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, 2003

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                  For the Transition Period from           to
                                                 ---------    ---------

                        Commission File Number: 000-32913

                            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)

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

                                      None
          ------------------------------------------------------------
                                (Title of Class)

                                 Not Applicable
          ------------------------------------------------------------
                   (Name of each exchange on which registered)

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

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

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No

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

Revenues for the fiscal year ended December 31, 2003 were $2.9 million.

The aggregate market value of shares of the Company's common stock held by
non-affiliates as of April 1, 2004 was $14,344,000 based upon the average bid
and asked prices of the issuer's common stock on the OTC Bulletin Board on March
31, 2004. Shares of common stock held by each executive officer or 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 1, 2004, there were 41,980,409 shares of common stock of the issuer
outstanding. The issuer'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.


<PAGE>


                                     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. The Company has incorporated
software-based methodologies and intellectual property throughout its service
offerings to allow content to be captured, converted, managed and distributed in
digital form efficiently and cost effectively. The Company is currently focusing
primarily on the sale of software and services to the broadcast, media and
entertainment industries. All of the Company's sales, sales engineering,
development and delivery capabilities have been organized and integrated to meet
the growing needs of this market, particularly the broadcast and content
provider segments.

         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 in the broadcast, media and
entertainment industries that have previously used film, microfiche and analog
audio video and tape for data storage 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 migration
toward the digitization of data will create a significant increase in the demand
for digital storage, which will increase the demand for digital archiving
products that will allow digitized data to be easily accessed, browsed, indexed,
managed and distributed. While fewer than 5% of broadcasters worldwide have made
the first-time investment in digital media, the Company believes the market
adoption rate is gaining pace. The number of new sales opportunities emerging
from global broadcasters in 2004 is expected to be nearly double that of 2003,
and the Company expects market forces to accelerate this trend through at least
the next three years.

         The Company's proprietary DIVArchive software products enable customers
to manage large-scale digital video archives in the broadcast, media and
entertainment industry. DIVArchive simplifies the process of preserving,
managing and accessing content. The Company believes participants in the
entertainment industry are increasingly seeking to convert non-digitized data to
digital formats that may easily be accessed, browsed, indexed, managed and
distributed.

<PAGE>

         The Company's transcoder product offerings enable 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 the digital media storage requirements of
its customers.

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

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

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

          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 a customer's 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.

BUSINESS STRATEGY

         The Company's strategy is to establish itself as a leading software and
services provider in the emerging markets for digital information asset
management, including archive management and the conversion and formatting of
text, images, audio, graphics and video from any format to alternate formats,
for access via multiple digital platforms. The Company's business operations
consist of: (1) the licensing of DIVArchive and transcoding software and the
integration and installation of such software products, (2) providing customer
support and maintenance under annual agreements for its proprietary software,
and (3) the continued research and development of its software products. Within
the media and entertainment industry, the Company is continuing the development
of a marketing strategy and program for the following primary market segments:

          o    Global media brands and content creation companies

          o    National broadcast and cable network operators

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          o    Regional content distribution/playout centers

          o    Film, animation and commercial post-production companies

         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 the global broadcast media and entertainment
industry. Key components of the Company's growth strategy include:

          o    The rapid development of 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 or services and the size and depth of their
               distribution channels, and are expected to be primarily tier one
               systems integrators, hardware manufacturers or entertainment,
               media, content management, storage, software companies and other
               organizations.

          o    The development of sales and marketing teams to support the
               Company's partnering strategy and to execute direct selling
               activities in selected geographic markets.

          o    The development of 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    Fostering 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    Scaling internal delivery capabilities by adding project
               managers, engineers 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    Launching additional digital media products and continuing to
               develop highly flexible, software driven products. Unlike
               competing hardware-based products, the Company's software-based
               solutions easily accommodate new features, are re-configurable to
               conform to other system interfaces and are believed to be less
               costly to produce, deliver and operate.

          o    Continuing 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

         The Company offers a comprehensive, integrated suite of digital media
solutions that facilitate the capture, management and distribution of digital


                                       3
<PAGE>

content. Components of these offerings include a distributed storage and archive
management solution for the entertainment and medical industries that simplifies
the process of preserving, managing and accessing digital content, a desktop
encoding system, automated video indexing and a real-time format transcoder.
Using a software-based approach built on intelligent, distributed architecture,
the Company's archive management and transcoding solutions are flexible,
scalable, easily upgradable, failure resilient and well-integrated with leading
automation and asset management applications.

         The Company's DIVArchive and BitScream applications provide the
essential integration layer within the digital broadcast environment. The
Company's products deliver encoding, transcoding, indexing, archive storage
management and search, and also meet mission-critical standards for
interoperability, scalability, functionality, reliability and performance. The
Company sells three primary software products:

DIVARCHIVE STORAGE MANAGEMENT

         DIVArchive (Distributed Intelligent Versatile Archive) 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 that 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 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 Company
is primarily focusing on the entertainment industry for developing its
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 toward digitization and the requirements and standards for
HDTV/Digital television will result in significant growth in sales of its
DIVArchive solution.

         DIVArchive is a software middleware application that enables
integration between asset management applications and storage devices in a true
Storage Area Network (SAN) environment. More specifically, DIVArchive enables
the interfacing of storage resources to video applications and broadcast
operating systems. It encompasses Hierarchical Storage Management (HSM) and
disk-extender functions and is "video aware." As a result, DIVArchive simplifies
the process of preserving, managing and accessing content with infinite capacity
and sustainable performance. The DIVArchive architecture is modular and is
therefore easily scalable from small disk-only systems to large capacity systems
using different forms of physical storage to balance response time, performance
and cost. DIVArchive functionality provides media and library management, back
up and recovery and data replication services that are critical components in
the digital workflow of broadcast, cable and content distribution companies
worldwide. Using DIVArchive, the Company builds upon open and scalable digital
video archives providing the broadcast, media and entertainment industries with
key benefits, including storage optimization, protection and control, full
life-


                                       4
<PAGE>

cycle management, video near-line editing and partial retrieval, video content
repurposing and sharing, archive networking, and other related functionality.

BITSCREAM TRANSCODING

         BitScream offers new capabilities to broadcasters and content providers
that need to capture, convert, manage and deliver digital video content. The
transcoding function of BitScream delivers true interoperability by automating
the direct exchange of digital video between various broadcast video server
formats, including playout, VOD or streaming servers. BitScream not only
eliminates the need to perform multiple captures of content from source tapes,
but also the requirement to store multiple copies of the same content in order
to deliver media for different streaming players, resolutions and connection
speeds. BitScream is designed to address and resolve common storage and delivery
issues by enabling users to control the on-demand, real-time reformatting of
their digital video assets. Designed for flexibility, scalability and investment
protection, BitScream provides the capability to convert content stored in
broadcast video server formats on demand, in real time or faster depending upon
computing power. BitScream currently supports all of the most common formats
used in digital broadcast environments around the world, including MPEG-1,
MPEG-2, MPEG-1 and MPEG-2 program and transport streams, DV to Real Media,
Windows Media, uncompressed AVI YUV and RGB wrapper formats.

         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.

         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:

          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.

                                       5
<PAGE>

          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.

         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.

VIDEO ARCHIVE SYSTEM TECHNOLOGY (VAST)

         By integrating BitScream and the DIVArchive storage manager, the
Company has created a versatile digital media archive workflow system called
Video Archive System Technology, or VAST. VAST enables content providers to
implement a complete workflow that automates and streamlines the movement of
content from ingest to delivery. This innovative approach to digital content
management incorporates the Company's core technologies in the areas of ingest,
transcoding and storage management, while integrating disk and tape storage
technologies, asset management applications and indexing, search and retrieve
solutions from other industry-leading vendors. Working within a facility's
digital infrastructure, VAST enables content providers to implement a complete
workflow that automates and streamlines the movement of content from ingest to
delivery. VAST is a powerful, scalable solution that enables content providers
to create and deliver digital content to their audiences using a wide range of
options, including popular streaming formats and broadcast quality distribution.
Content providers benefit from an efficient storage, retrieval and repurposing
system, seamless integration with streaming, VOD and automation to deliver a
marked improvement in operating efficiencies.

         In addition to its proprietary software solutions, the Company offers
the following:

          o    PROFESSIONAL SERVICES AND DEVELOPMENT: Specific expertise is
               focused on storage and archive systems, storage area and
               broadcast networking, video technology and operating
               environments, emerging video formats and transcoding processes,
               and a wide range of workflow requirements common to broadcasters
               and content providers around the world. Based on its unique media
               industry expertise, the Company provides consultation, design,
               development and integration services to customers and partners
               around the world. The Company's professional services
               organization ensures smooth implementation of complex
               installation and integration projects with video operational
               systems and applications.

          o    CUSTOMER SUPPORT AND MAINTENANCE: In connection with the
               licensing of its software products, the Company provides customer
               support under annual support agreements for a support fee equal
               to 15-20% of the software license fees. These agreements are
               renewed annually.

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


                                       6
<PAGE>

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 also is directing its efforts toward 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, 2003 and December 31, 2002, the
Company incurred costs related to its research and development activities
totaling $583,000 and $339,000, respectively, of which, $49,000 and $212,000,
respectively, was recorded as research and development expense and $534,000 and
$127,000, respectively, was capitalized and/or charged to cost of revenues.

MARKETING AND DISTRIBUTION

         Commencing in early 2003, the Company determined to focus its marketing
efforts primarily on software sales to the global media and entertainment
industries. Substantially all marketing, sales and distribution efforts and
capabilities have been reorganized and directed to meet the growing needs of
these markets, particularly the broadcast and content provider segments.

                                       7
<PAGE>

During 2003, the Company was able to invest only nominal amounts in marketing
and public relations for its target markets and products. However, in 2004, the
Company anticipates investing more in the marketing of, and the development of
distribution channels for, its products.

         The planning, specification, purchase, installation and invoicing of
any digital media conversion process is time consuming. Large projects often
span 12 to 18 months from concept to completion, which results in a long selling
cycle for the Company. While most media and entertainment businesses operate on
a calendar fiscal year, the Company believes capital purchase behavior is not
necessarily dictated by year-end/new-year budgeting. In the Company's core
broadcast market, the timing of large regional trade shows is more often a
driving factor in the timing of purchases. These events play a large role in the
buying decision process for any play-to-air operation and the vendors that sell
into this market.

         The supply chain for digital media workflow conversion includes a wide
range of providers of hardware, software and services. Storage hardware, video
server and other component manufacturers, automation and asset management
vendors and broadcast systems integrators all exercise influence in the final
selection of components chosen in the final integrated solution. The Company's
marketing and distribution efforts are focused on both direct and indirect
sales. Currently, the majority of the Company's sales are generated through
indirect channels.

         DIRECT SALES. Because the Company's sales force remains small, the
sales team concentrates its direct sales efforts on a limited target list of the
largest prospects in their respective regions. While these efforts often uncover
emerging opportunities, the Company's direct sales force more often is brought
into potential sales opportunities through the Company's indirect channel
partners.

         The Company intends to focus its direct sales forces on the leading
organizations in each industry sector and will attempt to develop a significant
indirect channel to reach the middle and lower tier segments. The Company's
sales 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.

         INDIRECT SALES. The Company generates most of its sales leads through
its formal and informal partnerships with entities focused on other areas of the
digital broadcast operation value chain. As the Company's products typically are
part of a larger-scale integration and implementation project, the Company
believes partnering with industry leaders is an effective means of penetrating
markets and positioning the Company's products. The Company's indirect channels
can be categorized as follows:

          o    Broadcast Systems Integrators: Systems integrators with digital
               media expertise involved in the complete installation and
               integration of digital broadcast operating environments.

          o    Storage Vendors: Storage is at the heart of every digital media
               operation, and every storage manufacturer has a "digital media
               strategy". Few, however, possess the in-house media industry


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<PAGE>

               expertise or relationships required to penetrate the broadcast
               market.

          o    Automation Vendors: Automation is an important part of a
               broadcast solution as it is a central component that controls the
               scheduling of television and video broadcast programming.
               Automation is the component of the broadcast infrastructure that
               interfaces with most of the operating systems, including the
               archive manager.

          o    Video Server Manufacturers: A digital archive is the natural
               extension of the storage capacity of the video servers, and the
               two systems have to smoothly interconnect in an integrated
               solution. DIVArchive fills this critical need. The Company is
               seeking to establish strong relationships with the key video
               server vendors.

          o    Asset Management Companies: As television broadcasters begin to
               migrate to digital programming, new tools are required to easily
               search and view video content. An asset management application
               fills this role and allows users from a desktop PC to search and
               view any content in a browse format. As with automation systems,
               an asset management application must interface with the storage
               archive via middleware, such as DIVArchive.

         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.

         The Company's principal strategic and marketing partners include the
following:

          o    Rainbow Network Communications, Inc., a subsidiary of
               Cablevision, Inc. ("Rainbow"), has entered into a five-year
               agreement to utilize the Company's transcoding and archiving
               middleware on an exclusive basis. This agreement also includes a
               technology partnership whereby Rainbow will fund the Company's
               development of certain 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    SONY is an established brand in the global digital media supply
               chain. The Company is working with certain affiliates of Sony
               Corporation on several new installations, and Sony has initiated
               strategic partner discussions in an effort to use the Company's
               technology to improve its product offerings. DIVArchive
               integrates with Sony video server and tape library systems to
               provide an integrated end-to end solution for broadcasters to
               access and playout their digital assets. Sony Electronics has
               certified its SAIT-based PetaSite tape storage systems with the
               Company's DIVArchive software, fusing storage performance and
               manageability for broadcast and media companies.

                                       9
<PAGE>

          o    International Business Machines Corporation ("IBM") and the
               Company have an ongoing technology relationship in which IBM
               markets the Company's DIVArchive products in its market sector,
               opening up new sales channels in and beyond the broadcast
               marketplace. The Company is in the very early stages of
               formalizing this relationship with IBM and is currently working
               under informal business terms with a view to establishing a
               formal strategic partnership with IBM.

          o    Storage Technology Corporation ("StorageTek") has entered into a
               global OEM agreement that provides StorageTek a worldwide license
               to market and sell the Company's DIVArchive software products.
               StorageTek is authorized to provide customer support,
               professional services implementation services, and product
               updates in connection with its sale of the DIVArchive software to
               its customers. This agreement allows the Company to build on its
               past success with StorageTek, extend the global reach of the
               Company's sales and marketing efforts, and strengthen its ability
               to compete on a worldwide basis.

          o    Thomson Broadcast and Media Solutions ("Thomson") delivers
               products and solutions for broadcast and TV/Film professionals
               under its Grass Valley brand name. DIVArchive interfaces with
               Thomson/Grass Valley video server systems to provide an
               integrated end-to end solution for broadcasters to access their
               digital assets.

          o    Magna Systems & Engineering ("Magna") is a well-established
               partner in the Asian and Pacific Rim markets. The Company and
               Magna jointly have delivered and installed numerous video archive
               solutions and continue to support digital video archive solutions
               for major broadcast customers in Australia and Hong-Kong.

          o    Communications Engineering, Inc. ("CEI") and the Company have
               formed a strategic partnership to provide design, installation
               and support for major U.S. broadcast customers, including PBS and
               Rainbow Network Communications.

          o    Harris Corporation ("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. The Company's DIVArchive and BitScream solutions have
               been tightly integrated into Harris' Invenio product, an
               enterprise-wide digital media asset management solution, and its
               related Louth automation system. With this combined technology,
               broadcasters can implement a complete content management solution
               that combines archiving, transcoding and comprehensive asset
               management.

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

                                       10
<PAGE>

CUSTOMERS

         The Company's customer base includes many large organizations in the
broadcast and medical industries, including Rainbow Networks Communications,
Inc., Public Broadcasting System (PBS), Microsoft Corporation, Canal +, Playboy
Television, Chum Television, Oxygen, BBC Broadcast, Bayerischer Rundfunk, Turner
Entertainment Networks Asia, Sony Pictures, Telecinco, France 3, SKY Perfect TV,
Eastern Television/Taiwan, TV Azteca, CentralChina Television, Seven Networks
and MTV Networks-Europe.

         In 2003, the Company's revenues came largely from the European and
Asian geographic markets. In 2003, aggregate revenues from customers located in
Europe or Asia amounted to $2.0 million, or 70% of total revenue, while revenues
from customers located in North America totaled $0.9 million, of 30% or total
revenue. In 2004, the Company expects this concentration of revenues to
continue. However, as the Company continues to develop its North American
presence and continues to develop and grow its business, it is anticipated that
the revenue allocation between customers located in Europe and Asia, on the one
hand, and customers located in North America should migrate toward 50/50. In
2002, the Company's revenues from customers located in Europe or Asia amounted
to $1.0 million, or 61% of total revenue, while revenues from customers located
in North America totaled $0.7 million, or 39% of total revenue.

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 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'

                                       11
<PAGE>

offerings, customer satisfaction and customer support capabilities, the breadth
of product lines and support services, the strength of the Company's sales force
and channel partnership relationships and general economic and business
conditions. The Company expects additional companies to begin offering products
and services similar to those offered by the Company. Many of these companies
have significantly greater financial resources than the Company.

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

         The Company believes the primary competitors for its DIVArchive
software products and services include Avalon, a division of EMC Corporation and
Software Generation Limited, a privately-held company based in Southampton,
England, Masstech Group, a privately-held corporation headquartered in Toronto,
Canada.

         The Company believes the primary competitors for its Transcoding
product line include Telestream Inc., a privately-held corporation located in
Nevada City, California, and Anystream Inc., a privately-held corporation
located in Sterling, Virginia.

EMPLOYEES

         As of March 31, 2004, the Company employed 26 persons on a full-time
basis, of which four were executive management, four were in finance and
administration, six were in sales and marketing, eight were in research and
development and four 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 former

                                       12
<PAGE>

Media Services Division. In December 2003, the Company disposed of this business
unit to Data Strategies International, Inc., a company owned and controlled by a
former employee of the Company.

         In August 2002, the Company acquired from ManagedStorage International
Inc. ("MSI") the DIVArchive operations of 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. See
further discussion in Note 3 to Notes to Consolidated Financial Statements.

         In April 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. See further discussion in Note 4 to Notes to Consolidated
Financial Statements.

ITEM 2. DESCRIPTION OF PROPERTY

         The Company's executive offices are located in Mount Laurel, New Jersey
where the Company leases approximately 4,000 square feet of office space through
September 2006. The New Jersey site is the Company's primary operating facility
in the United States and houses all of the Company's research and software
development resources, its development/testing/staging laboratory facilities,
and certain information management systems and administrative functions. The
Company also leases shared office space in Boulder, Colorado under a
month-to-month lease arrangement with Equity Pier, LLC, which is a significant
shareholder of the Company. The Company's executive management and certain
administrative functions are located in Boulder, Colorado. The Company also
utilizes an outsourced financial support and accounting systems operations. The
Company's international operations are located in 160 square meters of office
and production space in Toulouse, France under a lease that expires in May 2009.

         At December 31, 2003, aggregate lease payments under the Mount Laurel,
New Jersey and Toulouse, France leases through the end of the lease terms were
$130,000 and $169,000, respectively.

         The Company believes its current facilities are adequate for its
existing operations and that all of its properties are adequately covered by
insurance. The Company anticipates having to increase the size of its facilities
in 2004 if the growth the Company experienced in fiscal 2003 continues or
accelerates in 2004.

ITEM 3.  LEGAL PROCEEDINGS

         None

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 AND SMALL
         BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

         The Company's common stock is currently quoted on the OTC Bulletin
Board under the symbol "FPDI." The following table sets forth the high and low
bid prices for the Company's common stock for each fiscal quarter within the
last two fiscal years of the Company, 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.

                                                   HIGH BID           LOW BID
                                                   --------           -------
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

Year ended December 31, 2003
First Quarter..............................          $0.38             $0.15
Second Quarter.............................           0.26              0.08
Third Quarter..............................           0.40              0.13
Fourth Quarter.............................           0.22              0.11

         At April 1, 2004, there were approximately 400 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.

         As of December 31, 2003, 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 approved by
security holders                         -0-                      N/A                       -0-
=================================================================================================
Equity compensation
plans not approved by
security holders                   2,623,712                     $0.63                 4,776,288
=================================================================================================
Total                              2,623,712                     $0.63                 4,776,288
=================================================================================================
</TABLE>

         The Company's equity incentive plans are more fully described in Part
III herein and in Note 12 and Note 13 to Notes to Consolidated Financial
Statements.

                                       14
<PAGE>

         In January 2004, the Company applied to the CUSIP Service Bureau
operated by Standard & Poors' for a change in the CUSIP number identifying the
Company's common stock in an effort to curb perceived naked short selling of the
Company's common stock. The Company's application was not approved because the
Company did not meet the specified requirements for a CUSIP number change. The
Company does not intend to further pursue its application.

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
to 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,
goodwill and intellectual property and concentrations of risk related to
customers.

REVENUE RECOGNITION

         Given the growth in orders during 2003 and the continuation of such
growth into 2004, 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 under the Contract method of accounting
as prescribed by American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2 in connection with an arrangement to deliver
software or a software system requiring significant production, modification or
customization of software. 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 reasonably assured, 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 is generally not dependent on the professional
services portion of the contract, software revenue is recognized upon delivery.

         Fees for maintenance agreements are recognized ratably over the terms
of the agreements. 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.

                                       15
<PAGE>

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. 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 all previously capitalized costs are
amortized over the remaining estimated economic useful life of the product, not
to exceed to three years.

IMPAIRMENT OF LONG-LIVED ASSETS

         Long-lived, tangible and intangible assets that do not have indefinite
lives, such as fixed assets and intellectual property, are reviewed for
impairment whenever events or change in circumstances indicate that the carrying
amount of such assets may not be recoverable. Determination of recoverability is
based on an estimate of undiscounted future cash flows resulting from the use of
the asset and its eventual disposition. Measurement of an impairment loss for
such long-lived assets is based on the fair value of the asset.

         Goodwill and other intangible assets with indefinite lives are not
amortized and are subject to write downs charged to results of operations only
when their carrying amounts are determined to be more than their estimated fair
values based upon impairment tests that are required to be made annually or more
frequently under certain circumstances. Fair values are determined based on
models that incorporate estimates of future probability and cash flows.

                                       16
<PAGE>

CONCENTRATION OF RISK - CUSTOMERS AND GEOGRAPHIC

         In 2003, the Company's revenues came largely from the European and
Asian geographic markets. In 2003, aggregate revenues from customers located in
Europe or Asia amounted to $2.0 million, or 70% of total revenue, while revenues
from customers located in North America totaled $0.9 million, or 30% of total
revenue. In 2004, the Company expects this concentration of revenues to
continue. However, as the Company continues to develop its North American
presence and continues to develop and grow its business, it is anticipated that
the revenue allocation between customers located in Europe and Asia, on the one
hand, and customers located in North America should migrate toward 50/50. In
2002, the Company's revenues from customers located in Europe or Asia amounted
to $1.0 million, or 59% of total revenue, while revenues from customers located
in North America totaled $0.7 million, or 41% of total revenue.

         During 2003, revenues from two customers, each exceeding 10% of total
revenue, aggregated 19% and 15%, respectively. Accounts receivable from the
Company's largest customer was $321,000 as of December 31, 2003, which
represented approximately 32% of total trade receivables at that date. This
customer is also a stockholder of the Company and beneficially owned
approximately 12% of the Company's outstanding common stock as of March 31,
2004.

         During 2002, revenues from two customers, each exceeding 10% of total
revenue, aggregated 31% and 18%, respectively.

GENERAL

         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 had been gaining
acceptance in the marketplace, and to develop the business for sustained
operation and growth in the future. As of January 2003, the Company was
operating three separate business divisions:

          1.   Transcoding Division, based in Mt. Laurel, New Jersey

          2.   Media Services Division, based in Houston, Texas

          3.   DIVArchive Division (Broadcast and Medical), based in Toulouse,
               France

         The primary objective of the restructuring efforts was to reorganize
the business operations around its core competencies to focus on the sale of
archive management and transcoding software products and services to the
broadcast, media and entertainment industry. During 2003, the Company sold its
DIVArchive medical business to Kodak, and sold its Media Services business to a
former employee and the former owner of that business unit. The sale of these
businesses resulted in reduced operating costs from continuing operations,
enabled the redeployment of costs into one business unit, generated cash flow
from the sale of the businesses that could be used in financing the
restructuring of the Company, resulted in the settlement of

                                       17
<PAGE>

significant liabilities payable in 2004, and focused all of the Company's
resources on its most promising proprietary products and services.

         Management believes the Company now is repositioned to focus
exclusively on software sales to the broadcast, media and entertainment
industry. All of the Company's sales, sales engineering, development and
delivery capabilities have been organized and integrated to meet the growing
needs of this market, particularly the broadcast and content provider segments.
Management believes its DIVArchive software product is the leading archive
management software for digital video content in Europe and Asia.

         An integral component of the restructuring efforts was the disposition
of the Media Services and DIVArchive Medical businesses and many of the items
requiring restructuring were within those business units. The majority of
restructuring costs and related expenses have been accounted for within those
disposed business units as discontinued operations in the Company's consolidated
2003 financial statements. There were also non-recurring costs included in
operating costs from continuing operations incurred in 2003 related to the
restructuring. Operating expenses from continuing operations included
approximately $350,000 primarily attributable to employee-related costs and
termination costs, professional fees (primarily legal and accounting) and other
restructuring costs that are not expected to reoccur in 2004.

SALE OF DIVARCHIVE MEDICAL BUSINESS

         On April 23, 2003, the Company sold to 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
paid the Company $850,000, assumed $137,000 of accrued employee obligations,
employed 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 Company
recorded a gain on the sale of $586,000. Subsequent to the sale, Kodak and the
Company entered into certain other arrangements that resulted in Kodak assuming
much of the operating facility space and equipment located in Toulouse, France.
The DIVArchive Medical component is accounted for as a discontinued operation in
the accompanying consolidated financial statements. The Company incurred losses
from the operations of the DIVArchive Medical discontinued operation of $1.1
million in 2003. The disposal of this business unit provided cash for continuing
operations and enabled the Company to reduce its operating expenses and redeploy
resources and/or personnel in the Company's remaining business operations. The
reduction in operating costs resulting from this transaction was significant to
the Company, while the corresponding reduction in revenue associated with the
medical business was not expected to significantly impact the Company's revenues
going forward.

SALE OF MEDIA SERVICES BUSINESS

         In December 2003, the Company sold the remaining assets and
intellectual property of its former Media Services business unit to Data
Strategies International, Inc., a company owned and controlled by a former
employee of the Company. The Company also settled all remaining employment and
service related obligations to the former employee through the issuance of
1,833,000 shares of the Company's common stock with a fair market value of
$275,000 on the date of the transaction. The sale of the Media Services business
also settled all legal claims of the respective parties and

                                       18
<PAGE>

released all parties from any future claims or liabilities. The transaction
resulted in a non-cash loss to the Company of $1.0 million. Included as part of
the loss was the forgiveness by the former employee of $930,000 of cash
obligations payable by the Company in 2004, which was offset by the value of the
shares of common stock issued and the value of the assets and intellectual
property and goodwill sold. The Media Services business unit was accounted for
as a discontinued operation in the accompanying consolidated financial
statements. The Company incurred losses from the operations of the Media
Services business of $2.2 million in 2003. The disposal of this business also
involved the forgiveness of $930,000 in liabilities.

BUSINESS OUTLOOK

         As of December 31, 2003, the Company had accumulated a backlog of
contracted orders totaling $2.2 million, which orders are expected to be
recognized as revenue in 2004. Further, during the three months ended March 31,
2004, the Company received $1.7 million in new orders for the Company's software
products and services, all of which are expected to generate revenue in 2004.
The Company currently has approximately $37 million in net operating loss
carryforwards for international (French tax law), federal and state tax purposes
that will become a consideration in the event that the Company can generate
income in future periods. However, there can be no assurance that the Company
will be able to generate income in future periods, and the Company has yet to
generate any income since its inception.

         The Company is currently deploying its resources in the development of
the North American market for archive management and transcoding solutions
targeted at the broadcast, media and entertainment industry. The Company also is
continuing to expand its market presence in the European and Asian markets, and
is focusing on increasing its penetration and physical presence in Asia. As part
of this expansion, the Company will require resources for the expansion and
continued management of its global partner network. In addition, the Company
intends to allocate additional budgeted funds for marketing and
corporate/product branding expenditures in 2004. In particular, additional
resources will be deployed in connection with the National Association of
Broadcasters ("NAB") conference in April 2004 and the International Broadcasters
Conference ("IBC") held in Europe in September 2004. The Company's ability to
continue to expand its business is dependent on the ability of the Company to
continue to increase staffing, primarily in the sales and marketing, partner
channel management and operations/delivery functions. Additional resources in
other key functions of the Company will also be required to continue to expand
the business. All of these factors are dependent on the availability of capital
to the Company, the Company's ability to continue to generate new orders at the
current rate or faster, and the Company's ability to continue to deliver
software solutions to customers in a timely manner.

         The following discussion and analysis of financial condition and
results of operations is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
consolidated financial statements requires management to make estimates and
judgments that affect 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

                                       19
<PAGE>

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 - YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2002

         REVENUE. Total revenue for the year ended December 31, 2003 increased
$1.2 million, or 72%, to $2.9 million compared to total revenue of $1.7 million
for the year ended December 31, 2002. This increase was attributable to
increased orders for the Company's software and related products and services,
including sales of the Company's DIVArchive solutions, which generated $2.2 of
revenue in 2003. The increase in revenue from the sale of the DIVArchive product
offerings primarily was from software licensing fees, which represented the
up-front cost of purchasing the software and the annual maintenance revenue paid
by the customer. This increase in orders is the result of increased demand for
the Company's software products, reflects the recognition of the DIVArchive
product as a leader in the broadcast industry, as well as an increase in overall
market demand and the acceleration of the adoption of digital media broadcast
systems by broadcasters. The Company expects licensing revenues will be an
increasingly larger percentage of the revenue mix. In addition, the increase in
2003 revenues was due to the inclusion of the operations of the Company's
DIVArchive business for the full year 2003 as compared to only five months for
fiscal 2002. In addition, the Company generated $0.7 million of revenue in 2003
from the sale of its transcoding products and services.

         In 2003, the Company's revenues were derived largely from the European
and Asian geographic markets. In 2003, aggregate revenues from customers located
in Europe or Asia amounted to $2.0 million, or 70% of total revenue, while
revenues from customers located in North America totaled $0.9 million, of 30% or
total revenue. In 2004, the Company expects this concentration of revenues to
continue. However, as the Company continues to develop its North American
presence and continues to develop and grow its business, it is anticipated that
the revenue allocation between customers located in Europe and Asia, on the one
hand, and customers located in North America should migrate toward 50/50. In
2002, the Company's revenues from customers located in Europe or Asia amounted
to $1.0 million, or 59% of total revenue, while revenues from customers located
in North America totaled $0.7 million, or 41% of total revenue.

         GROSS MARGIN. Total gross margin for the year ended December 31, 2003
of $1.9 million, or 66% of total revenue, increased $561,000, or 41%, compared
to total gross margin of $1.4 million for the year ended December 31, 2002. The
increase in gross margin was attributable to increased revenues as described
above. The decrease in gross margin as a percentage of revenue was the result of
increased staffing costs in 2003 to generate and support the higher level of
revenue and the overall support and service of the Company's expanding customer
base. These additional costs were budgeted in 2003, and the lower level gross
margin was in line with expectations.

         During the year ended December 31, 2003, the gross margins generated
from the sale of the Company's software products and related services met the
Company's anticipated gross margin. On the basis of the Company's contracted

                                       20
<PAGE>

backlog of orders for its DIVArchive solutions and the pipeline of potential
business that Management believes will close during 2004, Management believes
2004 revenues will be at levels to support the Company's full development and
engineering resources. As a result, the Company anticipates its gross margin
will remain the same or increase during 2004.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the year ended December 31, 2003 increased
$1.1 million to $4.1 million from $3.0 million for the year ended December 31,
2002. SG&A expenses for the year ended December 31, 2003 included $2.1 million
in salaries and related benefits for employees not directly related to the
production of revenue, $1.0 million in professional fees, $598,000 in general
office expenses, $166,000 in facilities costs, $276,000 for travel-related costs
and $6,000 for bad debt expense. SG&A expenses for the year ended December 31,
2002 included $1.4 million in salaries and related benefits for employees not
directly related to the production of revenue, $726,000 in professional fees,
$467,000 in general office expenses, $114,000 in facilities costs, $254,000 for
travel-related costs and $30,000 for bad debt expense. The increase in SG&A
expenses during 2003 were the direct result of increased costs related to the
generation of the increased revenue levels and increased costs directed at the
expansion of the Company's business as well as to meet future anticipated
revenue from contracted orders. The Company expects SG&A expenses to remain
constant or slightly increase in supporting its existing and contracted orders
for revenue. However, the Company anticipates increasing costs particularly in
the area of sales and marketing and administration and in expanding the business
in 2004, given that the Company has sufficient cash flow or additional working
capital invested into the Company.

         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. The
Company expects it will begin to realize significant revenues and cash flows
from these efforts in 2004. For the years ended December 31, 2003 and 2002, the
Company incurred costs related to its research and development activities
totaling $583,000 and $339,000, respectively, of which, $49,000 and $212,000,
respectively, was recorded as research and development expense and $534,000 and
$127,000, respectively, was capitalized and/or charged to cost of revenues.

         DEPRECIATION AND AMORTIZATION. Amortization expense consists of
amortization of intellectual property, capitalized research and development
costs and other intangible assets. Depreciation expense consists of depreciation
of furniture, equipment, software and improvements. Depreciation and
amortization expense was $584,000 for the year ended December 31, 2003 and
$465,000 for the year ended December 31, 2002. The increase in these expenses in
2003 was primarily attributable to the inclusion of a full year of amortization
expense for intellectual property related to the Company's DIVArchive products,
which were acquired in August 2002, as compared to the inclusion of only five
months of amortization expense relating to such

                                       21
<PAGE>

intellectual property in 2002. Additional amortization expense of $93,000 would
have been recorded in the year ended December 31, 2002 if the acquisition had
occurred at the beginning of the period.

         OPERATING LOSS. During the year ended December 31, 2003, the
Company incurred a loss from operations of $2.8 million as compared to a loss
from operations of $2.3 million for the year ended December 31, 2002. The $0.5
million increase in loss from operations for the year ended December 31, 2003
was primarily due to the reasons described above.

         INTEREST EXPENSE. Interest expense was $783,000 for the year ended
December 31, 2003 compared to $500,000 for the year ended December 31, 2002. The
increase in interest expense was attributable to increased amortization of debt
discount of $231,000. Interest expense during 2003 included cash interest costs
accrued of $97,000 on notes payable for money borrowed. Interest expense for the
year ended December 31, 2003 also included non-cash interest charges aggregating
$696,000, including a non-cash interest charge of $606,000 related to the
amortization of debt discount, non-cash interest expense of $41,000 related to
amortization of non-cash financing costs and non-cash interest expense of
$49,000 related to the value of warrants to purchase common stock issued in
conjunction with the restructuring of certain payables in 2003.

         The principal balance of notes payable at December 31, 2002 was
$625,000, net of debt discount of $125,000. During 2003, the Company received
gross proceeds of $645,000 from the sale of additional 8% unsecured convertible
notes, converted the $500,000 senior secured convertible note due March 31, 2003
- $250,000 to common stock and $250,000 to new 8% unsecured convertible notes,
and converted $95,000 in current liabilities to the note. The Company also
restructured another note in 2003 with $160,000 of principal and accrued
interest, and made principal payments against that note of $107,000. At December
31, 2003, the outstanding balance on these notes, net of debt discount of
$509,000, was $534,000.

         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 pursue hedging
opportunities generally. At December 31, 2003, the Company reported an
accumulated translation gain of $67,000 as a component of Comprehensive Loss.
The Company is also subject to foreign exchange transaction exposure because it
provides for intercompany funding between the U.S. and international operations,
and when its subsidiaries transact business in a currency other than its own
functional currency. During 2003, the Company recorded $90,000 in expense
related to foreign currency transactions.

         LOSS FROM CONTINUING OPERATIONS. During the year ended December 31,
2003, the Company incurred a loss from operations of $3.7 million as compared to
a loss from operations of $2.8 million for the year ended December 31,

                                       22
<PAGE>

2002. The $0.9 million increase in loss from operations for the year ended
December 31, 2003 was due to increased staffing costs and other non-recurring
costs to restructure the business and increased non-cash interest expense
related to the amortization of debt discount, as discussed above.

         NET LOSS FROM DISCONTINUED OPERATIONS. During the year ended December
31, 2003, the Company incurred a net loss from discontinued operations of its
Media Services and DIVArchive Medical business units of $3.7 million as compared
to a loss of $458,000 for the prior year period. Included in the loss for 2003
was a $3.3 million non-cash loss on the impairment of goodwill and intellectual
property of the Media Services business unit, a $1.0 million non-cash loss on
the disposal of the Media Services business unit, and a $586,000 gain on the
sale of the DIVArchive Medical business unit, which were offset, in part, by the
results of operations of the discontinued business units.

         NET LOSS. During the year ended December 31, 2003, the Company incurred
a net loss of $7.4 million as compared to a net loss of $3.3 million for the
year ended December 31, 2002. The $4.1 million increase in net loss for the year
ended December 31, 2003 was primarily due to the increased net loss from
discontinued operations of $3.3 million and additional losses from operations of
$0.9 million, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2003, the Company had $394,000 of cash and cash
equivalents. Issuance of convertible debt securities have been a principal
source of liquidity for the Company.

         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. Principal
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 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. The Company also converted $250,000 of
principal and $35,000 of accrued interest from the former Senior Secured
Convertible Notes and $95,000 of current liabilities into this note in 2003.

         Also, 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: $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.; $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

                                       23
<PAGE>

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.

         The Company is still in the early stages of executing its business
strategy and expects to begin numerous new engagements during the next 12
months. Although the Company is experiencing success in the deployment of its
marketing strategy for the sale and delivery of its DIVArchive and other
software solutions, continuation of this success is contingent upon several
factors, including available cash resources, the prices of its products and
services relative to those of 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 April 1, 2004 will be sufficient to
operate through March 31, 2005. The Company incurred an operating loss of $2.8
million in 2003 and $2.3 million in 2002. These losses and other factors,
including the early stage of the Company's business, as well as potential
changes in the business and competitive environment in which the Company
operates, 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.

         During 2003, the Company was successful in deploying its marketing
strategy for the sale and delivery of its software solutions. As a result, the
Company has accumulated a backlog of contracted orders as of December 31, 2003
of $2.2 million, which is expected to generate revenue in 2004. Further, during
the three months ended March 31, 2004, the Company received $1.7 million in new
orders for the Company's software products and services, all of which are
expected to generate revenue in 2004. In addition, the Company is currently
seeking to raise additional equity capital to provide working capital to finance
its business plan and projected growth in 2004 and beyond. However, 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.

         The Company expects capital expenditures to be approximately $0.5
million during the 12-month period ended December 31, 2004. It is expected that
the Company's principal uses of cash will be for working capital, to finance
capital expenditures and for other general corporate purposes, including
financing the expansion of the business and implementation of its sales and
marketing strategy. The amount of spending in each respective area is dependent
upon the total capital available to the Company.

                                       24
<PAGE>

         As of December 31, 2003, the Company had current assets of $1.6
million. These assets were primarily derived from operations of the Company in
2003 the funding of the 8% unsecured convertible notes completed in April 2003
and the sale of the DIVArchive Medical business unit to Kodak for $850,000 in
cash [and the transfer of certain employee-related obligations of $137,000].
Long-term assets of $1.25 million consisted of $416,000 in goodwill associated
with DIVArchive assets acquired during 2002, software and intellectual property
of $276,000, property and equipment of $146,000, software development costs of
$374,000 and other assets of $40,000.

         Current liabilities of $3.9 million at December 31, 2003 consisted of
$1.0 million of accounts payable; $0.5 million of deferred revenue, which
consisted of billings in excess of revenue recognized, deposits and progress
payments received on engagements currently in progress; $0.9 million of accrued
expenses; $0.8 million of accrued expenses to employees; $534,000 of unsecured
convertible notes payable, net of debt discount of $509,000; and $92,000 for the
current portion other long-term obligations.

         The Company's working capital deficit was $2.3 million as of December
31, 2003 for the reasons described above. At such date, the Company's working
capital deficit excluding non-cash liabilities (deferred revenue and accrued
vacation and related obligations) was $1.5 million. Also, included in current
liabilities was $481,000 ($990,000 principal net of $509,000 discount) of the
Company's outstanding 8% convertible notes, which the Company expects will be
converted into common stock and thus not be realized as a cash obligation of the
Company. Assuming conversion of the Company's 8% convertible notes (of which,
$460,000 in principal amount plus accrued interest was converted during March
and April 2004), the Company's estimated working capital deficit would be
approximately $1.0 million.

         The Company used net cash of $2.2 million in operating activities
during the year ended December 31, 2003, primarily as a result of the net losses
incurred during the period. The Company provided net cash of $41,000 from
operating activities during the year ended December 31, 2002.

         The Company used net cash of $295,000 in investing activities during
the year ended December 31, 2003, $87,000 represented proceeds from the sale of
fixed assets, which was offset by $147,000 used for capital expenditures and
$234,000 used for the development of the Company's suite of video software
solutions and other investing activities. During the year ended December 31,
2002, the Company provided $230,000 from investing activities, of which $696,000
represented cash provided by the acquisition of the DIVArchive assets and
$47,000 represented proceeds from the sale of fixed assets, 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.

         Financing activities provided net cash of $362,000 during the year
ended December 31, 2003 primarily from proceeds from the issuance of notes
payable of $645,000, offset by principal repayments on notes payable and capital
leases of $283,000. 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

                                       25
<PAGE>

payable of $800,000, offset by principal repayments on notes payable and capital
leases of $299,000.

FINANCIAL INSTRUMENTS

         A summary of the Company's estimated required payments for financial
instruments as of December 31, 2003 is presented below:

<TABLE>
<CAPTION>
                                  2004             2005           2006           2007            2008
                                  ----             ----           ----           ----            ----
<S>                            <C>               <C>            <C>             <C>            <C>
   Total debt                  $1,143,000        $100,000       $100,000        $100,000       $72,000
   Operating lease
      obligations                 204,000         141,000         79,000          30,000        28,000
                               ----------        --------       --------        --------      --------
                               $1,347,000        $241,000       $179,000        $130,000      $100,000
</TABLE>


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which provides standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
Statement is effective for financial instruments entered into or modified after
May 31, 2003 and for pre-existing instruments as of the beginning of the first
interim period beginning after June 15, 2003. The adoption of this standard did
not have a material effect on the Company's financial condition or results of
operations.

         In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities". This interpretation addresses consolidation by
business enterprises of variable interest entities. The interpretation is not
expected to have a material effect on the Company's consolidated financial
statements.

ITEM 7.  FINANCIAL STATEMENTS

         The reports 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

           During the fiscal year ended December 31, 2003, the Company changed
its certifying accountants to J.H. Cohn LLP, as reported in the Company's
Current Report on Form 8-K dated October 31, 2003.

ITEM 8A. CONTROLS AND PROCEDURES.

         DISCLOSURE CONTROLS AND PROCEDURES. The Company's management, with the
participation of the Company's chief executive officer and chief financial
officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's chief executive officer and chief financial officer

                                       26
<PAGE>

have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.

         INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fourth quarter of 2003 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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 March 31, 2004:

Name                       Age          Position(s)
----                       ---          -----------
Thomas P. Sweeney III      43           Chairman of Board
Michael Knaisch            47           Chief Executive Officer
Matthew Richman            33           Chief Financial Officer, Chief Operating
                                          Officer and Treasurer
Dr. Jay Yogeshwar          41           Director
Paul McKnight              47           Director
Patrick Whittingham        56           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 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 ManagedStorage International, Inc. ("MSI"), a privately-held storage
service provider. 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.

         MICHAEL KNAISCH. Mr. Knaisch has been Chief Executive Officer of the
Company since June 2003. From January 2003 to June 2003, Mr. Knaisch was Chief
Operating Officer of the Company. From October 2002 to January 2003, Mr. Knaisch
served as a consultant to the Company. From August 1998 through

                                       27
<PAGE>

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 and Chief Operating Officer of the Company since June
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 a Director of the Company
since March 2004. Since January 2004, Dr. Yogeshwar has been a consultant for
Hitachi Data Systems Corporation. From October 2001 to January 2004, Dr.
Yogeshwar was the President of the Company and from October 2000 to January
2004, Dr. Yogeshwar was Chief Technology Officer of the Company. Dr. Yogeshwar
was a founder and the Chairman of the Board and Chief Executive Officer of Front
Porch (a predecessor to the Company), and became Chairman and Chief Executive
Officer of the Company in May 2000 in connection with the acquisition of Front
Porch by the Company. From 1996 to February 2000, Dr. Yogeshwar was Chief
Executive Officer and principal shareholder of Front Porch Video, Inc., a
provider of system design services to the digital media marketplace.

         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.

         PATRICK WHITTINGHAM. Mr. Whittingham has been a director of the Company
since April 2004. Since April 2004, Mr. Whittingham has been a consultant in the
area of broadcast and production technology, systems integration and digital
cinema. Prior to February 2004, Mr. Whittingham had been for more than 28 years
an employee of various affiliates of Sony Corporation, including President of
the Sony Broadcast and Production Systems Division of Sony Electronics (USA),
Inc. from June 2003 to January 2004; President of Sony Business Solution and
System Company (USA) from June 2002 to June 2003; Senior Vice President of
System Solutions Division (USA) from February 2001 to June 2002; and Executive
Vice President of Sony of Canada Ltd. from May 1997 to February 2001.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than ten
percent(10%)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

                                       28
<PAGE>

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 the Company's review of the copies of such forms
furnished to the Company during the year ended December 31, 2003, and
representations made by certain persons subject to the Section 16(a) reporting
obligations that such filings were not required to be made, the Company believes
that for the year ended December 31, 2003 all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10 percent shareholders
were complied with, except for a late filing of an Initial Statement of
Beneficial Ownership of Securities on Form 3 by each of Michael Knaisch, the
Chief Executive Officer of the Company, and Matthew Richman, the Chief Financial
Officer of the Company, and the late filings of an Initial Statement of
Beneficial Ownership of Securities on Form 3 and a Schedule 13D by each of
ManagedStorage International, Inc. and Equity Pier LLC, each of which
beneficially owns more than 10 percent of the outstanding shares of common stock
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 shareholder that would require the filing of any report pursuant to
Section 16(a) during the year ended December 31, 2003 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 2004.

AUDIT COMMITTEE

         The Company does not have a standing Audit Committee of the Board of
Directors. However, the Board of Directors has reviewed the audited financial
statements for the year ended December 31, 2003 and has taken such steps as was
deemed necessary to insure that the members of the Board discussed with its
independent auditors the matters required by SAS 61.

ITEM 10. EXECUTIVE COMPENSATION

         The following Summary Compensation Table sets forth compensation earned
by the Company for services rendered to each person who served as the Company's
Chief Executive Officer during the years ended December 31, 2003 and 2002, and
to the Company's most highly compensated executive officers at

                                       29
<PAGE>

December 31, 2003, other than the Chief Executive Officer (collectively, the
"Named Executed Officers").

<TABLE>
<CAPTION>
                                                                                    Long Term
                                                                                   Compensation
                                                                                      Awards
                                                                                   ------------
                                           Annual Compensation                  Awards           Payouts
                                      ----------------------------             --------          -------
                                                             Other      Restricted  Securities
                                                            Annual      Stock       Underlying   LTIP         All Other
                           Fiscal  Salary       Bonus    Compensation   Award(s)     Options/    Payouts    Compensation
                            Year      ($)        ($)          ($)          ($)       SARs (#)       ($)          ($)
                           -----     -----      ----        -------      -------    ------------  ------       ------
<S>                         <C>     <C>        <C>           <C>           <C>       <C>           <C>          <C>
Michael Knaisch(1)          2003    $217,000   $129,000      $-0-          $-0-      750,000       $-0-         $-0-
Chief Executive Officer     2002     $50,000       $-0-      $-0-          $-0-          $-0-      $-0-         $-0-
                            2001        $-0-       $-0-      $-0-          $-0-           -0-      $-0-         $-0-

Matthew Richman(2)          2003    $168,000   $105,000      $-0-          $-0-      500,000       $-0-         $-0-
Chief Financial Officer &   2002     $30,500       $-0-      $-0-          $-0-          $-0-      $-0-         $-0-
Chief Operating Officer     2001        $-0-       $-0-      $-0-          $-0-          $-0-      $-0-         $-0-

Donald Maggi(3)             2003    $207,500       $-0-      $-0-          $-0-      840,000       $-0-         $-0-
Chief Executive Officer     2002    $180,000       $-0-      $-0-          $-0-           -0-      $-0-         $-0-
Until June 1, 2003          2001     $10,000       $-0-      $-0-          $-0-      160,000       $-0-         $-0-

Jay Yogeshwar(4)            2003    $129,000    $10,500      $-0-          $-0-           -0-      $-0-         $-0-
President/CTO               2002    $150,000       $-0-      $-0-          $-0-           -0-      $-0-         $-0-
                            2001    $150,000       $-0-      $-0-          $-0-       15,950       $-0-         $-0-
</TABLE>

-----------------
1.   Mr. Knaisch has served as Chief Executive Officer of the Company since June
     2, 2003. From January 1, 2003 to June 2, 2003, Mr. Knaisch served as Chief
     Operating Officer of the Company. For the period from January 1, 2003 to
     May 31, 2003, Mr. Knaisch served as a consultant to the Company and
     received $100,000 in salary and $12,000 in bonus as compensation for
     services provided as the Company's Chief Operating Officer. From the period
     June 1, 2003 to December 31, 2003, Mr. Knaisch was an employee of the
     Company and received $117,000 in salary for serving as the Chief Executive
     Officer. Included in the $129,000 bonus earned by Mr. Knaisch in 2003 is
     $107,000 of accrued, but unpaid compensation. From October to December
     2002, Mr. Knaisch served as a consultant to the Company and was paid
     $50,000 in consulting fees and reimbursed $6,700 in business expenses.

2.   Mr. Richman has served as Chief Financial Officer and Treasurer of the
     Company since January 2003 and also Chief Operating Officer of the Company
     since June 2, 2003. For the period from January 1, 2003 to May 31, 2003,
     Mr. Richman served as a consultant to the Company and received $75,000 in
     salary and $12,000 in bonus as compensation for services provided as the
     Company's Chief Financial Officer. From the period June 1, 2003 to December
     31, 2003, Mr. Richman was an employee of the Company and received $93,000
     in salary for serving in the capacities described above. Included in the
     $105,000 bonus earned by Mr. Richman in 2003, is $85,000 of accrued, but
     unpaid compensation. From October to December 2002, Mr. Richman served as a
     consultant to the Company and was paid $30,500 in consulting fees and
     reimbursed $10,300 in business expenses.

3.   Mr. Maggi was appointed acting Chief Executive Officer of the Company
     effective December 1, 2001, in which capacity he served until June 1, 2003,
     at which time he resigned from that office and took the position of Senior
     Vice President of Business Development. Mr. Maggi resigned as an officer
     and director of the Company in January 2004. Mr. Maggi served as an officer
     of the Company in his capacity as controlling shareholder of Intertainment,
     Inc., which provided consulting services to the Company. Mr. Maggi was not
     compensated directly by the Company. For the year ended December 31, 2003,
     the Company paid Intertainment, Inc. $358,647 for Mr. Maggi's services as
     acting Chief Executive Officer and other capacities. Included

                                       30
<PAGE>

     in such payment was $207,500 in consulting fees, $119,647 in business
     expense reimbursements, and $31,500 as reimbursement for a portion of the
     rent on a New York office he occupied. 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, and
     $34,347 as reimbursement for a portion of the rent on a New York office he
     occupied. For the year ended December 31, 2001, total consulting fees paid
     to Intertainment, Inc. was $10,000.

4.   Dr. Yogeshwar resigned as an officer and employee of the Company in January
     2004. Dr. Yogeshwar was appointed to the Company's Board of Directors in
     March 2004.

EMPLOYEE BONUS PLAN

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

         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

                                       31
<PAGE>

immediately upon termination of employment. If an eligible employee dies while
he is employed by the Company or any of its subsidiaries, his estate or designee
shall be eligible to receive a prorated bonus. Bonus rights are not transferable
otherwise than by will or the laws of descent and distribution.

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

EQUITY INCENTIVE PLAN

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

         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

                                       32
<PAGE>

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, no options were granted to any
officer of the Company as compensation for services rendered.

         The following table sets forth information with respect to the stock
options granted to the Named Executive Officers during the year ended December
31, 2003.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                         Number of Securities
                              Underlying          % of Total Options/SARs
                             Options/SARs          Granted to Employees in     Exercise or Base
Name                          Granted (#)                Fiscal Year             Price ($/Sh)        Expiration Date
----                     ---------------------    ------------------------     ----------------      ---------------
<S>                           <C>                          <C>                      <C>              <C>
Michael Knaisch               750,000(1)                   19.6%                    $0.28            January 8, 2013
Matthew Richman               500,000(1)                   13.1%                    $0.28            January 8, 2013
Donald Maggi                  840,000(1)                   22.0%                    $0.28            January 8, 2013
Jay Yogeshwar                     -0-                       0%                       N/A                   N/A
</TABLE>

--------------
1. Stock option grants contain a one-year vesting acceleration upon the grant of
   the option.

         The following table sets forth information with respect to each
exercise of stock options during the year ended December 31, 2003 by each of the
Named Executive Officers and the value at December 31, 2003 of all unexercised
stock options held by such persons.

         AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2003
                       AND DECEMBER 31, 2003 OPTION VALUES

<TABLE>
<CAPTION>
                                                                                               Value of Unexercised
                                                          Number of Securities Underlying    In-the-money options at
                             Shares                           Unexercised Options at            December 31, 2003
                           Acquired on       Value               December 31, 2003                  Exercisable/
Name                       Exercise (#)    Realized ($)      Exercisable/ Unexercisable           Unexercisable(1)
----------------          -------------    ------------   -------------------------------    -----------------------
<S>                             <C>           <C>                 <C>                               <C>
Michael Knaisch                -0-            $-0-                500,000/250,000                   $-0-/$-0-
Matthew Richman                -0-            $-0-                333,333/166,667                   $-0-/$-0-
Jay Yogeshwar                  -0-            $-0-                   15,950/0                       $-0-/$-0-
Donald Maggi                   -0-            $-0-                  560,000/-0-                     $-0-/$-0-
</TABLE>

---------------
1.   Potential unrealized value is calculated as the fair market value at
     December 31, 2003 ($.12 per share on the OTC-BB), less the option exercise
     price, times the number of shares.

                                       33
<PAGE>

COMPENSATION OF DIRECTORS

         Non-employee directors currently receive no annual fees for their
services, but will be reimbursed for their reasonable out-of-pocket expenses
incurred in attending meetings of the Board.

EMPLOYMENT CONTRACTS

         The Company entered into one-year employment agreements with Michael
Knaisch, its Chief Executive Officer, and with Matthew Richman, its Chief
Financial Officer and Chief Operating Officer.

         The employment agreement with Mr. Knaisch contains the following
provisions: annual base salary of $200,000; annual bonus of up to 50% of the
base salary, subject to increase at the discretion of the Board of Directors;
covers a term of one year with automatic renewal; provides for additional life
insurance for the executive paid by the Company with a benefit equal to three
times the annual base salary; and contains severance provisions for the payment
of one-year annual salary and benefits in the event of a change in control or
the termination of the employee's employment for reason other than for cause.

         The employment agreement with Mr. Richman contains the following
provisions: annual base salary of $160,000; annual bonus of up to 50% of the
base salary, subject to increase at the discretion of the Board of Directors;
covers a term of one year with automatic renewal; provides for additional life
insurance for the executive paid by the Company with a benefit equal to three
times the annual base salary; and contains severance provisions for the payment
of one-year annual salary and benefits in the event of a change in control or
the termination of the employee's employment for reason other than for cause.

                                       34
<PAGE>

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

         The following table sets forth information as of March 16, 2004
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.

<TABLE>
<CAPTION>
                                                                                 Number of Shares       Percent of
                                                                                   Beneficially        Outstanding
           Name                            Address                                   Owned(1)            Shares(2)
--------------------        -----------------------------------                   ---------------      -----------
<S>                         <C>                                                     <C>                   <C>
Thomas P. Sweeney III       1140 Pearl Street                                       6,572,926             13.6%(14)
                            Boulder, CO  80302

ManagedStorage              12303 Airport Way, Suite 250, Broomfield,               16,952,381            28.9%(3)
  International, Inc.       CO 80021

Rice Opportunity Fund LLC   666 Dundee Rd. Suite 1901                                4,119,949             9.9%(4)
                            Northbrook, IL 60062
Equity Pier LLC             1140 Pearl Street                                        6,572,926            13.6%(5)
                            Boulder, CO  80301

Storage Technology          One StorageTek Drive                                     5,622,888            11.9%
  Corporation               Louisville, CO  80028

Irl Nathan                  8235 Douglas Ave. Suite 1100                             4,119,984             9.9%(6)
                            Dallas, TX 75225

Jay Yogeshwar               Front Porch Digital Inc.                                 2,287,045             5.2%(7)
                            20000 Horizon Way, Suite 120
                            Mount Laurel, NJ  08054

Christopher Brown           16902 Harbor Master Cove Cornelius, NC 28031             4,121,429             9.0%(8)

Brown Door, Inc.            P.O. 1099                                                3,416,866             7.6%(9)
                            Farmingdale, NJ 07727

Paul McKnight               1140 Pearl Street                                          200,000               * (13)
                            Boulder, CO  80302

Donald Maggi                10 Verrazano Drive                                         958,095             2.2%(10)
                            Middletown, NJ 07748

Michael Knaisch             1140 Pearl Street                                          857,143             2.0%(11)
                            Boulder, CO 80302

Matthew Richman             1140 Pearl Street                                          690,476             1.6%(12)
                            Boulder, CO 80302

Patrick Whittingham         12 Heron Drive                                                   -               -
                            Old Tappan, NJ 07675


All directors and executive officers as a group (six persons)                       10,607,590            22.5%
</TABLE>

-------------------
* Constitutes less than 1%

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

                                       35
<PAGE>

2.     All percentages are calculated based upon a total of 41,680,409 shares
       outstanding as of March 16, 2004, 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 shares owned of record by Rice Opportunity Fund LLC and shares
       of common stock issuable upon conversion of a convertible note, subject
       to a maximum aggregate ownership percentage of 9.9%.

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 shares owned of record by Mr. Nathan and shares of common
       stock issuable upon conversion of a convertible note, subject to a
       maximum aggregate ownership percentage of 9.9%.

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 550,000 shares owned of record by Dr. Brown and 3,571,429
       shares of common stock issuable upon conversion of a convertible note

9.     Represents 418,056 shares owned of record by Brown Door, Inc., 2,023,810
       shares of common stock issuable upon conversion of a convertible note,
       and presently exercisable warrants to purchase 975,000 shares at $0.50
       per share.

10.    Represents 238,095 shares of common stock issuable upon conversion of a
       convertible note and presently exercisable options to purchase 560,000
       shares at $0.28 per share and presently exercisable warrants to purchase
       160,000 shares at $0.50 per share.

11.    Represents 357,143 shares of common stock issuable upon conversion of a
       convertible note and presently exercisable options to purchase 500,000
       shares at $0.28 per share. The investment in the convertible note is held
       in aggregate by Equity Pier LLC, which has joint control over the
       instrument.

12.    Represents 357,143 shares of common stock issuable upon conversion of a
       convertible note and presently exercisable options to purchase 333,333
       shares at $0.28 per share. The investment in the convertible note is held
       in aggregate by Equity Pier LLC, which has joint control over the
       instrument.

13.    Represents presently exercisable options to purchase 200,000 shares at
       $0.28 per share. Mr. McKnight is a member of Equity Pier LLC and the
       Chief Financial Officer of ManagedStorage International Inc. Mr. McKnight
       disclaims beneficial ownership of the shares of common stock beneficially
       owned by those entities.

14.    Represents shares beneficially owned by Equity Pier LLC, of which Mr.
       Sweeney is the founder and managing member. Mr. Sweeney is also the
       Chairman of the Board and Chief Executive Officer of ManagedStorage
       International, Inc. Mr. Sweeney disclaims beneficial ownership of the
       shares of common stock beneficially owned by ManagedStorage
       International, Inc.


                                       36
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company regularly transacts business with Storage Technology
Corporation ("StorageTek"), a significant shareholder in the Company. During
2003, the Company purchased $62,000 from for hardware and related services and
generated $556,000 of revenue through its relationship with StorageTek (revenue
from an end-user customer that is not StorageTek). At December 31, 2003, the
Company had receivables from StorageTek of $321,000 and had a current liability
of $9,600.

         During 2002, the Company received a loan in the amount of $100,000 from
ManagedStorage International, Inc., 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 and Chief Executive Officer of MSI.

         During 2002, ManagedStorage International provided limited services to
the Company in human resources and technology support. The Company was not
charged for these services in 2002. At December 31, 2002, the Company had no
liability to MSI. In 2003, the Company incurred $41,000 in such costs to MSI. At
December 31, 2003, the Company had a liability to MSI in the amount of $15,000.

         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 2003,
the Company incurred costs totaling $16,000 primarily related to the
reimbursement of travel and business expenses of the Company incurred by Mr.
Sweeney and those incurred on behalf of the Company executives. Also during
2003, the Company leased office space from Equity Pier at a rate of $1,500 per
month. Total costs incurred under this arrangement amounted to $18,000. At
December 31, 2003, the Company owed Equity Pier $15,614. 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.

         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, 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.

                                       37
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (A)(1) FINANCIAL STATEMENTS:

                                                                         Page

Reports of Independent Public Accountants............................     F-1

Consolidated Balance Sheet as of December 31, 2003...................     F-4

Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002...........................................     F-5

Consolidated Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 2003 and 2002...............................     F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002...........................................     F-7

Notes to Consolidated Financial Statements...........................     F-8


         (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).

                                       38
<PAGE>

EXHIBIT
NUMBER
------

4.1      Form of 8% Convertible Note (incorporated by reference to Exhibit 4.1
         filed with the Company's Annual Report on Form 10-KSB for the period
         ended December 31, 2002 filed on May 19, 2003).

4.2      Promissory Note dated May 1, 2003 from the Company to Briolette
         Investments Ltd. (incorporated by reference to Exhibit 4.2 filed with
         the Company's Annual Report on Form 10-KSB for the period ended
         December 31, 2002 filed in on May 19, 2003).

10.1     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).

10.2     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).

10.3     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).

10.4     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).

10.5     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).

10.6     Letter Agreement dated April 14, 2003 among the Company, Rice
         Opportunity Fund LLC and Irl Nathan (incorporated by reference to
         Exhibit 10.7 filed with the Company's Annual Report on Form 10-KSB for
         the period ended December 31, 2002 filed on May 19, 2003).

10.7     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).

10.8     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).

10.9     Employment Agreement dated as of June 1, 2003 between the Company and
         Michael Knaisch (incorporated by reference to Exhibit 10.1 filed with
         the Company's Quarterly Report on Form 10-QSB for the period ended June
         30, 2003, filed on September 2, 2003).

                                       39
<PAGE>

EXHIBIT
NUMBER
------

10.10    Employment Agreement dated as of June 1, 2003 between the Company and
         Matthew Richman (incorporated by reference to Exhibit 10.2 filed with
         the Company's Quarterly Report on Form 10-QSB for the period ended June
         30, 2003, filed on September 2, 2003).

23.1     Consent of J.H. Cohn LLP

23.2     Consent of Ernst & Young LLP

23.3     Consent of Ernst & Young Audit, France

31.1     Certification of Principal Executive Officer pursuant to Section 302 of
         the Sarbanes-Oxley Act of 2002

31.2     Certification of Principal Financial Officer pursuant to Section 302 of
         the Sarbanes-Oxley Act of 2002

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

32.2     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/A dated October 8, 2003 amending
the Financial Statements, Pro Forma Financials and Exhibits filed pursuant to
Item 7 of the Company's Current Report on Form 8-K previously filed on July 31,
2002.

The Company filed a Current Report on Form 8-K dated October 31, 2003 announcing
the dismissal of Ernst & Young LLP as the Company's independent accountants and
the engagement of J.H. Cohn LLP as the Company's new independent accountants.

The Company filed a Current Report on Form 8-K dated November 19, 2003
announcing the Company's financial results for the third quarter of 2003.


                                       40
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

         The firm of J.H. Cohn LLP served as our independent public accountants
since October 24, 2003. The firm of Ernst & Young LLP served as our independent
public accountants through October 23, 2003. The aggregate fees billed by the
accounting firms for the audits 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 year ended
December 31, 2003 was $30,000 by J.H. Cohn LLP and $18,000 by Ernst & Young LLP.
The aggregate fees billed by the Ernst & Young LLP for the fiscal year ended
December 31, 2002, totaled $112,000.

AUDIT-RELATED FEES

         The aggregate fees billed in each of fiscal 2003 and 2002 for assurance
and related services by the accounting firms 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 $8,200 ($3,800 by J.H. Cohn LLP and $4,400 by
Ernst & Young LLP) and $77,000, respectively.

TAX FEES

         The aggregate fees billed in each of fiscal 2003 and 2002 for
professional services rendered by the accounting firms for tax compliance, tax
advice or tax planning was $0 and $0, respectively.

ALL OTHER FEES

         There were no fees billed in fiscal 2003 or 2002 for professional
services rendered by the accounting firms except as disclosed above.

BOARD OF DIRECTORS PRE-APPROVAL

         In accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X,
the Company's Board of Directors formally adopted resolutions pre-approving our
engagement of J.H. Cohn LLP to act as our independent auditor for our last
fiscal year ended December 31, 2003. Although our Board of Directors did not
formally adopt resolutions pre-approving our engagement of Ernst & Young LLP to
act as our independent auditor for the fiscal year ended December 31, 2002, each
of directors was aware of, but did not object to, our engagement of Ernst &
Young LLP. Our independent auditors performed all work described above with
their respective full-time, permanent employees.


                                       41
<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.

Dated: April 13, 2004                           Front Porch Digital Inc.
                                                By: /s/ Michael Knaisch
                                                ---------------------------
                                                Michael Knaisch
                                                Chief Executive Officer


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/ Michael Knaisch                           Chief Executive Officer (principal
------------------------------------            executive officer)
Michael Knaisch
April 13, 2004

/s/ Matthew Richman                           Chief Financial Officer and
------------------------------------            Treasurer (principal financial
Matthew Richman                                 and accounting officer)
April 13, 2004

/s/ Paul McKnight                             Director

------------------------------------
Paul McKnight
April 13, 2004

/s/ Thomas P. Sweeney                         Director
------------------------------------
Thomas P. Sweeney
April 13, 2004

/s/ Jay Yogeshwar                             Director
------------------------------------
Jay Yogeshwar
April 13, 2004


                                              Director
------------------------------------
Patrick Whittingham
April __, 2004



                                       42
<PAGE>

                            FRONT PORCH DIGITAL INC.
                          INDEX TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002

                                                                         Page

Reports of Independent Public Accountants............................     F-1

Consolidated Balance Sheet as of December 31, 2003...................     F-4

Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002...........................................     F-5

Consolidated Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 2003 and 2002...............................     F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002...........................................     F-7

Notes to Consolidated Financial Statements...........................     F-8









<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Front Porch Digital, Inc.

We have audited the consolidated balance sheet of Front Porch Digital,  Inc. and
Subsidiary as of December 31, 2003, and the related  consolidated  statements of
operations,  stockholders'  equity (deficiency) and cash flows for the year then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial  statements  based on our  audit.  We did not  audit the
financial   statements  of  Front  Porch  Digital   International,   S.A.S.,   a
wholly-owned subsidiary,  which statements reflect total assets of $1,319,037 as
of December 31, 2003,  and total revenues of $2,042,640 for the year then ended.
Those  statements were audited by other auditors whose report has been furnished
to us, and our opinion,  insofar as it relates to the amounts included for Front
Porch Digital International,  S.A.S., is based solely on the report of the other
auditors.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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 audit and the report of
other auditors provide a reasonable basis for our opinion.

In our  opinion,  based on our  audit  and the  report  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the  financial  position of Front Porch  Digital,  Inc. and
Subsidiary as of December 31, 2003,  and their  results of  operations  and cash
flows  for the  year  then  ended,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses and
has a net capital  deficiency that raise  substantial doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also described in Note 1. The consolidated  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.


                                             /s/ J.H. Cohn LLP

Roseland, New Jersey
March 31, 2004, except for Note 17
   which is as of April 8, 2004



                                       F-1


<PAGE>

                               ERNST & YOUNG AUDIT


Front Porch Digital International, S.A.S.

Report of independent auditor

To the partner of Front Porch Digital International S.A.S.,

We have audited the  accompanying  financial  statements  of Front Porch Digital
International  S.A.S.  as of and for the year ended  December  31,  2003.  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 audit.

We conducted our audit in accordance with Generally  Accepted Auditing Standards
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 audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the  accompanying  financial  statements of Front Porch Digital
International  S.A.S.  present fairly, in all material  respects,  the financial
position of the company at December  31,2003,  and the results of its operations
and its  cash  flows  for the year  then  ended in  conformity  with  accounting
principles generally accepted in the United States.

March 30, 2004

                               Ernst & Young Audit

/s/ JEROME GUIRAUDEN                                      /s/ JEAN-MARC BINSON
--------------------                                      --------------------
Jerome Guirauden                                          Jean-Marc Binson

                                       F-2


<PAGE>

Report of Independent Auditors


Board of Directors and Stockholders
Front Porch Digital Inc.

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity,  and cash flows of Front Porch  Digital Inc. for the year
ended December 31, 2002. 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 audit.

We conducted our audit 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 audit  provides a  reasonable  basis for our
opinion.

In our opinion, the financial statements of Front Porch Digital Inc. referred to
above present fairly, in all material respects,  the consolidated results of its
operations  and its  cash  flows  for the  year  ended  December  31,  2002,  in
conformity with accounting principles generally accepted in the United States.

The  accompanying  2002  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-3


<PAGE>

                            FRONT PORCH DIGITAL, INC.
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
ASSETS                                                                        December 31, 2003
<S>                                                                                <C>
Current assets:
  Cash and cash equivalents                                                        $    394,295
  Accounts receivable - trade and other, net of allowance of $30,200
    Non-affiliates                                                                      666,497
    Affiliates                                                                          321,475
  Other current assets                                                                  180,068
                                                                                   ------------
Total current assets                                                                  1,562,335


Property and equipment, net                                                             146,098

Software development costs, net                                                         374,417

Intellectual property, net                                                              275,889

Goodwill, net                                                                           415,718

Other assets                                                                             40,317
                                                                                   ------------

Total assets                                                                       $  2,814,774
                                                                                   ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
  Notes payable                                                                    $    534,190
  Current portion of long-term liabilities                                               92,204
  Accounts payable                                                                    1,060,889
  Accrued expenses                                                                      898,909
  Accrued expenses - employees                                                          793,261
  Deferred revenue                                                                      506,030
                                                                                   ------------
Total current liabilities                                                             3,885,483

Long-term liabilities, net of current portion                                           372,318
                                                                                   ------------

Total liabilities                                                                     4,257,801
                                                                                   ------------

Commitments and contingencies

Stockholders' deficiency:
  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, 43,138,652 shares
    issued, 41,705,652 shares outstanding, 1,433,000 shares in treasury                  41,705
  Common stock to be issued                                                             380,000
  Additional paid-in capital                                                         25,455,215
  Accumulated other comprehensive income-foreign currency translation adjustment         67,406
  Accumulated deficit                                                               (27,387,353)
                                                                                   ------------
Total stockholders' deficiency                                                       (1,443,027)
                                                                                   ------------

Total liabilities and stockholders' deficiency                                     $  2,814,774
                                                                                   ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                            FRONT PORCH DIGITAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      Years ended December 31,
                                                                ----------------------------------
                                                                     2003                  2002
                                                                ----------------------------------
<S>                                                             <C>                   <C>
Revenues:
  Products                                                      $  2,084,532          $    903,690
  Services                                                           281,089               797,166
  Services - affiliate                                               556,134                  --
                                                                ------------          ------------
Total revenues                                                     2,921,755             1,700,856
                                                                ------------          ------------

Cost of revenues:
  Products                                                           387,016               331,304
  Services                                                           616,669                12,312
                                                                ------------          ------------
Total cost of revenues                                             1,003,685               343,616
                                                                ------------          ------------
Gross margin                                                       1,918,070             1,357,240
                                                                ------------          ------------

Operating expenses:
Selling, general and administrative                                4,104,039             2,977,486
Research and development                                              49,429               211,828
Depreciation                                                         293,572               250,853
Amortization                                                         290,835               214,509
                                                                ------------          ------------
Total operating expenses                                           4,737,875             3,654,676
                                                                ------------          ------------

Operating loss                                                    (2,819,805)           (2,297,436)
                                                                ------------          ------------

Other income (expense):
Interest income                                                       10,466                 1,259
Interest expense                                                    (782,689)             (500,360)
Other income (expense)                                                 6,799               (49,344)
Foreign currency transaction (loss) gain                             (89,849)                3,444
                                                                ------------          ------------
Total other expense, net                                            (855,273)             (545,001)
                                                                ------------          ------------

Loss from continuing operations                                   (3,675,078)           (2,842,437)
                                                                ------------          ------------

Loss from operations of discontinued operations                   (3,262,644)             (458,201)
Loss on sale of discontinued operations                             (448,529)                 --
                                                                ------------          ------------
Loss from discontinued operations                                 (3,711,173)             (458,201)
                                                                ------------          ------------

Net loss                                                        $ (7,386,251)         $ (3,300,638)
                                                                ============          ============

Weighted average shares outstanding - basic and diluted           38,773,487            28,767,606

Loss per share - basic and diluted:
Loss from continuing operations                                 $      (0.09)         $      (0.10)
Loss from discontinued operations                               $      (0.10)         $      (0.01)
Net loss                                                        $      (0.19)         $      (0.11)
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                            FRONT PORCH DIGITAL, INC.
                 Statements of Stockholders' Equity (Deficiency)
                     Years Ended December 31, 2003 and 2002

<TABLE>
<CAPTION>
                                                                      Common                Accumulated                   Total
                                                  Common Stock        Stock     Additional     Other                   Stockholders'
                                            ----------------------    to be      Paid-in   Comprehensive Accumulated     Equity
                                              Shares      Amount      Issued     Capital      Income       Deficit     (Deficiency)
                                            ----------- ----------   --------  ----------- ------------- -----------   -------------
<S>                                          <C>           <C>     <C>         <C>           <C>        <C>             <C>
Balance, January 1, 2002                     25,655,120   $25,655  $    --     $20,353,532   $    --    $(16,700,464)   $ 3,678,723

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

Debt discount on notes payable                     --        --         --         500,000        --            --          500,000

Common stock 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 retiremen of shares and warrants        1,062,075     1,062       --          (1,062)       --            --             --

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

2,500,000 common 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 adjustment                                                     68,705            --           68,705
                                                                                                                         -----------
Total comprehensive loss                                                                                                 (3,231,933)
                                           -----------------------------------------------------------------------------------------
Balance, December 31, 2002                   32,329,937    32,330    750,000    23,312,102    68,705     (20,001,102)     4,162,035

Debt discount on 8% unsecured
  convertible notes                                --        --         --         990,000      --              --          990,000

Common stock issued for conversion
  of senior secured debt to equity            6,785,715     6,785       --         278,215      --              --          285,000

Common stock issued in satisfaction
  of earnout considerations on acquisition    2,500,000     2,500   (750,000)      747,500      --              --             --

Induced conversion of debt                         --        --         --          39,588      --              --           39,588

Warrants issued in connection
  with refinancing                                 --        --         --          73,500      --              --           73,500

Common stock issued to employees
  for services                                   90,000        90                   14,310                                   14,400

1,833,000 common shares to be issued for
  disposition of business unit                     --        --      275,000          --        --              --          275,000

175,000 common shares to be issued for
  legal settlement                                 --        --      105,000          --        --              --          105,000

Comprehensive Loss:

  Net loss                                                                                                (7,386,251)    (7,386,251)

  Foreign currency translation adjustment                                                     (1,299)                        (1,299)
                                                                                                                         -----------
Total comprehensive loss                                                                                                 (7,387,550)
                                           -----------------------------------------------------------------------------------------
Balance, December 31, 2003                   41,705,652   $41,705  $ 380,000   $25,455,215   $67,406    $(27,387,353)   $(1,443,027)
                                           =========================================================================================

</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                            FRONT PORCH DIGITAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                              2003                2002
                                                                                          --------------------------------
<S>                                                                                       <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                                $(7,386,251)       $(3,300,638)
  Loss from operations of discontinued operations                                           3,262,644            458,201
  Loss on sale of discontinued operations                                                     448,529               --
                                                                                          -----------        -----------
  Loss from continuing operations                                                          (3,675,078)        (2,842,437)
  Adjustments to reconcile net loss from continuing operations to net cash
  used in operating activities:
    Depreciation and amortization                                                             584,407            465,362
    Non-cash interest expense                                                                 695,801            468,175
    Non-cash issuance of common stock to employees and consultants for services                  --              329,888
    Stock option compensation expense                                                            --              200,932
    Bad debt expense                                                                            5,700            125,000
    Gain on sale of fixed assets                                                               (6,875)           (46,551)
    Changes in operating assets and liabilities:
      Decrease in accounts receivable                                                         435,487            494,710
      Increase in accounts receivable - affiliate                                            (636,467)          (322,326)
      Decrease in deferred costs                                                                 --              159,746
      Decrease in other current assets                                                        121,890            148,973
      Decrease (increase) in other assets                                                     109,086            (48,825)
      (Decrease) increase in accounts payable                                                (323,263)           476,098
      Decrease in accrued expenses                                                            (47,859)           (48,689)
      Increase in accrued expenses - employees                                                220,626             66,996
      Increase in deferred revenue                                                            346,197            423,902
      Other changes in operating activities                                                    17,814             (9,586)
                                                                                          -----------        -----------
  Net cash (used in) provided by operating activities by continuing operations             (2,152,534)            41,368
                                                                                          -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                                                       (146,707)          (375,471)
  Net cash acquired from ManagedStorage                                                          --              695,706
  Software development costs                                                                 (234,314)          (127,249)
  Proceeds from sale of fixed assets                                                           86,509             46,551
  Other investing activities                                                                     --               (9,406)
                                                                                          -----------        -----------
  Net cash (used in) provided by investing activities from continuing operations             (294,512)           230,131
                                                                                          -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes payable                                                                 645,000            800,000
  Repayment of note payable and capital leases                                               (283,135)          (299,471)
  Proceeds from issuance of common stock                                                         --               50,000
                                                                                          -----------        -----------
  Net cash provided by financing activities from continuing operations                        361,865            550,529
                                                                                          -----------        -----------

  Net cash provided by (used in) discontinued operations                                    1,706,160           (421,162)

  Effect of exchange rate changes on cash and cash equivalents                                (26,152)             5,163
                                                                                          -----------        -----------

  Net (decrease) increase in cash and cash equivalents                                       (405,173)           406,029
  Cash and cash equivalents, beginning of year                                                799,468            393,439
                                                                                          -----------        -----------
  Cash and cash equivalents, end of year                                                  $   394,295        $   799,468
                                                                                          ===========        ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
    Conversion of senior secured notes and accrued interest into shares of common stock   $   285,000        $      --
    Conversion of convertible senior notes into new unsecured convertible notes               250,000               --
    Conversion of liabilities into new unsecured convertible notes                             95,000               --
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003


1.    ORGANIZATION AND BASIS OF PRESENTATION

Front Porch Digital Inc. (which is referred to herein together with its
subsidiary as 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 video archives in the media and
entertainment industry. DIVArchive simplifies the process of preserving,
managing and accessing content.

The Company is positioned to focus exclusively on the sale of software and
services to the broadcast, media and entertainment industry. All of the
Company's sales, sales engineering, development and delivery capabilities are
organized and integrated to meet the growing needs of this market, particularly
the broadcast and content provider segments.

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

Consolidated assets as of December 31, 2003 and revenues for the year then ended
include $1,319,000 and $2,093,000, respectively, related to the Company's
subsidiary in France.


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. The Company has incurred
losses since commencement of operations in its current line of business. In
2003, the Company incurred losses from continuing operations and generated
negative cash flows from operating activities from continuing operations of $3.7
million and $2.2 million, respectively. The Company incurred a net loss of $7.4
million for the year ended December 31, 2003. Included in that loss is the net
loss from discontinued operations of $3.7 million for the year ended December
31, 2003. Although management expects the Company's operating results to improve
in 2004, there can be no assurance that the Company will not continue to sustain
operating losses in 2004. Further, at December 31, 2003, the Company had a
working capital deficit of $2.3 million and a stockholders' deficiency of $1.4
million. These factors create significant doubt about the Company's ability to
continue as a going concern.

By the end of 2003, the Company had completed its restructuring efforts which
were initiated during the fourth quarter of 2002. Key results of the
restructuring were: the disposal of the Media Services business segment in
Houston, TX; the disposal of the DIVArchive Medical business unit in France; a
reduction in headcount and resultant cost savings; reduced facilities and costs
in France; restructuring and settlement of liabilities and contingencies; and
generating capital from issuance of notes and sale to Kodak. Management
believes, but cannot assure, that these restructuring


                                      F-8
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

efforts, and similar efforts in 2004, will enable the Company to meet its
obligations through at least December 31, 2004.

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 under the Contract method of accounting as
prescribed by AICPA Statement of Position ("SOP") 97-2 in connection with an
arrangement to deliver software or a software system requiring significant
production, modification, or customization of software. The Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery and
acceptance have 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 reasonably assured, 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 is generally not dependent on the professional
services portion of the contract, software revenue is recognized upon delivery.

Fees for maintenance agreements are recognized ratably over the terms of the
agreements. 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.

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

ACCOUNTS RECEIVABLE

Accounts receivable are reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts. The Company estimates doubtful
accounts based on historical bad debts, factors related to specific customers'
ability to pay and current economic trends. The Company

                                      F-9
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

writes off accounts receivable against the allowance when a balance is
determined to be uncollectible.

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
the term of the corresponding leases.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived tangible and intangible assets that do not have indefinite lives,
such as fixed assets and intellectual property, are reviewed for impairment
whenever events or change in circumstances indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. Measurement of an impairment loss for such
long-lived assets is based on the fair value of the asset.

Goodwill and other intangible assets with indefinite lives are not amortized and
are subject to write downs charged to results of operations only when their
carrying amounts are determined to be more than their estimated fair values
based upon impairment tests that are required to be made annually or more
frequently under certain circumstances. Fair values are determined based on
models that incorporate estimates of future profitability and cash flows.

GOODWILL AND OTHER INTANGIBLE ASSETS

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 the reporting unit to which the goodwill is applicable below its
carrying value. Pursuant to SFAS No. 142, the Company discontinued the
amortization of its goodwill as of January 1, 2002.

At June 30, 2003, as a result of changes in the business environment, the
Company recorded a loss of $3.3 million (included in loss from discontinued
operations) for the impairment of goodwill and intellectual property related to
the media services segment to reflect the fair value of the business based upon
a valuation analysis using discounted future cash flows. Also at that time, the
Company evaluated the recoverability of its other intangible assets and found no
indication of 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.

At December 31, 2003, total goodwill amounted to $416,000. Included in the
impairment charge described above, is an impairment charge of $3.0 million
against goodwill related to the Media Services business recorded on June 30,


                                      F-10
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

2003. Also during 2003, the Company sold $1.7 million of goodwill in connection
with the sale of its Media Service business, and the Company sold $208,000 of
goodwill in connection with the sale of the DIVArchive Medical business to
Kodak. Prior to those changes, goodwill at December 31, 2002 amounted to $5.3
million. There were no other changes to goodwill during 2003. During 2002, in
connection with the acquisition of its DIVArchive business operations in France,
the Company recorded goodwill of $628,000. There were no other changes to
goodwill during 2002.

Other amortized intangibles consist primarily of intellectual property and are
amortized on a straight-line basis over the estimated life of the assets (three
years). Amortization expense for other amortized intangibles was $189,414 for
the year ended December 31, 2003. For the year ended December 31, 2002,
amortization expense was $62,709. Projected amortization expense for the next
two years for intangibles will approximate $176,000 and $100,000.

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, 2003, $562,000 of software development
costs had been capitalized and $188,000 of accumulated amortization was
recorded. For the year ended December 31, 2003, total amortization expense of
$101,000 was recorded for capitalized software development costs.

RESEARCH AND DEVELOPMENT COSTS

For the years ended December 31, 2003 and 2002, the Company incurred costs
related to its research and development activities totaling $583,000 and
$339,000, respectively, of which, $49,000 and $212,000, respectively, was
recorded as research and development expense and $534,000 and $127,000,
respectively, was capitalized and/or charged to cost of revenues.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

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 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 pursue hedging opportunities

                                      F-11
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

generally. At December 31, 2003, the Company reported a cumulative translation
gain of $67,000 as a component of accumulated other comprehensive income. The
Company is also subject to foreign exchange transaction exposure when its
subsidiary transacts business in a currency other than its own functional
currency. The effects of exchange rate fluctuations in remeasuring foreign
currency transactions for the year ended December 31, 2003 and 2002 was a loss
of $90,000 and a gain of $3,000, respectively.

INCOME TAXES

The Company utilizes the asset and liability method to determine the provision
for income taxes, whereby deferred tax assets and liabilities are determined
based on temporary 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 temporary differences are expected to reverse.
Since the Company has incurred losses since inception and there can be no
assurance that the Company will not continue to generate losses in the future, a
full valuation allowance is recorded against net deferred tax assets.

PER SHARE DATA

The Company reports its earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No. 128, "Accounting for Earnings Per Share"
("SFAS 128"). Basic loss per share is calculated using the net loss divided by
the weighted average common shares outstanding during the period. 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,
2003 and 2002 because the effect would be antidilutive. However, if the Company
was not in a loss position, 24,396,429 shares from the assumed exercise or
conversion of warrants, options, and convertible notes would have been
considered dilutive shares at December 31, 2003.

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.

In 2003, the Company's revenues came largely from the European and Asian
geographic markets. In 2003, aggregate revenues from customers located in Europe
or Asia amounted to $2.0 million, or 70% of total revenue, while revenues from
customers located in North America totaled $0.9 million, or 30% or total
revenue. In 2002, the Company's revenues from customers located in Europe or
Asia amounted to $1.0 million, or 59% of total revenue, while revenues from
customers located in North America totaled $0.7 million, or 41% of total
revenue.

During 2003, revenues from two customers, each exceeding 10% of total revenue,
aggregated 19% and 15%, respectively. Accounts receivable from the

                                      F-12
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

Company's largest customer was $321,000 as of December 31, 2003, which
represented approximately 37% of total trade receivables at that date. This
customer is also a stockholder of the Company.

During 2002, revenues from two customers, each exceeding 10% of total revenue,
aggregated 31% and 18%, respectively.

FINANCIAL INSTRUMENTS

The carrying value of short-term financial instruments, such as cash and cash
equivalents, accounts receivable, accounts payable, 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 the intrinsic value method as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee stock
options whereby compensation cost is recorded for any excess of the quoted
market price of its common shares over the exercise price at the date of grant
for all employee stock options issued. The effect of applying the fair value
method pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock Based Compensation" to the Company's stock-based awards is
disclosed in the table below. Pro forma results of operations may not be
representative of the effects on reported or pro forma results of operations for
future periods.

<TABLE>
<CAPTION>
                                                                               YEARS ENDED DECEMBER 31,
                                                                               2003              2002
                                                                          -------------      ------------
<S>                                                                        <C>                <C>
Pro Forma Net Loss:
Net loss                                                                   $(7,386,000)       $(3,301,000)
Add: Stock based employee compensation expense - as recorded                      --              201,000
Deduct: Stock based employee compensation expense - determined under
   fair value based method for all awards                                      383,000          1,028,000
                                                                           -----------        -----------
Pro forma net loss                                                         $(7,769,000)       $(4,128,000)
                                                                           ===========        ===========

Pro Forma Loss Per Share:
Loss per share - basic and diluted, as reported                            $     (0.19)       $     (0.11)
Loss per share - basic and diluted, proforma                               $     (0.20)       $     (0.14)
</TABLE>


The Company accounts for common stock, stock options and other equity
instruments issued in exchange for goods or services using the fair value method
and records expense based on the values determined.

In determining the fair value of stock options granted in 2003 and 2002, and
thus determining historical and pro forma compensation expense under the fair
value method, the Company utilized the Black-Scholes valuation model with the


                                      F-13
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

following weighted average assumptions: dividend yield of 0%, risk free interest
rate of 0.81%, expected volatility between 134% and 183% in 2003 and 2002,
respectively, and expected lives of three years.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 periods. Actual
results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications of previously reported amounts have been made to
conform to 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 of the
Company 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. In April 2003, 2.5 million
shares of common stock of the Company were issued in satisfaction of this
earn-out consideration.

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

                                                           2002
                                                           ----
         Revenues                                      $ 3,997,000
         Loss from continuing operations                (3,709,000)
         Net loss                                       (4,804,000)
         Basic and diluted loss per share              $      (.14)
         Weighted average shares outstanding
         - basic and diluted                            34,349,798



                                      F-14
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

4.    SALE OF DIVARCHIVE MEDICAL BUSINESS

On April 23, 2003, the Company sold to 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 paid the
Company $850,000, assumed $137,000 of accrued employee obligations, employed
substantially all of the Company's personnel associated with the transferred
assets and assumed certain software support obligations related to the Company's
existing DIVArchive customers in the medical industry. The Company recorded a
gain on the sale of $586,000. Subsequent to the sale, Kodak and the Company
entered into certain other arrangements that resulted in Kodak assuming much of
the Company's operating facility space and equipment located in Toulouse,
France. These actions and certain other costs incurred in 2003 related to
closing of this operation have been classified as a loss from discontinued
operations.

Summarized components of the gain on the sale of the DIVArchive Medical business
were as follows:

         Cash received                                        $ 850,000
         Liabilities transferred                                137,000
         Intellectual property and goodwill sold               (401,000)
                                                              ---------
         Gain on sale of DIVArchive Medical component         $ 586,000
                                                              =========

The DIVArchive Medical business is accounted for as a discontinued operation in
the accompanying consolidated financial statements in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The gain
on the sale of the DIVArchive Medical business is included as a component of the
loss from discontinued operations. The results of operations and cash flows of
the DIVArchive Medical operations have been removed from the Company's results
of continuing operations for all periods presented. All related disclosures have
also been adjusted to reflect the discontinued operation. See Note 7 -
Discontinued Operations - to the consolidated financial statements.

5.    SALE OF MEDIA SERVICES BUSINESS

In December 2003, the Company sold the remaining assets, intellectual property
and certain liabilities of the Media Services business unit to a former employee
of the Company, and Data Strategies International, Inc. (collectively, "the
parties"), a company owned and controlled by said former employee. The Company
also settled all remaining employment and service related obligations to the
parties through the issuance of 1,833,000 shares of the Company's common stock
with a fair market value of $275,000 on the transaction date. The sale of the
business unit also settled all legal claims on behalf of all parties and release
all parties from any future claims, liabilities, etc.


                                      F-15
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

Summarized components of the transaction and resultant loss on the sale of the
Media Services business were as follows:

         Liabilities transferred                               $   930,000
         Common stock to be issued                                (275,000)
         Tangible net assets sold                                 (328,000)
         Intellectual property and goodwill sold                (1,362,000)
                                                               -----------
         Loss on sale of Media Services segment                $(1,035,000)
                                                               ===========

The Media Services business is accounted for as a discontinued operation in the
accompanying consolidated financial statements in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The loss on
the sale of the Media Services business is included as a component of the loss
from discontinued operations. The results of operations and cash flows of the
Media Services operations have been removed from the Company's results of
continuing operations for all periods presented. All related disclosures have
also been adjusted to reflect the discontinued operation. See Note 7 -
Discontinued Operations - to the consolidated financial statements.

6.    LOSS ON IMPAIRMENT OF GOODWILL AND INTELLECTUAL PROPERTY - MEDIA SERVICES
      SEGMENT

As a result of changes in the business environment, at June 30, 2003, the
Company recorded a loss of $3.3 million on the impairment of goodwill and
intellectual property related to the Company's Media Services business to
reflect the fair value of the business based upon a valuation analysis using
discounted future cash flows. Included in the loss is:

Impairment of intellectual property                         $   362,000
Impairment of goodwill                                        2,974,000
                                                            -----------
Total impairment recorded                                   $ 3,336,000
                                                            ===========

The loss on impairment of goodwill and intellectual property is included in the
operating results of the Media Services business which is accounted for as a
discontinued operation in the accompanying consolidated financial statements in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." See Note 7 - Discontinued Operations - to the consolidated
financial statements.

7.    DISCONTINUED OPERATIONS

During 2003, the Company disposed of two business units: DIVArchive Medical
business and the Media Services business. As a result of these dispositions, the
Company currently operates in one business segment.

The operating results of the two business units are accounted for as
discontinued operations in the accompanying consolidated financial statements in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The results of operations and cash flows of the two business
units' operations have been removed from the Company's results of

                                      F-16
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

continuing operations and cash flows for all periods presented. All related
disclosures have also been adjusted to reflect the discontinued operation.

Summarized operating results for the discontinued operations are as follows:

                                                     Years Ended December 31,
                                                      2003              2002
                                                  ------------------------------

       Revenues                                   $ 3,712,000       $ 3,197,000
       Gross margin                                 2,691,000         1,937,000
       Operating costs                              5,954,000         2,395,000
                                                  -----------       -----------
       Loss from operations of discontinued
           operations                             $(3,263,000)      $  (458,000)
                                                  ===========       ===========


Included within 2003 operating costs in the loss from operations of
discontinued operations is a loss of $3,336,000 on the impairment of goodwill
($2,974,000) and intellectual property ($362,000) related to the Company's media
services business. See Note 5 to the consolidated financial statements.

During 2003, losses incurred from the disposition of the discontinued business
units were:

Gain on sale of DIVArchive Medical business      $   586,000
Loss on sale of Media Services segment            (1,035,000)
                                                 -----------
Net loss on disposal of business units           $  (449,000)
                                                 ===========

Net loss from discontinued operations was $3.7 million and $0.5 million for the
years ended December 31, 2003 and 2002, respectively.

8.    PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2003, consisted of:

         Computer equipment                           $588,601
         Software                                      324,118
         Leasehold improvements                         28,807
         Office furniture and equipment                190,995
                                                    ----------
                                                     1,132,521

         Less accumulated depreciation
           and amortization                            986,423
                                                    ----------
                                                      $146,098
                                                    ==========

Depreciation and amortization expense for the years ended December 31, 2003 and
2002 totaled $294,000 and $251,000, respectively.

                                      F-17
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

9.    NOTES PAYABLE AND LONG-TERM LIABILITIES

At December 31, 2003, notes payable consisted of:

$990,000 aggregate principal amount of unsecured convertible notes that were
issued in April 2003. The notes contain a beneficial conversion feature as the
notes include certain anti-dilution protection and rights, and are convertible
into Company Common Stock at a price significantly below the then current market
price. The Company allocated $990,000 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 for amortization of debt discount of $481,000 during
the year ended December 31, 2003. At December 31, 2003, the remaining
unamortized debt discount on these notes totaled $509,000 and the principal
balance was $481,000. Proceeds from the issuance of these notes included:
$645,000 cash proceeds received by the Company; retirement of $250,000 principal
balance of the former senior secured convertible notes that matured on March 31,
2003 (the remaining $250,000 principal and $35,000 in accrued interest was
converted into 6,786,000 shares of the Company's common stock in accordance with
the terms of the convertible secured note); and the conversion of $95,000 in
current liabilities. The convertible notes bear interest at the rate of 8% per
annum and mature on September 30, 2004. Principal 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 Company Common Stock 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. In
the event of a prepayment by the Company, or upon payment of principal and
interest at maturity, the Company will be required to issue to the holders of
such notes five-year common stock purchase warrants to purchase a number of
shares of Company Common Stock equal to 5,500 shares for each $1,000 of
principal balance repaid, at a purchase price of $0.10 per share, subject to
certain anti-dilution adjustments. The purchase agreement relating to the
convertible notes contains restrictions that, among others, prohibit the Company
from issuing new debt, making capital expenditures in excess of specified
amounts, paying dividends on common stock or granting security interests in
assets without the consent of note holders owning a majority in principal amount
of the outstanding convertible notes. The Company also recorded $125,000
non-cash interest expense for amortization of debt discount on the former senior
secured convertible notes during the year ended December 31, 2003.

$53,333 unsecured note payable 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 April 2003, the Company recapitalized the outstanding balance and
accrued interest of this existing unsecured note payable. 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.

In connection with the conversion of the $500,000 of the senior secured
convertible notes into common stock and the 8% unsecured convertible

                                      F-18
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

note, the Company recorded a $39,000 non-cash charge for this induced
conversion.

At December 31, 2003, other long-term liability consisted of a $372,000
long-term payable to a single vendor, which was restructured in May 2003, 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.

As of December 31, 2003, the Company had net capitalized deferred financing
costs of $28,000. Amortization of these costs totaled $41,000 for the year ended
December 31, 2003.

10. INCOME TAXES

At December 31, 2003, the Company had available for federal and state income tax
purposes, net operating loss carry forwards of approximately $20 million that
expire between 2007 and 2023 and foreign loss carryforwards of approximately $17
million with no expiration. The utilization of the U.S. Federal and State 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,
2003 are attributable to temporary differences as follows:

         Deferred tax assets:

                           Accrued expenses and other             $     85,000
                           Depreciation                                599,000
                           Net operating loss carry forwards        12,415,000
                                                                  ------------
                  Total deferred tax assets                         13,099,000
                                                                  ------------

         Deferred tax liabilities:

                           Software development costs             $    127,000
                           Goodwill                                     14,000
                                                                  ------------
                  Total deferred tax liabilities                       141,000
                                                                  ------------
                  Net deferred tax assets                           12,958,000
                  Valuation allowance                              (12,958,000)
                                                                  ------------
                  Net deferred tax assets                         $        -0-
                                                                  ============

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, 2003 and 2002 was $5,443,000 and $1,315,000,

                                      F-19
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

respectively. The statutory U.S. tax rate of 34% was reduced to zero due to an
increase in the valuation allowance in 2003 and 2002.

11.   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 plan is established as a
defined contribution plan. The Company in its sole discretion may make a
matching contribution up to 100% of the employees' contributions during any plan
year. As of December 31, 2003, the Company has not elected to make any such
matching contributions to employee retirement accounts.

12.   STOCKHOLDERS' EQUITY (DEFICIENCY)

On December 2, 2003, the Company issued 90,000 shares to a former employee in
settlement of service related obligations in the amount of $14,400.

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 exchanged
for 8% unsecured convertible notes. In connection with this conversion, the
Company recorded $39,000 in non-cash interest expense related to the value of
this induced conversion of debt.

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.

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.

13.   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

                                      F-20
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

Incentive Plan provides for the issuance of up to 6,000,000 shares of common
stock upon exercise of the options. The Company has reserved 6,000,000 shares of
common stock to satisfy the requirements of the Equity Incentive Plan. Options
intended to be incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and nonqualified options may be
granted under the Equity Incentive Plan. Outstanding incentive stock options
granted under the Equity Incentive Plan vest over three years beginning on the
first anniversary of the grant date and are exercisable for a period of not more
than ten years from the date of grant. In addition, the Company has granted
nonqualified stock options to certain employees of the Company. Such options
have been granted with an exercise price below market at the date of grant, vest
immediately or contain accelerated vesting or vest over three years beginning on
the first anniversary of the grant date, and are exercisable for a period of
three to ten 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 ten years. During 2002, the
Company recognized expense of approximately $201,000 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, January 1, 2002              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

Options exercised                                        --               --

Options granted                                   3,820,000             0.28

Options forfeited/canceled                       (2,734,095)            1.28
                                               ---------------
Options outstanding, December 31, 2003            2,623,712          $  0.62
                                               =================================

Exercisable at December 31, 2002                  1,176,000          $  2.44
Exercisable at December 31, 2003                  1,625,000          $  0.81


                                      F-21
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

A summary of the status of options outstanding at December 31, 2003 follows:

<TABLE>
<CAPTION>
                                        WEIGHTED         WEIGHTED                            WEIGHTED
                                         AVERAGE          AVERAGE                             AVERAGE
  EXERCISE                              REMAINING      EXERCISE PRICE                     EXERCISE PRICE
  PRICE PER            OPTIONS         CONTRACTUAL     OF OUTSTANDING      OPTIONS        OF EXERCISABLE
    SHARE            OUTSTANDING      LIFE IN YEARS        OPTIONS       EXERCISABLE          OPTIONS
--------------------------------------------------------------------------------------------------------

<S>                   <C>                 <C>               <C>           <C>                  <C>
  $   .28- 1.39       2,339,000           8.9               $0.28         1,350,000            $0.28
     2.00 - 2.90        110,000           3.0                2.41           103,000             2.36
     4.00               175,000           5.3                4.00           172,000             4.00
</TABLE>


The weighted average fair value of options granted during 2003 and 2002 was $.21
and $0.24 respectively.

14.   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,
2003, no shares have been issued under this plan.

15.   WARRANTS

On December 31, 2003, 1,114,550 warrants to purchase common stock at an exercise
price of $0.50 per share expired.

During 2003, the Company issued 500,000 warrants with an exercise price of $0.10
per share to a related party in connection with the refinancing of payment terms
on short-term obligations. Also, during 2003, the Company issued 100,000
warrants with an exercise price of $0.10 per share in connection with the
refinancing of a short-term unsecured note. In conjunction with those issuances,
the Company recorded non-cash interest expense related to the fair value of the
warrants of $74,000 for the year ended December 31, 2003.

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

                                      F-22
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

expense related to the fair value of the warrants of $52,000 for the year ended
December 31, 2002.

At December 31, 2003, the Company had the following warrants outstanding for the
purchase of its common stock:

<TABLE>
<CAPTION>
                                                                           NUMBER OF           EXERCISE
           DESCRIPTION                       EXPIRATION DATE            SHARES ISSUABLE         PRICE
           -----------                       ---------------            ---------------         -----
<S>                                          <C>                            <C>                <C>
Issued to original
       Front Porch shareholders              May 2, 2005                    2,900,000          $   0.50
                                             February 1, 2005                 150,000          $   0.50
                                             March 31, 2007                   300,000          $   0.65

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

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          $   0.10

Issued to Equity Pier in
       exchange for consulting

       services (Note 14)                    February 28, 2006              3,324,696          $   2.00

Issued to noteholder                         May 1, 2008                      100,000          $   0.10

Issued to noteholder                         May 1, 2008                      500,000          $   0.10

                                                                     ------------------
       Total warrants outstanding                                          12,049,196
                                                                     ==================
</TABLE>


16.   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, 2003 were as follows:

                                      F-23
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

                    Year ending December 31,
                               2004                        $ 204,000
                               2005                          141,000
                               2006                           79,000
                               2007                           30,000
                               2008                           28,000
                                                          ----------
                                                           $ 482,000
                                                          ==========

Rental expense under operating leases, not including month-to-month leases with
related parties, was $148,000 and $204,000 in 2003 and 2002, respectively.

17. RELATED PARTY TRANSACTIONS

The Company regularly transacts business with Storage Technology Corporation
("StorageTek"), a significant shareholder in the Company. During 2003, the
Company purchased $62,000 of hardware and related services and generated
$556,000 of revenue through its relationship with StorageTek (revenue from
unrelated end-user customers). At December 31, 2003, the Company had receivables
from StorageTek of $321,000 and had a current liability of $9,600.

During 2002, the Company received a loan in the amount of $100,000 from
ManagedStorage International, Inc., 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 and Chief Executive Officer of MSI.

During 2002, ManagedStorage International provided limited services to the
Company in human resources and technology support. The Company was not charged
for these services in 2002. At December 31, 2002, the Company had no liability
to MSI. In 2003, the Company incurred $41,000 in such costs to MSI. At December
31, 2003, the Company had a liability to MSI in the amount of $15,000.

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 2003, the
Company incurred costs totaling $16,000 primarily related to the reimbursement
of travel and business expenses of the Company incurred by Mr. Sweeney and those
incurred on behalf of the Company's executives. Also during 2003, the Company
leased office space from Equity Pier at a rate of $1,500 per month. Total costs
incurred under this arrangement amounted to $18,000. At December 31, 2003, the
Company owed Equity Pier $15,614. 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.

                                      F-24
<PAGE>

                            Front Porch Digital Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2003

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, 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.

18.   SUBSEQUENT EVENTS

Subsequent to December 31, 2003, the following transactions were consummated:

On March 1, 2004, the Company issued 94,760 shares to three current employees in
payment of service related obligations that had been accrued as of December 31,
2003.

In March 2004, a noteholder instructed the Company to convert $75,000 of
principal on his investments in the Company's 8% unsecured convertible notes
into 1,785,714 common shares in accordance with the provisions of the agreement.

On April 1, 2004, three noteholders instructed the Company to convert an
aggregate of $385,000 of principal on their investments in the Company's 8%
unsecured convertible notes into 9,166,667 common shares in accordance with the
provisions of the agreement.

On April 8, 2004, the Company's shareholders adopted a resolution by majority
consent to increase the authorized common stock of the Company from 50,000,000
shares to 150,000,000 shares.




                                      F-25