiently delivering revenue.

         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. The Company
continues 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,
manage and reformat digital content on demand and archiving technologies. As a
result, research and development expenses have

                                       18
<PAGE>

increased to $771,000 for the year ended December 31, 2002 from $657,000 for the
year ended December 31, 2001.

         DEPRECIATION AND AMORTIZATION. Amortization expense prior to January 1,
2002 consisted 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 $1.2
million for the year ended December 31, 2002 and $2.5 million for the year ended
December 31, 2001. The decrease in these expenses was primarily attributable to
discontinuing the amortization of intangible assets (goodwill) acquired in
conjunction with the acquisition of the media services operations in October
2000 in accordance with FASB 142, and an adjustment to the carrying value of
intangible assets of $865,000 in 2001.

         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 its media conversion business segment acquired in
October 2002 and recorded a charge of $865,000 to reflect the excess cost over
fair value of assets acquired at its estimated fair value. No adjustment to the
carrying value of intangibles was required in 2002.

         INTEREST EXPENSE. Interest expense was $500,000 for the year ended
December 31, 2002 compared to $18,000 for the year ended December 31, 2001.
Interest expense during 2002 represented interest of $33,000 on notes payable
for money borrowed. Interest expense for the year ended December 31, 2002 also
included non-cash interest charges aggregating $467,000, including a non-cash
interest charge of $375,000 related to the amortization of debt discount on the
Company's senior secured convertible notes, non-cash interest expense of $40,000
related to amortization of non-cash financing costs and non-cash interest
expense of $52,000 related to the value of warrants to purchase common stock
issued in conjunction with a short-term working capital loan to the Company
during 2002.

         The principal balance of notes payable at 2001 was $200,000. The
Company received gross proceeds of $800,000 from the sale of additional notes
during 2002, of which $250,000 was repaid during 2002. In addition, during 2002,
$375,000 of debt discount was amortized to earnings. At December 31, 2002, the
outstanding balance on these notes, net of debt discount of $125,000, was
$625,000.

         LOSS FROM OPERATIONS. During the year ended December 31, 2002, the
Company incurred a loss from operations of $2.8 million as compared to a loss
from operations of $8.1 million for the year ended December 31, 2001. The $5.3
million decrease in loss from operations for the year ended December 31, 2002
was due to growth in revenue of $3.8 million, which resulted in additional gross
margin of $3.2 million, and the reduction in operating expenses of $2.1 million
as part of the Company's efforts to reduce costs and reposition the Company and
its products and services for growth into 2003 and beyond. In addition, the loss
from operations in the current year was primarily accumulated in the first three
quarters of 2002 as the Company's revenues continued to ramp up to the level of
$2.7 million in the fourth quarter of 2002. The loss from operations for the
fourth quarter of 2002 was $107,000 as compared to a loss from operations of
$1.8 million for the comparable quarter of 2001.

         FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. The Company conducts
business in various countries outside the United States in which the functional
currency of the country is not the U.S. dollar. As a result, the Company has
foreign currency exchange translation exposure as the results of these foreign
operations are translated into U.S. dollars in its consolidated financial
statements. The effect of changes in value of the U.S. dollar compared to other
currencies, primarily the euro, has been to increase reported revenues and
operating profit when the U.S. dollar weakens and reduce these amounts when the
dollar strengthens. While the Company looks for opportunities to reduce its
exposure to foreign currency fluctuations against the U.S. dollar, at this point
the Company has not had adequate financial resources to

                                       19
<PAGE>

pursue hedging opportunities generally. At December 31, 2002, the Company
reported a translation gain of $68,705 as a component of Comprehensive Loss. The
Company is also subject to foreign exchange transaction exposure when its
subsidiaries transact business in a currency other than its own functional
currency. These transactions are infrequent and have not had a significant
effect on the consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2002, the Company had $718,000 of unrestricted cash and
cash equivalents. Issuance of convertible debt securities and common stock have
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 had a
one year term, bore interest at the rate of 7% per annum, which was payable on a
quarterly basis, and were secured by all assets of the Company. The notes were
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 required 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 contained
restrictions, which, among others, prohibited the Company from issuing new debt,
paying creditors in excess of specified amounts, or prepaying the notes without
the consent of the note holders. The notes contained a beneficial conversion
feature and, accordingly, 100% of the amount was allocated to additional paid-in
capital. In April 2003, notes in the principle amount of $250,000 plus all
accrued interest were converted into 6,785,715 shares of common stock. At such
time, the balance of such notes were converted into new notes having terms
identical to the $645,000 principal amount of unsecured convertible promissory
notes issued in April 2003.

         During 2002, the Company received two loans to satisfy short-term
working capital needs. The lender loaned the Company $55,000 on October 11,
2002, which was repaid with accrued interest on October 24, 2002, and $100,000
on November 27, 2002, which was repaid with accrued interest on January 6, 2003.
As such, as of December 31, 2002, the Company's current liabilities included a
note payable in the amount of $100,000. Both notes were payable on demand and
carried annual interest rates of 8%. As additional compensation for providing
these loans, in December 2002, the Company issued the lender warrants to
purchase 225,000 shares of the Company's common stock at a price per share of
$0.10. These warrants were immediately vested and have a five-year life.
Interest expense of $52,000 related to the value of the warrants was recognized
in 2002.

         During 2002, the Company received a loan in the amount of $100,000 from
MSI for short-term working capital in connection with the acquisition of the
DIVArchive product suite. The note was payable on demand and carried an annual
interest rate of 7%. This note and all accrued interest was repaid on December
9, 2002.

         In April 2003, the Company issued $645,000 principal amount of
unsecured convertible promissory notes to a group of investors primarily
consisting of existing shareholders and management. The notes bear interest at a
rate of 8% per annum and have a maturity date of September 30, 2004. Principle
and accrued interest are payable at maturity. The convertible notes are
convertible at any time at the option of the note holders into shares of common
stock of the Company at a conversion price of $0.042 per share, subject to
certain anti-dilution adjustments. The convertible notes may be prepaid by the
Company at any time without penalty. The notes contain restrictions that, among
others, prohibit the Company from issuing new debt, incurring

                                       20
<PAGE>

capital expenditures in excess of specified amounts or granting security
interests in assets, in each case without the consent of note holders owning a
majority in principal amount of outstanding notes.

         During April 2003 and in connection with the $645,000 funding and
secured note conversion discussed above, the Company restructured certain other
current liabilities including:

              o $530,000 of current liabilities to a single vendor to be payable
         over a five-year period, with interest of 5%. Payments under the
         agreement are fixed for the first year at $100,000. Remaining payments
         are subject to certain acceleration clauses based upon working capital
         levels and capital raised. In connection with this agreement, the
         Company issued to the vendor warrants to purchase up to 500,000 shares
         of common stock at a price per share of $0.10.

              o $150,000 in principal and accrued interest on a promissory note
         that was due in full on June 30, 2003 into a new note that is payable
         in 12 equal monthly installments beginning May 1, 2003 and carries an
         annual interest rate of 9%. Accrued interest is payable at maturity. In
         connection with this agreement, the Company issued warrants to the note
         holder to purchase up to 100,000 shares of common stock at a price per
         share of $0.10.

         On April 23, 2003, the Company sold to Eastman Kodak Company ("Kodak")
the Company's intellectual property rights relating to the DIVArchive product
applications for the medical imaging and information management market. In
connection with such sale, Kodak will pay the Company $850,000 and has offered
employment to substantially all of the Company's personnel associated with the
transferred assets and assumed certain software support obligations to the
Company's existing DIVArchive customers in the medical industry. The reduction
in operating costs resulting from this transaction is significant to the
Company, while the corresponding reduction in revenue associated with the
medical business will not significantly impact the Company's revenue going
forward.

         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 Company expects that anticipated cash flow from operations combined
with its cash and cash equivalents at May 1, 2003 will be sufficient to operate
for at least the next 12 months. Fourth quarter 2002 operating loss was $107,000
as compared to $1.8 million for the comparable quarter in 2001 largely due to
revenue growth and cost reductions. Included in the fourth quarter operating
loss was depreciation and amortization, which totaled $390,000 and $1,267,000
for the three months ended December 31, 2002 and 2001, respectively.
Nonetheless, these factors and the early stage of the Company's business, as
well as potential changes in the business and competitive environment, continue
to present a significant risk to the Company's long-term success. 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. 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.

         The Company expects capital expenditures to be approximately $0.5
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
sales and marketing strategy. The amount of spending in each respective area is
dependent upon the total capital available to the Company.

                                       21
<PAGE>

         As of December 31, 2002, the Company had liquid assets (cash and cash
equivalents and accounts receivable) of $2.4 million and current assets of $3.1
million. These assets were primarily derived from operations of the Company in
2002 and the funding of the senior secured notes completed in March and April of
2002. Long-term assets of $7.8 million consisted of the excess of cost over fair
value of the media services assets and DIVArchive assets acquired during 2000
and 2002 of $4.4 million, software and intellectual property of $1.8 million,
property and equipment of $1.2 million, software development costs of $0.3
million and other assets of $0.1 million.

         Current liabilities of $5.2 million at December 31, 2002 consisted of
$1.7 million of accounts payable; $1.3 million of deferred revenue, which
consisted of billings in excess of revenue recognized, deposits and progress
payments received on engagements currently in progress; $1.2 million of accrued
expenses; $565,000 of accrued expenses to employees; $376,000 of notes payable
which includes $170,000 for the current portion of a note payable to an employee
that was assumed upon the acquisition of the media services operations and
$118,000 of accrued vacation.

         The Company's working capital deficit was $2.1 million as of December
31, 2002 for the reasons described above. At such date, the Company's working
capital deficit excluding non-cash liabilities ($119,000 stock bonus) was $2.0
million.

         The Company used net cash of $380,000 in operating activities during
the year ended December 31, 2002 and $2.9 million in operating activities during
the year ended December 31, 2001, primarily as a result of the net losses
incurred during the periods.

         The Company provided net cash of $230,000 in investing activities
during the year ended December 31, 2002, of which $696,000 represented cash
provided by the acquisition of the DIVArchive assets from MSI and proceeds from
the sale of fixed assets of $47,000 which was offset by $376,000 used for
capital expenditures and $127,000 used for the development of the Company's
suite of video software solutions and other investing activities. During the
year ended December 31, 2001, the Company used $686,000 in investing activities,
of which $395,000 was used for capital expenditures and $261,000 was used for an
investment in a technology company that has since ceased operations.

         Financing activities provided net cash of $551,000 during the year
ended December 31, 2002 primarily from proceeds from the issuance of common
stock of $50,000, proceeds from the issuance of notes payable of $800,000,
offset by principle repayments on notes payable and capital leases of $299,000.
Financing activities provided net cash of $1.5 million during the year ended
December 31, 2001, primarily due to the successful completion of the private
placement in July 2001.

FINANCIAL INSTRUMENTS

         A summary of the Company's estimated required payments for financial
instruments as of December 31, 2002 are presented below:

                   2003        2004       2005      2006      2007    Thereafter
                ----------  ----------  --------  --------  --------  ----------
Total debt      $  426,000  $1,074,000     $-0-      $-0-      $-0-       $-0-
Operating
  lease
  obligations      599,000     366,000   247,000   176,000   126,000    178,000
                ----------  ----------  --------  --------  --------   --------
                $1,025,000  $1,243,000  $247,000  $176,000  $126,000   $178,000
                ==========  ==========  ========  ========  ========   ========

                                     22
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill. At
the time of an acquisition, using the criteria of SFAS No. 141, the Company will
identify and recognize intangible assets separate from goodwill. The Company has
applied SFAS No. 141 in its allocation of the purchase price for the DIVArchive
division of MSI (see Note 3 of the Notes to the Consolidated Financial
Statements).

         Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 establishes a new method of testing
goodwill for impairment and requires this testing on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Pursuant to SFAS No.
142, the Company discontinued the amortization of its goodwill as of January 1,
2002, and completed its transitional impairment testing of its goodwill and
found no indication of impairment. As of October 1, 2002, the Company performed
its annual impairment testing of its goodwill and found no impairment. The
Company will continue with its annual testing of the impairment of goodwill
under this standard that may result in future periodic write-downs of its
goodwill. As a result of the adoption of SFAS No. 142, all amortization of
goodwill as a charge to earnings ($791,000 in 2001) was eliminated.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement supersedes both SFAS
No. 121 and the provisions of Accounting Principles Board Opinion No. 30 that
are related to the accounting and reporting for the disposal of a segment of a
business. SFAS No. 144 establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale. This statement retains most of the requirements in SFAS No. 121 related
to the recognition of impairment of long-lived assets to be held and used. The
adoption of SFAS No. 144 has not had a material impact on the Company's
financial position, cash flows or results of operations.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has not adopted SFAS No. 148 in its accounting for stock-based
compensation. However it has updated its disclosure to conform to the
pronouncement.

ITEM 7.  FINANCIAL STATEMENTS

         The report of independent auditors and the Company's consolidated
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

                                       23
<PAGE>

                                    PART III

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

MANAGEMENT AND BOARD OF DIRECTORS

         The following sets forth the name, age and position of each director
and executive officer of the Company as of April 7, 2003:

NAME                               AGE    POSITION(S)
----                               ---    -----------
Thomas P. Sweeney III              42     Chairman of Board
Donald Maggi                       42     Chief Executive Officer and Director
Michael Knaisch                    46     Chief Operating Officer
Matthew Richman                    32     Chief Financial Officer and Treasurer
Jay Yogeshwar                      39     President and Chief Technology Officer
Joseph Bianco                      51     Director
Paul McKnight                      46     Director


All directors serve for one year and until their successors are elected and
qualified. All officers serve at the pleasure of the Board of Directors. There
are no family relationships among any of the officers and directors.

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

         THOMAS P. SWEENEY III. Mr. Sweeney has been Chairman of the Board of
Directors of the Company since August 2, 2002. Mr. Sweeney also previously
served as a Director of the Company for the period November 30, 2000 through
February 12, 2002. Since February 2001, Mr. Sweeney has been President and Chief
Executive Officer, and since February 2003, Mr. Sweeney has been Chairman of the
Board, of MSI. Mr. Sweeney is the founder of Equity Pier LLC, a business
advisory and venture capital firm, and has served as its Managing Partner since
May 2000. From August 1997 through February 2000, Mr. Sweeney was Senior Vice
President of Marketing at Level 3 Communications, Inc., where he was responsible
for the development of all global products and services.

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

         MICHAEL KNAISCH. Mr. Knaisch has been Chief Operating Officer of the
Company since January 2003. From October 2002 to January 2003, Mr. Knaisch
served as a consultant to the Company. From August 1998 through September 2002,
Mr. Knaisch was Senior Vice President of Global Strategic Alliances at Level 3
Communications, Inc.

         MATTHEW RICHMAN. Mr. Richman has been Chief Financial Officer of the
Company since January 2003. From October 2002 to January 2003, Mr. Richman
served as a consultant to the Company. From February 2001 to September 2002, Mr.
Richman served as Chief Financial Officer of Advanced Data Center, Inc., a
datacenter and managed technology services provider. From October 2000 through
January 2001, Mr. Richman was Vice President of Finance for TelePlace, Inc., a
datacenter/co-location company. From September 1994 through September 2000, Mr.
Richman was employed by Deloitte & Touche LLP, where he served in various
auditing and consulting roles, most recently as a Manager.

         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

                                       24
<PAGE>

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.

         JOSEPH BIANCO. Mr. Bianco has been a Director of the Company since
September 2002. From 2001 until present, Mr. Bianco has served as a consultant
to several companies in the entertainment field. From 1997 to 2000, Mr. Bianco
was Chairman of Cognitive Arts, Inc.

         PAUL MCKNIGHT. Mr. McKnight has been a Director of the Company since
August 2002. From August 2002 to January 2003, Mr. McKnight also served as
interim Chief Financial Officer of the Company. Since August 2001, Mr. McKnight
has been the Chief Financial Officer of MSI. From May 2000 to August 2001, Mr.
McKnight served as Chief Financial Officer of Equity Pier LLC, a business
advisory and venture capital firm. From January 1997 through May 2000, Mr.
McKnight was the Chief Operating Officer and Chief Financial Officer of MCI
WorldCom Wireless.

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, 2002, 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 filing of an Initial Statement of Beneficial Ownership of
Securities on Form 3 by Joseph Bianco, a director of the Company.

         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, 2002 that has not been filed
with the Securities and Exchange Commission.

CODE OF ETHICS

         The Company has not yet adopted a formal code of ethics. Management
expects to implement a formal code of ethics and related controls during 2003.

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, 2002 and 2001, and
to the Company's most highly compensated executive officers at December 31,
2002, 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.


                                       25
<PAGE>

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                         Long Term
                                                                                        Compensation
                                                                                           Awards
                                                                             ----------------------------------
                                                Annual Compensation                   Awards            Payouts
                                       ------------------------------------  -----------------------    -------
                                                                  Other      Restricted   Securities                 All
                                                                  Annual       Stock      Underlying     LTIP       Other
                          Fiscal       Salary         Bonus    Compensation   Award(s)     Options/     Payouts  Compensation
                           Year           $            ($)         ($)         ($)        SARS (#)       ($)         ($)
                          ------       --------     --------   ------------  ----------   ----------    -------   ------------
<S>                        <C>         <C>          <C>          <C>            <C>         <C>           <C>        <C>
Donald Maggi/1/            2002        $180,000         $-0-         $-0-       $-0-        840,000       $-0-       $-0-
Chief Executive            2001         $10,000         $-0-         $-0-       $-0-        160,000       $-0-       $-0-
Officer                    2000            $-0-         $-0-         $-0-       $-0-            -0-       $-0-       $-0-

Jean Reiczyk/2/            2002            $-0-         $-0-         $-0-       $-0-            -0-       $-0-       $-0-
Chairman/Chief             2001        $ 86,667         $-0-         $-0-       $-0-        636,188       $-0-       $-0-
Executive
Officer                    2000            $-0-         $-0-         $-0-       $-0-            -0-       $-0-       $-0-

Jay Yogeshwar/3/           2002        $150,000         $-0-         $-0-       $-0-            -0-       $-0-       $-0-
President/CTO              2001        $149,958         $-0-         $-0-       $-0-         15,950       $-0-       $-0-
                           2000        $104,167     $376,271         $-0-       $-0-            -0-       $-0-       $-0-

Giancarlo  Gaggero/4/

                           2002        $150,000      $50,000         $-0-       $-0-            -0-       $-0-       $-0-
Sr VP Media                2001        $141,875      $50,000         $-0-       $-0-         15,950       $-0-       $-0-
Technologies               2000         $32,981         $-0-     $211,899       $-0-        250,000       $-0-       $-0-
</TABLE>


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

/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, 2002, the
         Company paid Intertainment, Inc. $314,830 for Mr. Maggi's services as
         acting Chief Executive Officer. Included in such payment was $180,000
         in consulting fees, $100,483 in expense reimbursements, including
         $34,347 as reimbursement for a portion of the rent on a New York office
         he occupies. For the year ended December 31, 2001, total consulting
         fees paid to Intertainment, Inc. was $10,000. Intertainment, Inc.
         received no fees during 2000.

/2/      Mr. Reiczyk is a member of Equity Pier LLC, which from January 1, 2001
         to May 1, 2001, was a consultant to the Company. During such period,
         Mr. Reiczyk 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 LLC consisted of a non-cash charge of $1.2 million
         recorded in connection with the issuance of 964,362 shares of common
         stock, a $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 May 2001, provided for an annual salary of $250,000, and options
         to purchase up to 625,000 shares of the Company's common stock. Mr.
         Reiczyk resigned as an employee of 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/      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. Dr. Gaggero's employment was terminated in March
         2003.

         On January 8, 2003, the Company appointed Michael Knaisch Chief
Operating Officer and Matthew Richman Chief Financial Officer. Mr. Knaisch and
Mr. Richman served as consultants to the Company during the fourth quarter of
2002.

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

                                       26
<PAGE>

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.

         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.


                                       27
<PAGE>

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).

         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 hold 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.

         During the year ended December 31, 2002 there were no options granted
as compensation for services rendered to any officer of the Company.


                                       28
<PAGE>

         AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2002

                       AND DECEMBER 31, 2002 OPTION VALUES

<TABLE>
<CAPTION>
                                                            Number of Securities          Value of Unexercised
                               Shares                      Underlying Unexercised        In-the-money options at
                            Acquired on      Value               Options at                 December 31, 2002
                              Exercise     Realized          December 31, 2002                 Exercisable/
Name                            (#)           ($)        Exercisable/ Unexercisable          Unexercisable /1/
----                        -----------    --------      --------------------------      -----------------------
<S>                             <C>           <C>              <C>                                <C>
Don Maggi                       -0-           -0-                160,000/0                        $0/$0
Jean Reiczyk                    -0-           -0-                   0/0                           $0/$0
Jay Yogeshwar                   -0-           -0-                 15,950/0                        $0/$0
Giancarlo Gaggero               -0-           -0-              182,617/83,333                     $0/$0
</TABLE>

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

/1/    Potential unrealized value is calculated as the fair market value at
       December 31, 2002 ($.30 per share on the OTC-BB), less the option
       exercise price, times the number of shares.

COMPENSATION OF DIRECTORS

         The Company's policy is to grant outside directors of the Company
(non-employees, non-consultants) options to purchase 150,000 shares of common
stock to 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

         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 30 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.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

         The following table sets forth information as of April 28, 2003
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 APRIL 28, 2002

<TABLE>
<CAPTION>
                                                                             NUMBER OF SHARES          PERCENT OF
                                                                               BENEFICIALLY           OUTSTANDING
NAME                     ADDRESS                                                 OWNED /1/             SHARES /2/
---------------------    -------------------------------------------         ----------------         ------------
<S>                      <C>                                                    <C>                    <C>
ManagedStorage           12303 Airport Way, Suite 250                           16,952,381             33.2%  /3/
 International, Inc.     Broomfield, CO 80021
</TABLE>


                                       29
<PAGE>

                           BENEFICIAL STOCK OWNERSHIP
                              AS OF APRIL 28, 2002

<TABLE>
<CAPTION>
                                                                             NUMBER OF SHARES          PERCENT OF
                                                                               BENEFICIALLY           OUTSTANDING
NAME                     ADDRESS                                                 OWNED /1/             SHARES /2/
---------------------    -------------------------------------------         ----------------         ------------
<S>                      <C>                                                    <C>                    <C>

Rice Opportunity Fund    666 Dundee Rd. Suite 1901                               7,642,857             16.9%  /4/
 LLC                     Northbrook, IL 60062

Equity Pier LLC          1140 Pearl Street                                       6,572,926             14.0%  /5/
                         Boulder, CO  80301

Storage Technology       One StorageTek Drive                                    5,622,888             13.5%
 Corporation             Louisville, CO  80028

Irl Nathan               8235 Douglas Ave. Suite 1100                            5,095,238             11.6%  /6/
                         Dallas, TX 75225

Jay Yogeshwar            Front Porch Digital Inc.                                2,287,045              5.5%  /7/
                         20000 Horizon Way, Suite 120
                         Mount Laurel, NJ  08054

Chris Brown              16902 Harbor Master Cove Cornelius, NC 28031            3,397,618              7.7%

Brown Door, Inc.         4 Tall Oaks Court                                       2,341,810              5.4%
                         Farmingdale, New Jersey  07727

Donald Maggi             Front Porch Digital Inc.                                  533,333              1.3%  /8/
                         20000 Horizon Way, Suite 120
                         Mount Laurel, NJ  08054

Giancarlo                Front Porch Digital Inc.                                  215,950                 *  /9/
 Gaggero                 20000 Horizon Way, Suite 120
                         Mount Laurel, NJ  08054

      All Executive Officers and Directors as a Group                           10,634,810             21.7%
      (7 persons)
</TABLE>


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

* Constitutes less than 1%

/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 41,615,648 shares
       outstanding as of April 28, 2003, 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 7,500,000 shares owned of record, 5,952,381 shares of common
       stock issuable upon conversion of a convertible note, warrants to
       purchase 1,750,000 shares at $2.00 per share and warrants to purchase
       1,750,000 shares at $4.00 per share.

/4/    Represents 4,071,429 shares owned of record by Rice Opportunity Fund and
       3,571,429 shares of common stock issuable upon conversion of a
       convertible note.

/5/    Represents 1,224,420 shares owned of record by Equity Pier LLC, 2,023,810
       shares of common stock issuable upon conversion of a convertible note and
       presently exercisable warrants to purchase 3,324,696 shares at $2.00 per
       share.

/6/    Represents 2,714,286 shares owned of record by Mr. Nathan and 2,380,952
       shares of common stock issuable upon conversion of a convertible note.

                                       30
<PAGE>

/7/    Represents 2,033,000 shares owned of record by Dr. Yogeshwar, 238,095
       shares of common stock issuable upon conversion of a convertible note and
       presently exercisable options to purchase 15,950 shares at $.64 per
       share.

/8/    Represents presently exercisable options and warrants to purchase
       533,333 shares at $.50 per share.

/9/    Represents presently exercisable options to purchase 15,950 shares at
       $.64 per share and 200,000 shares at $2.00 per share.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company regularly transacts business with Storage Technology
Corporation ("StorageTek"), a significant shareholder in the Company. During
2002, the Company paid StorageTek $25,000 for hardware and related services and
generated $1 million in media conversion revenue through its relationship with
StorageTek (revenue from an end-user customer that is not StorageTek). At
December 31, 2002, the Company had receivables from StorageTek of $325,823 and
had a current liability of $136,788.

         During 2002, the Company received two loans from a member of the law
firm which serves as the Company's primary legal counsel in order to satisfy
short-term working capital needs. The lender personally loaned the Company
$55,000 on October 11, 2002, which was repaid with accrued interest on October
24, 2002, and $100,000 on November 27, 2002, which was repaid with accrued
interest on January 6, 2003. Both notes were payable on demand and carried
annual interest rates of 8%. As additional compensation for providing these
loans, in December 2002, the Company issued the lender warrants to purchase
225,000 shares of the Company's common stock at a price per share of $0.10.
These warrants were immediately vested and have a five-year term.

         During 2002, the Company received a loan in the amount of $100,000 from
MSI, a significant shareholder of the Company, for short-term working capital in
connection with the acquisition of the DIVArchive product line. The note was
payable on demand and carried an annual interest rate of 7%. This note and all
accrued interest were repaid on December 9, 2002. Thomas P. Sweeney III, the
Chairman of the Board of the Company, is the Chairman of the Board, Chief
Executive Officer and a significant shareholder of MSI.

         During 2002, MSI provided limited services to the Company in human
resources and technology support. The Company was not charged for these services
in 2002; however for 2003, the Company and MSI have agreed to specified rates to
be charged to the Company for such support. The Company and MSI are currently
finalizing a consulting agreement to cover such services. Total costs to the
Company under this agreement are not expected to be significant for 2003. At
December 31, 2002, the Company had no liability to MSI.

         Thomas P. Sweeney III, the Chairman of the Board of the Company, is the
founder and Managing Partner of Equity Pier LLC ("Equity Pier"). During 2002,
the Company incurred a liability of $10,695 to Equity Pier primarily related to
the reimbursement of travel and business expenses incurred by Mr. Sweeney, which
liability was unpaid at December 31, 2002. At December 31, 2002, the Company
owed Equity Pier $40,605. At December 31, 2001, the Company owed Equity Pier
$29,910. For the period January 1 2003 to April 30, 2003, the Company leased
office space from Equity Pier at a rate of $1,500 per month.

         During 2002, Paul McKnight, the Chief Financial Officer of MSI and a
Principal of Equity Pier, served as the Company's interim Chief Financial
Officer. For that service, the Company paid Mr. McKnight $12,500.

         During 2002 and 2001, the Company utilized the services of Data
Strategies, Inc., a technical consulting firm owned by Dr. Giancarlo Gaggero,
the former Senior Vice President of Media Services of the Company. During 2002
and 2001, the Company incurred expenses of $126,026 and $168,414, respectively,
related to this agreement. As of December 31, 2002 and 2001, the Company owed
Data Strategies $63,549 and $35,182, respectively, for such consulting services.
The agreement with Data Strategies was terminated in March 2003.

                                       31
<PAGE>

         In August 2000, the Company issued to 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.










                                       32
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (A)(1) FINANCIAL STATEMENTS:

                                                                         Page

Report of Independent Auditors.......................................     F-1

Consolidated Balance Sheet as of December 31, 2002...................     F-2

Consolidated Statements of Operations for the years ended
  December 31, 2002 and 2001.........................................     F-3

Consolidated Statements of Stockholders' Equity for the years ended
  December 31, 2002 and 2001.........................................     F-4

Consolidated Statements of Cash Flows for the years ended
  December 31, 2002 and 2001.........................................     F-5

Notes to Consolidated financial statements........................... F-6 - F-21



         (A)(2) EXHIBITS

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

   EXHIBIT
   NUMBER
   ------
     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 Registration Statement on Form SB-2
               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 Registration
               Statement on Form SB-2 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 Current Report on 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 Annual Report on Form 10-KSB
               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 Quarterly Report on Form 10-QSB 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 Registration Statement on Form SB-2 filed on November
               13, 1996).

     4.1       Form of 8% Convertible Note.

     4.2       Promissory Note dated May 1, 2003 from the Company to Briolette
               Investments Ltd.

                                       33
<PAGE>

   EXHIBIT
   NUMBER
   ------
     10.1      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 Annual Report on Form 10-KSB for
               the period ended December 31, 2000 filed on April 2, 2001).

     10.2      2000 Equity Incentive Plan dated as of May 2, 2000 (incorporated
               by reference to exhibit 10.9 filed with the Company's Annual
               Report on Form 10-KSB for the period ended December 31, 2000
               filed on April 2, 2001).

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

     10.4      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 Current Report on Form 8-K filed on October 26, 2000).

     10.5      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 Annual Report
               Form 10-KSB for the period ended December 31, 2000 filed on April
               2, 2001).

     10.6      Registration Right Agreement dated as of July 31, 2002 between
               the Company and ManagedStorage International Inc. (incorporated
               by reference to Exhibit 10.2 filed with the Company's Current
               Report on Form 8-K dated July 31 2002 and filed on August 14,
               2002).

     10.7      Letter Agreement dated April 14, 2003 among the Company, Rice
               Opportunity Fund and Erl Nathan.

     10.8      Software Sale and Assignment Agreement dated as of April 22, 2003
               between the Company and Eastman Kodak Company.

     10.9      Warrant dated as of July 31, 2002 for the purchase of up to
               $1,750,000 shares of the Company Common Stock at $2.00 per share
               (incorporated by reference to Exhibit 10.4 filed with the
               Company's Current Report on Form 8-K dated July 31 2002 and filed
               on August 14, 2002).

     10.10     Warrant dated as of July 31, 2002 for the purchase of up to
               $1,750,000 shares of the Company Common Stock at $4.00 per share
               (incorporated by reference to Exhibit 10.5 filed with the
               Company's Current Report on Form 8-K dated July 31 2002 and filed
               on August 14, 2002).

     23.1      Consent of Ernst & Young LLP

     99.1      Certification of Principal Executive Officer pursuant to Section
               906 of the Sarbanes-Oxley Act of 2002

     99.2      Certification of Principal Financial Officer pursuant to Section
               906 of the Sarbanes-Oxley Act of 2002


----------

         (B)      CURRENT REPORTS ON FORM 8-K OR 8-K/A

         The Company filed a Current Report on Form 8-K dated March 15, 2003
announcing that effective February 28, 2003, David Cohen resigned as a director
of the Company. In connection with such resignation, Mr. Cohen did not advise
the Company of any disagreement with the Company on any matter relating to the
Company's operations, policies or practices.

         The Company filed a Current Report on Form 8-K dated January 24, 2003
announcing that effective January 8, 2003, Paul McKnight resigned as Chief
Financial Officer of the Company. Also on that date, the Board of Directors of
the Company elected Michael Knaisch as Chief Operating Officer of the Company
and Matthew Richman as Chief Financial Officer of the Company.

                                       34
<PAGE>

ITEM 14. CONTROLS AND PROCEDURES.

         (a)      Based upon an evaluation performed within 90 days of this
Report, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
have each concluded that our disclosure controls and procedures are effective to
ensure that material information relating to our Company is made known to
management, including the CEO and CFO, particularly during the period when our
periodic reports are being prepared, and that our internal controls are
effective to provide reasonable assurances that our financial condition, results
of operations and cash flows are fairly presented in all material respects.

         (b)      The CEO and CFO each note that, since the date of his
evaluation until the date of this Report, there have been no significant changes
in internal controls or in other factors that could significantly affect
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

         The firm of Ernst & Young LLP ("Ernst & Young") served as our
independent public accountants for each of our last two fiscal years ended
December 31, 2002 and 2001. The aggregate fees billed by Ernst & Young for the
audit of our financial statements included in our annual report on Form 10-KSB
and for the review of our financial statements included in our quarterly reports
on Form 10-QSB for our fiscal years ended December 31, 2002 and 2001 was
$112,000 and $75,000, respectively.

Audit-Related Fees

         The aggregate fees billed in each of fiscal 2002 and 2001 for assurance
and related services by Ernst & Young that are reasonably related to the audit
or review of our financial statements and that were not covered in the Audit
Fees disclosure above, was $77,000 and $19,000, respectively. These services
included audit, review, tax, reporting and acquisition related activities.

Tax Fees

         The aggregate fees billed in each of fiscal 2002 and 2001 for
professional services rendered by Ernst & Young for tax compliance, tax advice
or tax planning was $0 and $17,000, respectively.

All Other Fees

         There were no fees billed in fiscal 2002 or 2001 for professional
services rendered by Ernst & Young except as disclosed above.

Board Of Directors Pre-Approval

         Although our Board of Directors did not formally adopt resolutions
pre-approving our engagement of Ernst & Young to act as our independent auditor
for our last two fiscal years ended December 31, 2002, each of directors was
aware of, but did not object to, our engagement of Ernst & Young. Immediately
following the filing of our Annual Report, our Board of Directors intends to
adopt pre-approval policies and procedures in accordance with paragraph
(c)(7)(i) of Rule 2-01 of Regulation S-X. Our independent auditors performed all
work described above with their respective full-time, permanent employees.

                                       35
<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 May 19, 2003

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 (principal
Donald Maggi                             executive officer)
May 19, 2003


/s/ Matthew Richman                      Chief Financial Officer and Treasurer
------------------------------------     (principal financial and accounting
Matthew Richman                          officer)
May 19, 2003


/s/ Joseph Bianco                        Director
------------------------------------
Joseph Bianco
May 19, 2003


/s/ Paul McKnight                        Director
------------------------------------
Paul McKnight
May 19, 2003


/s/ Thomas P. Sweeney                    Director
------------------------------------
Thomas P. Sweeney
May 19, 2003

                                       36
<PAGE>

                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
                           PURSUANT TO 18 U.S.C. 1350
                 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, Donald Maggi, certify that:

     1.   I have reviewed this annual report on Form 10-KSB of Front Porch
Digital Inc.;

     2.   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4.   The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a)   designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

          c)   presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

          a)   all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

     6.   The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

                                             By:  /s/ DONALD MAGGI
                                                  ------------------------------
                                                  Name:  Donald Maggi
                                                  Title: Chief Executive Officer

May 19, 2003

<PAGE>

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
                           PURSUANT TO 18 U.S.C. 1350
                 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, Matthew Richman, certify that:

     1.   I have reviewed this annual report on Form 10-KSB of Front Porch
Digital Inc.;

     2.   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4.   The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a)   designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

          c)   presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

          a)   all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

     6.   The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

                               By:  /s/ MATTHEW RICHMAN
                                    ------------------------------
                                    Name:  Matthew Richman
                                    Title: Chief Financial Officer and Treasurer
May 19, 2003

<PAGE>

                            FRONT PORCH DIGITAL INC.
                          INDEX TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001

                                                                         Page

Report of Independent Auditors.......................................     F-1

Consolidated Balance Sheet as of December 31, 2002...................     F-2

Consolidated Statements of Operations for the years ended
  December 31, 2002 and 2001.........................................     F-3

Consolidated Statements of Stockholders' Equity for the years ended
  December 31, 2002 and 2001.........................................     F-4

Consolidated Statements of Cash Flows for the years ended
  December 31, 2002 and 2001.........................................     F-5

Notes to Consolidated financial statements........................... F-6 - F-21


<PAGE>

                         Report of Independent Auditors

Board of Directors and Stockholders
Front Porch Digital Inc.

We have  audited  the  accompanying  consolidated  balance  sheet of Front Porch
Digital Inc. as of December 31, 2002, and the related consolidated statements of
operations,  stockholders'  equity,  and cash flows for the years ended December
31, 2002 and 2001.  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  consolidated  financial  position  of Front Porch
Digital  Inc.  at  December  31,  2002,  and  the  consolidated  results  of its
operations and its cash flows for the years ended December 31, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the  consolidated  financial  statements,  in 2002 the
Company adopted Statement of Financial  Accounting  Standards No. 142, "Goodwill
and Other  Intangible  Assets,"  which  resulted  in Front  Porch  Digital  Inc.
changing the method of accounting for goodwill.

The accompanying  consolidated  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 $2.1 million at December
31, 2002. 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


Philadelphia, Pennsylvania
May 9, 2003

                                      F-1
<PAGE>

                            FRONT PORCH DIGITAL, INC.
                           CONSOLIDATED BALANCE SHEET

ASSETS                                                         December 31, 2002
Current assets:
  Cash and cash equivalents                                      $      717,631
  Accounts receivable - trade & other, net of allowance
    of $125,000:
      Non-affiliates                                                  1,362,573
      Affiliates                                                        325,823
  Deferred costs                                                         88,527
  Other current assets                                                  594,633
                                                                 --------------
Total current assets                                                  3,089,187

Restricted cash                                                          81,837

Property and equipment, net                                           1,221,126

Software development costs, net                                         241,525

Software and intellectual property, net
  of accumulated amortization of $460,500                             1,804,816

Excess cost over fair value of net assets acquired, net
  of accumulated amortization of $946,093                             4,364,439

Other assets                                                            123,093
                                                                 --------------
Total assets                                                     $   10,926,023
                                                                 ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Current portion of notes payable                               $      376,664
  Current lease liability                                                40,630
  Accounts payable                                                    1,652,762
  Accrued expenses                                                    1,183,127
  Accrued expenses - employees                                          565,424
  Accrued vacation                                                      117,777
  Deferred revenue                                                    1,290,299
                                                                 --------------
Total current liabilities                                             5,226,683

Notes payable and accrued interest, net of current portion            1,027,299
Other long-term obligations, net of current portion                     463,336
Other long-term liabilities                                              46,670

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, 32,329,937 shares issued and outstanding                 32,330
  Additional paid in capital                                         23,312,102
  Accumulated other comprehensive income                                 68,705
  Common stock to be issued                                             750,000
  Accumulated deficit                                               (20,001,102)
                                                                 --------------
Total stockholders' equity                                            4,162,035
                                                                 --------------

Total liabilities and stockholders' equity                       $   10,926,023
                                                                 ==============

SEE ACCOMPANYING NOTES

                                      F-2
<PAGE>

                            FRONT PORCH DIGITAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                    Year ended December 31,
                                               --------------------------------
                                                    2002              2001
                                               --------------    --------------
Revenues:
  Products                                     $    1,086,232    $      264,904
  Services                                          2,931,174           697,534
  Services - affiliate                                880,194           169,716
                                               --------------    --------------
Total revenue                                       4,897,600         1,132,154

Cost of revenue:
  Products                                            513,006           124,346
  Services                                          1,090,526           893,181
                                               --------------    --------------
                                                    1,603,532         1,017,527
                                               --------------    --------------
Gross margin                                        3,294,068           114,627


Selling, general and administrative                 4,126,792         5,094,765
Research and development                              770,589           656,607
Depreciation                                          702,101           574,684
Amortization                                          450,223         1,892,024
                                               --------------    --------------
                                                    6,049,705         8,218,080
                                               --------------    --------------
Loss from operations                               (2,755,637)       (8,103,453)

Other income (expense):

Interest income                                         1,259            37,673
Interest expense                                     (500,360)          (18,135)
Other expense                                         (49,344)               --
Foreign currency transaction gain                       3,444                --
                                               --------------    --------------
                                                     (545,001)           19,538
                                               --------------    --------------
Net loss                                       $   (3,300,638)   $   (8,083,915)
                                               ==============    ==============

Weighted average number of common
shares outstanding - basic and diluted             28,767,606        25,008,310

Loss per common share - basic and diluted      $        (0.11)   $        (0.32)
                                               --------------    --------------

SEE ACCOMPANYING NOTES

                                      F-3
<PAGE>


                            FRONT PORCH DIGITAL, INC.
                 Consolidated Statements of Stockholders' Equity
                     Years Ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                 ACCUMULATED    COMMON
                                           COMMON STOCK            ADDITIONAL       OTHER        STOCK                    TOTAL
                                     -------------------------      PAID-IN     COMPREHENSIVE    TO BE    ACCUMULATED  STOCKHOLDERS'
                                        SHARES        AMOUNT        CAPITAL        INCOME        ISSUED     DEFICIT       EQUITY
                                     -----------   -----------    ------------  -------------   --------  -----------  -------------
<S>                                  <C>             <C>           <C>            <C>           <C>      <C>            <C>
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

Comprehensive Loss:

  Net loss                                                                                --         --    (8,083,915)  (8,083,915)

Total comprehensive 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

Stock option compensation costs               --           --          200,932            --         --            --      200,932

Proceeds allocated to
  beneficial conversion of
  notes payable                               --           --          500,000            --         --            --      500,000

Common stock and warrants issued
  to MSI for acquisition of
  MSI France assets                    5,000,000        5,000        1,827,500            --         --            --    1,832,500

Common stock and warrants issued
  for cash, net of issuance costs        400,000          400           49,600            --         --            --       50,000

Common stock issued to employees
  and consultants                        678,490          679          381,134            --         --            --      381,813

Common stock issued in exchange
  for retirement of shares
  and warrants                         1,062,075        1,062           (1,062)           --         --            --           --

Return of common stock shares
  issued to Storage Technology
  for the acquisition of media
  services operation in 2000            (465,748)        (466)             466            --         --                         --

2,500,000 common stock shares
  to be issued upon settlement
  of contingent consideration                 --           --               --            --    750,000            --      750,000

Comprehensive Loss:

  Net loss                                                                                --               (3,300,638)  (3,300,638)

  Foreign currency translation                                                        68,705                                68,705

Total comprehensive loss                                                              68,705               (3,300,638)  (3,231,933)
                                     -----------     --------      -----------    ----------   --------  ------------   ----------
Balance, December 31, 2002            32,329,937     $ 32,330      $23,312,102    $   68,705   $750,000  $(20,001,102)  $4,162,035
                                     ===========     ========      ===========    ==========   ========  ============   ==========
</TABLE>

                                      F-4


SEE ACCOMPANYING NOTES
<PAGE>

                            Front Porch Digital, Inc.
                     Consolidated Statements of Cash Flows

                                                       Year Ended December 31,
                                                        2002            2001
                                                    -----------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss                                            $(3,300,638)    $(8,083,915)
Adjustments to reconcile net loss to
  net cash used in operating activities:
    Depreciation & amortization                       1,152,324       2,466,708
    Non-cash interest expense                           468,175              --
    Non-cash issuance of common stock to
      employees and consultants                         329,888         292,631
    Stock option compensation cost                      200,932         934,418
    Bad debt expense                                    125,000              --
    Gain on sale of fixed assets                        (46,551)             --
    Changes in operating assets and liabilities:
      (Increase) decrease in accounts
        receivable - affiliate                         (322,326)        222,410
      Increase in accounts receivable                  (157,910)       (175,249)
      Decrease in deferred costs                        159,746              --
      Decrease (increase) in other current assets       148,973        (180,749)
      Increase in other assets                          (48,825)             --
      Increase in accounts payable                      492,248         610,976
      (Decrease) increase in accrued expenses           (69,689)         97,749
      Increase in accrued expenses - employees           95,421          84,000
      (Decrease) increase in accrued vacation           (28,425)         72,248
      Increase in deferred revenue                      431,449         779,200
      Other changes in operating activities              (9,586)          2,311
                                                    -----------     -----------
  Net cash used in operating activities                (379,794)     (2,877,262)
                                                    -----------     -----------

  CASH FLOWS FROM INVESTING ACTIVITIES

  Capital expenditures                                 (375,471)       (395,490)
  Cash acquired from ManagedStorage                     695,706              --
  Software development costs                           (127,249)       (261,245)
  Proceeds from sale of fixed assets                     46,551              --
  Other investing activities                             (9,406)        (28,880)
                                                    -----------     -----------
  Net cash provided by (used in)
    investing activities                                230,131        (685,615)
                                                    -----------     -----------

  CASH FLOWS FROM FINANCING ACTIVITIES

  Proceeds from note payable                            800,000              --
  Repayment of note payable and capital lease          (299,471)             --
  Proceeds from issuance of common stock                 50,000       1,511,789
                                                    -----------     -----------
  Net cash provided by financing activities             550,529       1,511,789
                                                    -----------     -----------

  Effect of exchange rate changes on
    cash and cash equivalents                             5,163              --

  Net increase (decrease) in cash and
    cash equivalents                                    406,029      (2,051,088)
  Cash and cash equivalents, beginning
    of year                                             393,439       2,444,527
                                                    -----------     -----------
  Cash and cash equivalents, end of year            $   799,468     $   393,439
                                                    ===========     ===========


SEE ACCOMPANYING NOTES

                                      F-5
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

1.   ORGANIZATION AND BASIS OF PRESENTATION

          Front Porch Digital Inc. (the "Company" or "FPDI") enables the
conversion, preservation and management of analog and digital content, including
text, images, audio, graphics, video and rich media. The Company develops
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. The software, based on proprietary and
patent-pending technology, enables a new paradigm in the way broadcasters,
content owners, education and law enforcement personnel manage their workflow -
a shift from tape-oriented warehousing to a fully-digital, instant access
automated archive.

          The Company's customers are located in the United States, Europe and
Asia.

          The consolidated 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 consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue in existence. In 2002, the Company
incurred losses and negative cash flows from operating activities of $3.3
million and $.4 million, respectively. The Company has incurred losses since
commencement of operations in its current line of business. Although the
Company's operating results have improved in 2002, the Company has made certain
progress toward financial stability as described in Note 16 Subsequent Events,
and the Company expects its results of operations to continue to improve in
2003, there can be no assurance that the Company will not continue to sustain
operating losses into 2003. Further, at December 31, 2002, the Company had a
working capital deficit of $2.1 million. These factors create significant
uncertainty about the Company's ability to continue as a going concern.

          During the fourth quarter of 2002 and continuing into 2003, management
has implemented a restructuring of the operations of the Company that included
reorganizing the functions and personnel of the Company, reducing headcount,
reducing non-essential operating costs and refocusing of the Company's business
strategy, products and services. The Company has also undertaken an aggressive
cash management program that includes deferral of payment of certain expenses
and the accelerated collection of cash payments on contracted revenues.
Management of the Company recognizes that additional resources will be required
to continue as a going concern and has secured additional sources of capital and
restructured certain liabilities as described in Note 16 -- Subsequent Events.
Management believes these actions will enable the Company to obtain sufficient
cash to continue as a going concern. However, there can be no assurance that the
additional capital and improved liquidity will be adequate to enable the Company
to continue as a going concern.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

          The consolidated financial statements include the accounts of Front
Porch Digital, Inc. and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.

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 collection is reasonably assured.

                                      F-6
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

         The Company licenses software under license agreements and provides
professional services including training, installation, consulting, and
maintenance. License fee revenues are recognized when a license agreement has
been signed, the software product has been shipped, the fees are fixed and
determinable, collection is considered probable, and no significant vendor
obligations remain.

         The Company allocates revenue to each component of the contract based
on objective evidence of its fair value, as established by management. Because
licensing of the software generally is not dependent on the professional
services portions of the contract, the software revenue is recognized upon
delivery.

         Fees for maintenance agreements are recognized ratably over the term of
the agreement. Maintenance is generally billed in advance resulting in deferred
revenues.

         The Company provides software-related professional services. Services
are generally provided on a time and materials basis and revenue is recognized
as the services are provided.

         Revenue under service contracts is recognized when services have been
performed and accepted, or on the proportional-performance method of accounting,
depending on the nature of the project. The extent of progress toward completion
under the proportionate method of accounting is measured by using the number of
sites and/or units under the contract that have been completed and the progress
towards completion of batches in progress at period end.

CASH EQUIVALENTS

         The Company considers all highly liquid investments 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 over
three years, office furniture and equipment over seven years and leasehold
improvements over four to ten years.

INTANGIBLE ASSETS

         Amortization of software and intellectual property is calculated using
the straight-line method over three to seven years, based upon the expected
useful life of the asset. 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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill. At
the time of an acquisition, using the criteria of SFAS No. 141, the Company will
identify and recognize intangible assets separate from goodwill. The Company has
applied SFAS No. 141 in its allocation of the purchase price for MSI France (see
Note 3).

         Also, effective January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 establishes a new method of
testing goodwill for impairment and requires this testing on an annual basis or
on an interim basis if an event occurs or circumstances change that would reduce
the fair value of a reporting unit below its carrying value. Pursuant to SFAS
No. 142, the Company discontinued the amortization of its goodwill as of January
1, 2002, and completed its transitional impairment testing of its goodwill and
found no indication of impairment. As of October 1, 2002, the Company performed
its annual impairment testing of its goodwill and found no impairment. The
Company will continue with its annual testing of the impairment of goodwill
under this standard that may result in future periodic write-downs of its
goodwill.

         As a result of the adoption of SFAS No. 142, all amortization of
goodwill as a charge to earnings ($791,000 in 2001) was eliminated. Pro forma
net loss and net loss per share would have been $7.3 million and $.29 per share
in 2001.

                                      F-7
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

          In the fourth quarter of 2001, the Company revised its estimate of
expected future cash flows from operations of the media services business
segment 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 consolidated financial
statements for the year ended December 31, 2001.

          Other amortized intangibles consist primarily of intellectual property
and are amortized on a straight-line basis over the estimated life of the assets
(3 to 7 years). Amortization expense for other amortized intangibles was
$450,223 for the year ended December 31, 2002. For the year ended December 31,
2001 amortization expense was $1.1 million

IMPAIRMENT OF LONG-LIVED ASSETS

          In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement supersedes both SFAS
No. 121 and the provisions of Accounting Principles Board Opinion No. 30 that
are related to the accounting and reporting for the disposal of a segment of a
business. SFAS No. 144 establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale. This statement retains most of the requirements in SFAS No. 121 related
to the recognition of impairment of long-lived assets to be held and used. The
adoption of SFAS No. 144 has not had a material impact on the Company's
financial position, cash flows or results of operations.

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 three years. As of December 31, 2002, $329,000 of
software development costs had been capitalized and $87,000 of accumulated
amortization was recorded.

CURRENCY TRANSLATION

          The accounts of the international subsidiary are translated in
accordance with SFAS No. 52, "Foreign Currency Translation", which requires that
assets and liabilities of international operations be translated using the
exchange rate in effect at the balance sheet date, and that the results of
operations be translated at the average exchange rates during the year. The
effects of exchange rate fluctuations in translating assets and liabilities of
international operations into U.S. dollars are accumulated and reflected as a
translation adjustment included as accumulated other comprehensive income (loss)
in shareholders' equity. As of December 31, 2002, the cumulative translation
adjustment was $68,705. The effects of exchange rate fluctuations in remeasuring
foreign currency transactions for the year ended December 31, 2002 was a gain of
$3,444.

ACCUMULATED OTHER COMPREHENSIVE INCOME

          SFAS No. 130, "Reporting Comprehensive Income", established the
concept of comprehensive income. Comprehensive income is defined as net income
plus revenue, expenses, gains and losses that, under generally accepted
accounting principles, are

                                      F-8
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

excluded from net income. The Company's accumulated other comprehensive income
is comprised of unrealized gains and losses from foreign currency translation
adjustments.

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 have been omitted
from the computations of diluted loss per share for the years ended December 31,
2002 and 2001 because the effect would be antidilutive.

CONCENTRATION OF CREDIT RISK

          The Company sells its products and services throughout the United
States, Europe and Asia. 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, 2002, revenues from two customers, each exceeding 10% of total revenue,
aggregated 31% and 18%, respectively. Accounts receivable from the Company's
second largest customer was $325,823 as of December 31, 2002, which represented
18% of total trade receivables. This customer is also a stockholder of the
Company. 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. The Company was a subcontractor for its second largest
customer during 2002, which beneficially owned 13.5% of the Company's
outstanding common stock as of April 28, 2003.

FINANCIAL INSTRUMENTS

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

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 amounts reported in
2001 and 2002 and loss per share that is the same as the amounts reported in
2001 and 2002. 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>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

USE OF ESTIMATES

          The preparation of consolidated 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

RECLASSIFICATIONS

          Certain reclassifications of previously reported amounts have been
made to conform with the current period presentation.

3. ACQUISITION

          On July 31, 2002, the Company acquired all of the outstanding stock of
ManagedStorage International France, a French SOCIETE PAR ACTIONS SIMPLIFEE("MSI
France"), and certain assets of ManagedStorage International, Inc., a Delaware
corporation ("ManagedStorage" or "MSI"), pursuant to a Stock and Asset Purchase
Agreement dated as of July 31, 2002 (the "Purchase Agreement"), between the
Company and ManagedStorage. The consideration paid by the Company pursuant to
the Purchase Agreement consisted of (a) 5,000,000 shares of common stock, par
value $.001 per share, of the Company (the "Company Common Stock") which were
valued at $1.5 million; (ii) a warrant for the purchase of up to 1,750,000
shares of Company Common Stock at a price of $2.00 per share, exercisable
immediately and expiring on July 31, 2012; and (iii) a warrant for the purchase
of up to 1,750,000 shares of Company Common Stock at a price of $4.00 per share,
exercisable immediately and expiring on July 31, 2012. In December 2002, an
additional $750,000 of consideration became payable to the seller as certain
earn-out targets were achieved. This amount was recorded as common stock to be
issued at December 31, 2002 and, in April 2003, 2.5 million shares of common
stock of the Company were issued in satisfaction of this earn-out consideration.

          Pursuant to the terms of the Purchase Agreement, the Company acquired
from ManagedStorage (i) all of the issued and outstanding shares of capital
stock of MSI France and (ii) certain software and related intellectual property
rights, including DIVArchive, a software solution designed to assist media,
entertainment and medical companies in the preservation, management and
accessing of digital content consisting of large digital data files.

          Pursuant to the Purchase Agreement, ManagedStorage entered into a
Lock-Up Agreement with the Company whereby, subject to certain exceptions,
ManagedStorage agreed not sell, assign, transfer, pledge or otherwise dispose of
any Company Common Stock owned or acquired by it or any interest therein prior
to July 31, 2003, except as expressly permitted by the Lock-Up Agreement. In
connection with the transaction, ManagedStorage was granted certain demand
registration rights with respect to the shares of Company Common Stock acquired
by ManagedStorage pursuant to the terms of the Purchase Agreement.

          The acquisition has been accounted for as a purchase. Results of
operations from the date of acquisition for the acquired entity are included in
the consolidated statement of operations for the year ended December 31, 2002.

         The purchase price allocation at December 31, 2002 is as follows:

         Current assets                     $ 2,650,000
         Property and equipment                 299,000
         Other assets                           160,000
         Current liabilities                 (1,655,000)
         Other liabilities                      (57,000)
         Intellectual property                  721,000
         Goodwill                               629,000
                                            -----------
         Total purchase price               $ 2,747,000
                                            ===========

                                      F-10
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

          Intellectual property, which represents the DIVArchive software, is
amortized over three year period. Total amortization expense related to the
intellectual property acquired was $62,000 for the year ended December 31, 2002.

          The following pro forma results of operations for the year ended
December 31, 2002 and 2001 are presented to reflect the acquisition as if it had
occurred as of the beginning of the periods presented.

PRO FORMA RESULTS OF OPERATIONS:

                                                  2002             2001
          Revenues                            $ 7,194,249     $  4,424,611
          Loss from continuing operations      (4,167,050)     (14,982,193)
          Net loss                             (4,804,313)     (15,668,343)
          Basic and diluted loss per share           (.14)            (.48)

4.   PROPERTY AND EQUIPMENT

          Property and equipment as of December 31, 2002, consisted of:

               Computer equipment                      $2,018,317
               Software                                   259,730
               Leasehold improvements                     343,627
               Office furniture and equipment             329,120
                                                       ----------
                                                        2,950,794

               Less accumulated depreciation            1,729,668
                                                       ----------
                                                       $1,221,126
                                                       ==========

          Included in the balance above is equipment under a capital lease with
a cost of $91,000 and accumulated depreciation of $57,000.

5.   NOTES PAYABLE

          At December 31, 2002, notes payable consisted of:

               $150,000 unsecured note payable that bore interest at
          9% per annum. In September 2002, the Company recapitalized
          the outstanding balance and accrued interest of an existing
          unsecured note payable. The new principal amount of $246,500
          included the original principal balance of $200,000 plus
          accrued interest of $46,500. The note was payable in an
          initial payment of $45,000, and equal monthly installments of
          $25,000 through June 1, 2003, with a final payment of $8,647
          on July 1, 2003. At December 31, 2002, the remaining
          principle balance on this note was $150,000. During April
          2003, the Company restructured this note payable as
          described in Note 16 -- Subsequent Events;

               $100,000 of an unsecured note payable to a related
          party that bore interest at 8% per annum and was payable on
          demand. During January 2003, the Company repaid this note
          payable, including accrued interest, as described in Note 16
          -- Subsequent Events;

               $744,000 of an unsecured non-interest bearing note
          payable to an employee. This note is payable based on a
          percentage of revenue of certain operations of the Company,
          ranging between 2% and 3% per year, to be payable in full no
          later than December 31, 2004. In the event


                                      F-11
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

          the Company exits the media conversion business prior to
          December 31, 2004, the remaining balance of this note is
          payable on demand. The Company has estimated that $170,000
          will be payable in the next year; and

               $500,000 aggregate principal amount of convertible
          secured notes to two investors which were issued on March
          27, 2002. The notes contained a beneficial conversion
          feature as the notes included certain anti-dilution
          protection and rights, and they were convertible into common
          stock at a price significantly below the then current market
          price. The Company allocated $500,000 of the value received
          to this beneficial conversion feature which has been
          recorded as a debt discount and is being amortized to
          interest expense over the term of the debt. The Company
          recorded non-cash interest expense related to debt discount
          of $375,000 during the year ended December 31, 2002. The
          notes matured on March 27, 2003, bore interest at the rate
          of 7% per annum, which was payable on a quarterly basis, and
          were secured by all assets of the Company. The notes were
          convertible at any time at the option of the note holders
          into a number of shares of common stock of the Company equal
          to 14% of the outstanding shares of common stock, subject to
          certain anti-dilution adjustments. 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 contained restrictions that, among
          others, prohibited 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 raised $2.5 million of equity capital, the
          Company could have deposited 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 would have been 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 shares of common stock of the
          Company is transferred, the note holders were 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. During April
          2003, the Company converted and restructured these notes as
          detailed in Note 16 -- Subsequent Events.

          Based on the refinancing described in Note 16, the Company has
classified $376,664 as a current liability and $1,027,299 as a long-term
liability, which includes accrued interest of $25,000 and will be due in 2004.

6.   INCOME TAXES

          At December 31, 2002, the Company had available for federal and state
income tax purposes, net operating loss carry forwards of approximately $11.5
million that expire between 2007 and 2021. The utilization of the above net
operating loss carry forwards is subject to significant limitations under the
tax codes due to changes in ownership, and portions may expire prior to
utilization.

          Significant components of the Company's deferred tax asset as of
December 31, 2002 are as follows:

                                      F-12
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

Deferred tax assets:

                   Accrued expenses and other                 $ 1,678,000
                   Start-up costs                               1,006,000
                   Amortization                                   518,000
                   Net operating loss carry forwards            4,313,000
                                                              -----------
               Total deferred tax assets                        7,515,000
               Valuation allowance for deferred tax assets     (7,515,000)
                                                              -----------
               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
the years ended December 31, 2002 and 2001 was $1,315,000 and $2,937,000,
respectively.

7.   SEGMENT INFORMATION

          SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas,
and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.

          The Company's operations are segregated into two lines of business:
media conversion services and software and related services. The Company
operates these lines of business across the geographic areas of the United
States, Europe, Canada and Asia-Pacific. Offices and facilities are located in
Mount Laurel, New Jersey, Houston, Texas and Toulouse, France. The Company's
lines of business are not completely integrated into all locations and therefore
the Company does not currently offer all solutions in all markets in which it is
present. Current efforts are underway to integrate products and services across
all markets served.

          The media conversion business segment offers a comprehensive,
integrated suite of enterprise data media solutions ("EDMS") that can help
customers ensure information preservation, reduce cost and improve productivity
without compromising the security and integrity of their stored information. The
Company's EDMS group has performed professional services for over 600 customers
worldwide in industries that include banking and finance, power utility,
petroleum, pharmaceutical and government. All services offered by the EDMS group
are performed offline utilizing the Company's proprietary software and
stand-alone hardware devices, at either the customer site or one of the
Company's secure delivery facilities. These services can be performed for any
applicable optical and/or tape media type and format. Components of the
currently available offerings include tape copy and conversion, tape volume
management, tape data assurance, and archive generation and conversion.

          The software and related services business segment offers an
integrated suite of digital media solutions that facilitate the capture,
management and distribution of digital content. Components of these offerings
include a desktop encoding system, automated video indexing and a real-time
format transcoder. In addition, the Company offers a distributed storage and
archive management solution for the entertainment industry that simplifies the
process of preserving, managing and accessing digital content.

          Revenues, margins and operating expenses of the Company's lines of
business are evaluated by management. The Company does not measure assets by
lines of business as assets are generally not distinctive to a particular line
of business and they are not fundamental in assessing segment performance.
Capital expenditures are managed by segment, but only for purposes of budgeting
and cash flow management. General overhead expenses are included completely in
the software and services business

                                      F-13
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

segment as the media conversion segment has been and continues to be an easily
definable, separate, stand-alone business - no allocations of such costs are
made as allocated indirect costs are not considered in the management of the
business segments. All direct and indirect costs associated with a segment are
reported within that segment. Summarized operations of each of the Company's
operating segments in the aggregate for the years ended December 31, 2002 and
2001, are as follows:

                            MEDIA CONVERSION           SOFTWARE AND SERVICES

                           2002          2001           2002           2001

Revenues                $2,756,574    $  826,955     $2,141,026     $  305,199
Gross margin             1,756,232       (46,367)     1,537,836        160,994
Gross margin %                 64%           (6%)           72%            53%
Income (Loss) from
continuing operations      921,035    (1,176,131)    (3,676,672)    (6,927,322)
Capital expenditures       357,931       197,694         17,540        197,796

          Included in the media conversion business segment in 2001 was an
impairment loss of $865,000 related to the carrying value of the assets acquired
in the media services acquisition in 2000.

          At December 31, 2002 and 2001, goodwill of $3.7 million and $3.7
million, respectively, was recorded within the media services segment. In the
software and services segment, goodwill of $.6 million and $0 was recorded at
December 31, 2002 and 2001,respectively.

          In the software and services business segment, 2002 revenues broken
down geographically were $0.6 million in the United States and $1.5 million in
Europe/Asia.

          In the media conversion business segment, for the year ended December
31, 2002, revenues from two customers aggregated 55% and 32% of revenue. These
two customers comprised 0% and 46% of accounts receivable, respectively. In
addition, another single customer comprised 68% of accounts receivable at
December 31, 2002. For the year ended December 31, 2001, revenues from two
customers aggregated 60% and 23% of revenue. These two customers comprised 1%
and 6% of accounts receivable, respectively. In addition, another customer
accounted for 12% of revenue and 47% of accounts receivable at December 31,
2001.

          In the software and services business segment, for the year ended
December 31, 2002, revenues from three customers aggregated 16%, 14% and 10% of
revenue. These three customers comprised 23%, 10% and 18% of accounts
receivable, respectively. In addition, another single customer comprised 13% of
accounts receivable at December 31, 2002. For the year ended December 31, 2001,
revenues from two customers aggregated 60% and 12% of revenue. These two
customers comprised 79% and 0% of accounts receivable, 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. The retirement plan expense for the year ended December 31, 2002
is


                                      F-14
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

$48,000. In addition, the retirement plan expense for the year ended December
31, 2001 of $75,000 has not been paid to date.

          Effective January 1, 2003, the retirement plan has been modified so
that the Company is no longer obligated to make contributions for any employee.

9.   STOCKHOLDERS' EQUITY

          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 addition, for each of
these investors who participated in this private placement, 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, 1,062,075 shares
were issued and 637,500 warrants were canceled in conjunction with this offer.

          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, 1,114,550 warrants were issued 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 issued 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 in consideration for 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 had a
one-year term, bore interest at the rate of 7% per annum, which was payable on a
quarterly basis, and were secured by all assets of the Company. The notes were
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
notes contained a beneficial conversion feature and, accordingly, 100% of the
amount was allocated to additional paid-in capital.

          In August 2002, in connection with the acquisition of MSI France from
MSI, the Company issued 5,000,000 shares of unregistered common stock to MSI in
exchange for acquiring 100% ownership of MSI France. As additional consideration
for the acquisition, the Company issued 1,750,000 and 1,750,000 warrants to
purchase unregistered common stock at an exercise price of $2.00 and $4.00,
respectively. Subsequent to the acquisition, in December 2002, the Company
recorded an additional investment amount related to the issuance of an
additional 2,500,000 shares of unregistered common stock to MSI in accordance
with the earn-out provision of the acquisition agreement for MSI France. These
common shares were issued in April 2003.

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


                                      F-15
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

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 the date of grant, vest
immediately, and are exercisable for a period of not more than nine years.
During 2002 and 2001, the Company recognized expense of approximately $201,000
and $934,000, respectively, related to stock options granted to employees,
directors and consultants.

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

                                                                WEIGHTED AVERAGE
                                                       SHARES    EXERCISE PRICE
                                                     ---------- ----------------

          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

          Options exercised                              (6,472)        .58

          Options granted                               335,834         .83

          Options forfeited/canceled                 (1,093,659)       3.28
                                                     ----------     -------
          Options outstanding, December 31, 2002      1,537,807     $  2.64
                                                     ==========     =======

          Exercisable at December 31, 2001              975,438     $  3.00

          Exercisable at December 31, 2002            1,176,479     $  2.44

          The weighted exercise price for options granted during the year ended
December 31, 2002 was $0.83 for options whose exercise price (i) equals, (ii)
exceeds, or (iii) is less than the market price of the stock on the grant date.

                                      F-16
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

          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.

          A summary of the status of options outstanding at December 31, 2002
follows:

                                           WEIGHTED AVERAGE
EXERCISE PRICE          OPTIONS         REMAINING CONTRACTUAL          OPTIONS
   PER SHARE          OUTSTANDING            LIFE IN YEARS           EXERCISABLE
--------------------------------------------------------------------------------

$  .45 - 1.39           362,807                   8.5                  362,807
  2.00 - 2.90           436,667                   8.0                  293,927
  4.00                  738,333                   7.3                  519,745

          The weighted average fair value of options granted during 2002 and
2001 was $.24 and $1.72 respectively.


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, 2002, no shares have been issued under this plan.

12.  WARRANTS

          During 2002, the Company issued 225,000 warrants with an exercise
price of $0.10 per share to a related party in connection with two short-term
loans. In conjunction with that issuance, the Company recorded non-cash interest
expense related to the fair value of the warrants of $52,000 for the year ended
December 31, 2002.

          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. In November 2001, for those investors who
participated in the Company's private placement during 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, 1,062,075 shares were
issued and 387,500 warrants were canceled in conjunction with this offer.

          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, 1,114,550 warrants were issued in conjunction with this offer.

          At December 31, 2002, the Company had the following warrants
outstanding for the purchase of its common stock:

                                      F-17
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

                                                        NUMBER OF       EXERCISE
        DESCRIPTION              EXPIRATION DATE     SHARES ISSUABLE     PRICE
--------------------------------------------------------------------------------
Issued to original
  Front Porch shareholders       May 2, 2005            2,900,000        $ .50
                                 February 1, 2005         150,000        $ .50
                                 March 31, 2007           300,000        $ .65

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            120,000        $3.00
                                 December 31, 2003      1,114,550        $ .50

Issued to MSI in connection
  with MSI France Acquisition    July 31, 2012          1,750,000        $2.00
                                 July 31, 2013          1,750,000        $4.00

Issued to Noteholder             December 31, 2007        225,000        $ .10

Issued to Equity Pier in
  exchange for consulting
  services (Note 14)             February 28, 2006      3,324,696        $2.00
                                                       ----------
Total warrants outstanding                             12,563,746
                                                       ==========

13.  COMMITMENTS

          The Company has non-cancelable operating leases for facilities and
office equipment that expire through 2008. Future minimum rentals due under
non-cancelable operating leases as of December 31, 2002 were as follows:

                 Year ending December 31

                          2003                     $    599,000
                          2004                          366,000
                          2005                          247,000
                          2006                          176,000
                          2007                          126,000
                       Thereafter                       178,000
                                                   ------------
                                                   $  1,692,000
                                                   ============

          Rental expense under operating leases, not including month-to-month
leases with related parties, was $382,000 and $164,000 in 2002 and 2001,
respectively.

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. 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.

          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


                                      F-18
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

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 Chairman of the Board of Directors of the Company is the managing
partner of Equity Pier.

15.  RELATED PARTY TRANSACTIONS

          The Company regularly transacts business with Storage Technology
Corporation ("StorageTek"), a significant shareholder in the Company. During
2002, the Company paid StorageTek $25,000 for hardware and related services and
generated $880,000 million in media conversion revenue through its relationship
with StorageTek (end-user customer is not StorageTek). At December 31, 2002, the
Company had receivables from StorageTek of $325,823 and had a current liability
of $136,788.

          During 2002, the Company received two loans from a member of the firm
that serves as the Company's primary legal counsel to satisfy short-term working
capital needs. The lender personally loaned the Company $55,000 on October 11,
2002, which was repaid with accrued interest on October 24, 2002, and $100,000
on November 27, 2002, which was repaid with accrued interest on January 6, 2003.
As such, as of December 31, 2002, the Company's current liabilities included a
note payable to the lender for $100,000. Both notes were payable on demand and
carried annual interest rates of 8%. As additional compensation for providing
these loans, in December 2002, the Company issued the lender 225,000 warrants to
purchase the Company's common stock at a price per share of $0.10. These
warrants were immediately vested and have a five-year term. Interest expense
related to the fair value of the warrants, which was originally record as a debt
discount, has been recognized in the Company's consolidated financial statements
as of December 31, 2002.

          During 2002, the Company received a loan in the amount of $100,000
from ManagedStorage for short-term working capital in connection with the
acquisition of MSI France. The note was payable on demand and carried an annual
interest rate of 7%. This note and all accrued interest were repaid on December
9, 2002.

          During 2002, ManagedStorage provided limited services to the Company
in human resources and technology support. The Company was not charged for these
services in 2002; however for 2003, the Company and ManagedStorage have agreed
to specified rates to be charged to the Company for such support. The Company
and ManagedStorage are currently finalizing a consulting agreement to cover such
services. Total costs to the Company under this agreement are not expected to be
significant for 2003. At December 31, 2002, the Company had no liability to
ManagedStorage.

          Thomas P. Sweeney III, the Chairman of the Board of the Company, is
the founder and Managing Partner of Equity Pier LLC ("Equity Pier"). During
2002, the Company incurred liabilities to Equity Pier of $10,695, primarily
related to reimbursement for travel and business expenses incurred by Mr.
Sweeney, which liability was unpaid at December 31, 2002. At December 31, 2002,
the Company owed Equity Pier $40,605. At December 31, 2001, the Company owed
Equity Pier $29,910. For the period January 1 2003 to April 30, 2003, the
Company leased office space from Equity Pier at a rate of $1,500 per month.

          During 2002, Paul McKnight, the Chief Financial Officer of
ManagedStorage and a Principal of Equity Pier served as the Company's Chief
Financial Officer. For that service, the Company paid Mr. McKnight $12,500.

                                      F-19
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

          During 2002 and 2001, the Company utilized the services of Data
Strategies, Inc., a technical consulting firm owned by Dr. Giancarlo Gaggero,
the former Senior Vice President of Media Services of the Company. During 2002
and 2001, the Company incurred expenses of $126,026 and $176,414, respectively,
related to this agreement. As of December 31, 2002 and 2001, the Company owed
Data Strategies $63,549 and $35,182, respectively, for such consulting services.
The agreement with Data Strategies was terminated in March 2003.

          In August 2000, the Company issued to 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.

16.  SUBSEQUENT EVENTS

          Subsequent to year end, the following transactions were consummated:

          On January 6, 2003, the Company repaid the $100,000 unsecured note
payable that bore interest at 8% per annum and was payable on demand.

          In April 2003, the Company issued $645,000 aggregate principal amount
of unsecured convertible promissory notes that bear interest at a rate of 8% and
mature on September 30, 2004. Principle and accrued interest are payable at
maturity. The convertible notes are convertible at any time at the option of the
note holders into shares of common stock of the Company at a conversion price of
$.042 per share, subject to certain anti-dilution adjustments. The convertible
notes may be prepaid by the Company at any time without penalty. The purchase
agreement relating to the convertible notes contains restrictions that, among
others, prohibit the Company from issuing new debt, issuing equity, making
capital expenditures in excess of specified amounts or granting security
interests in assets without the consent of note holders owning a majority in
principal amount of the outstanding notes.

          In April 2003, the holders of the $500,000 aggregate principal amount
of convertible secured notes converted $250,000 of the outstanding principle and
100% of the accrued interest into 6,785,715 shares of common stock of the
Company pursuant to the conversion terms of the convertible secured notes
discussed in Notes 5. The holders of this note also converted the remaining
$250,000 principal balance on the note into the Convertible Notes described in
the preceding paragraph under the same terms and conditions as the other
investors.

                                      F-20
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2002

          During April 2003 and in connection with the $645,000 funding and
secured note conversion above, the Company restructured certain other current
liabilities including: (i) restructuring $530,000 of current liabilities to a
single vendor to be payable over a five-year period, with interest of 5%.
Principal payments under the agreement are fixed for the first year at $100,000
per year. Remaining payments after the second year are subject to certain
acceleration clauses based upon working capital levels and capital raised. In
connection with this agreement, the Company issued warrants to purchase up to
500,000 shares of common stock at a price per share of $0.10 to the vendor and
(ii) restructuring a $150,000 note payable and accrued interest which was due in
full on June 30, 2003 into a new note which is payable over 12 months maturing
on May 1, 2004. The note is payable in equal monthly installments beginning May
1, 2003 and carries an annual interest rate of 9%. Accrued interest is payable
at maturity. In connection with this agreement, the Company issued warrants to
purchase up to 100,000 shares of common stock at a price per share of $0.10 to
the vendor.

          On April 23, 2003, the Company sold to Eastman Kodak Company ("Kodak")
the Company's intellectual property rights relating to the DIVArchive product
applications for the medical imaging and information management market. In
connection with such sale, Kodak will pay the Company $850,000 and has offered
employment to substantially all of the Company's personnel associated with the
transferred assets and assumed certain software support obligations to the
Company's existing DIVArchive customers in the medical industry.

                                      F-21