UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   Form 10-QSB
                                   (Mark One)

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                       For the period ended June 30, 2004

             [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               For the transition period from _______ to _______.

                        Commission File Number 333-16031
                            FRONT PORCH DIGITAL INC.
           -----------------------------------------------------------
           (Name of small business issuer as specified in its charter)

                    NEVADA                              86-0793960
                    ------                              ----------
          State or other jurisdiction                 (I.R.S. Employer
       of incorporation or organization)            Identification No.)

                               1140 PEARL STREET
                             BOULDER, COLORADO 80302
                    (Address of principal executives offices)
                                 (856) 439-9950
                           (Issuer's telephone number)

           20000 Horizon Way, Suite 120, Mt. Laurel, New Jersey 08054
           ----------------------------------------------------------
                           (Former address of Issuer)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

As of August 13, 2004, 70,753,840 shares of the issuer's common stock, par value
$.001, were outstanding. Transitional Small Business Disclosure Format (check
one): Yes [ ] No [X]

<PAGE>


PART I. FINANCIAL INFORMATION


                            FRONT PORCH DIGITAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

ASSETS                                                             June 30, 2004
Current assets:
   Cash and cash equivalents                                     $    1,304,770
   Accounts receivable - trade & other,
      net of allowance of $30,200                                     1,538,453
   Other current assets                                                 129,070
                                                                 --------------
Total current assets                                                  2,972,293

Property and equipment, net                                             158,216
Software development costs, net                                         627,519
Intellectual property, net                                              214,950
Goodwill, net                                                           415,718
Restricted cash                                                       3,500,000
Deferred financing costs, net                                           939,814
Other assets                                                             12,123
                                                                 --------------

Total assets                                                     $    8,840,633
                                                                 ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of notes payable                              $      597,609
   Current portion of long-term liabilities                             139,828
   Accounts payable                                                   1,083,891
   Accrued expenses                                                   1,010,383
   Accrued expenses - employees                                         666,363
   Deferred revenue                                                     946,432
                                                                 --------------
Total current liabilities                                             4,444,506

Note payable, net of current portion                                  2,989,044
Long-term liabilities, net of current portion                           280,668
                                                                 --------------

Total liabilities                                                     7,714,218
                                                                 --------------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, nonvoting, $.001 par value, 5,000,000
      shares authorized, none issued or outstanding                          --
   Common stock, $.001 par value, 150,000,000 shares
      authorized, 60,127,995 shares issued, 58,694,316
      shares outstanding, 1,433,639 shares in treasury                   58,694
   Additional paid-in capital                                        29,241,937
   Accumulated other comprehensive income-foreign currency
      translation adjustment                                             78,254
   Accumulated deficit                                              (28,252,470)
                                                                 --------------
Total stockholders' equity                                            1,126,415
                                                                 --------------

Total liabilities and stockholders' equity                       $    8,840,633
                                                                 ==============

     See accompanying notes to condensed consolidated financial statements.

<PAGE>


<TABLE>
<CAPTION>
                                                      FRONT PORCH DIGITAL, INC.
                                           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (Unaudited)

                                                      Three months ended June 30,                  Six months ended June 30,
                                                   ---------------------------------           ---------------------------------
                                                        2004               2003                     2004               2003
                                                   --------------     --------------           --------------     --------------
<S>                                                <C>                <C>                      <C>                <C>
Revenues:
  Products                                         $    1,727,299     $      228,486           $    3,047,611     $      930,272
  Services                                                253,935            162,155                  501,743            306,107
                                                   --------------     --------------           --------------     --------------
Total revenues                                          1,981,234            390,641                3,549,354          1,236,379
                                                   --------------     --------------           --------------     --------------

Cost of revenues:
  Products                                                319,921             44,877                  494,672            188,861
  Services                                                196,335            156,017                  462,754            235,365
                                                   --------------     --------------           --------------     --------------
Total cost of revenues                                    516,256            200,894                  957,426            424,226
                                                   --------------     --------------           --------------     --------------
Gross margin                                            1,464,978            189,747                2,591,928            812,153
                                                   --------------     --------------           --------------     --------------

Operating expenses:
Selling, general and administrative                     1,448,386            864,637                2,606,690          1,738,383
Research and development                                   13,438             72,842                   68,295             96,998
Depreciation                                               11,526             93,181                   34,841            173,734
Amortization                                               72,606             87,123                  144,572            177,687
                                                   --------------     --------------           --------------     --------------
Total operating expenses                                1,545,956          1,117,783                2,854,398          2,186,802
                                                   --------------     --------------           --------------     --------------

Operating loss                                            (80,978)          (928,036)                (262,470)        (1,374,649)
                                                   --------------     --------------           --------------     --------------

Other income (expense):
Interest income                                             6,363                412                    7,564                797
Interest expense                                         (420,687)          (208,857)                (618,892)          (362,392)
Other income (expense)                                         --             (1,346)                  20,873                (80)
Foreign currency transaction loss                         (14,193)            (2,536)                 (12,191)            (3,237)
                                                   --------------     --------------           --------------     --------------
Total other expense, net                                 (428,517)          (212,327)                (602,646)          (364,912)
                                                   --------------     --------------           --------------     --------------

Loss from continuing operations                          (509,495)        (1,140,363)                (865,116)        (1,739,561)
                                                   --------------     --------------           --------------     --------------

Loss from operations of discontinued operations                --         (2,667,284)                      --         (2,312,366)
Gain on sale of discontinued operations                        --            586,955                       --            586,955
                                                   --------------     --------------           --------------     --------------
Loss from discontinued operations                              --         (2,080,329)                      --         (1,725,411)
                                                   --------------     --------------           --------------     --------------

Net loss                                           $     (509,495)    $   (3,220,692)          $     (865,116)    $   (3,464,972)
                                                   ==============     ==============           ==============     ==============

Weighted average shares outstanding -
   basic and diluted                                   55,485,065         39,370,754               48,641,473         35,869,795

Loss per share - basic and diluted:
Loss from continuing operations                    $        (0.01)    $        (0.03)          $        (0.02)    $        (0.05)
Loss from discontinued operations                  $           --     $        (0.05)          $           --     $        (0.05)
                                                   --------------     --------------           --------------     --------------
Net loss                                           $        (0.01)    $        (0.08)          $        (0.02)    $        (0.10)
                                                   ==============     ==============           ==============     ==============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

<PAGE>


                                       FRONT PORCH DIGITAL, INC.
                            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (Unaudited)

<TABLE>
<CAPTION>
                                                                                          Six Months Ended June 30,
                                                                                           2004               2003
                                                                                      --------------     --------------
<S>                                                                                   <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                                           $     (865,116)    $   (3,464,972)
   Loss from operations of discontinued operations                                                --          2,312,366
   Gain on sale of discontinued operations                                                        --           (586,955)
                                                                                      --------------     --------------
   Loss from continuing operations                                                          (865,116)        (1,739,561)
   Adjustments to reconcile loss from continuing operations to net cash provided
   by (used in) operating activities from continuing operations:
     Depreciation and amortization                                                           179,413            351,421
     Non-cash interest expense                                                               549,445            310,691
     Stock option compensation expense                                                       233,081              9,259
     Bad debt expense                                                                             --             50,000
     Gain on sale of fixed assets                                                               (466)            (9,951)
     Changes in operating assets and liabilities:
         Decrease (increase) in accounts receivable                                          113,689           (258,103)
         Decrease in other current assets                                                     44,339            181,250
         Decrease in other assets                                                                 --             33,548
         Increase (decrease) in accounts payable                                              71,358           (839,648)
         Increase in accrued expenses                                                        171,473             40,274
         Increase in accrued expenses - employees                                             13,243             95,470
         Decrease in deferred revenue                                                       (341,939)          (394,137)
         Other changes in operating activities                                                    --            (21,530)
                                                                                      --------------     --------------
   Net cash provided by (used in) operating activities from continuing operations            168,520         (2,191,015)
                                                                                      --------------     --------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures                                                                      (68,533)           (86,507)
   Software development costs                                                               (316,330)          (151,275)
   Increase in restricted cash                                                            (3,500,000)                --
   Proceeds from sale of fixed assets                                                            490             39,534
                                                                                      --------------     --------------
   Net cash used in investing activities from continuing operations                       (3,884,373)          (198,248)
                                                                                      --------------     --------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from notes payable, net of financing costs                                     4,625,296            645,000
   Repayment of notes payable and other long-term liabilities                               (103,333)           (68,780)
   Proceeds from issuance of common stock                                                     28,000                 --
                                                                                      --------------     --------------
   Net cash provided by financing activities from continuing operations                    4,549,963            576,220
                                                                                      --------------     --------------

   Net cash provided by discontinued operations                                               62,203          1,742,396

   Effect of exchange rate changes on cash and cash equivalents                               14,162            (35,082)
                                                                                      --------------     --------------

   Net increase (decrease) in cash and cash equivalents                                      910,475           (105,729)
   Cash and cash equivalents, beginning of period                                            394,295            799,468
                                                                                      --------------     --------------
   Cash and cash equivalents, end of period                                           $    1,304,770     $      693,739
                                                                                      ==============     ==============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
     Conversion of unsecured notes into shares of common stock                        $      571,000     $           --
     Restricted stock issued in connection with payment of accrued officer bonuses           115,200                 --
     Warrants issued in connection with obtaining notes payable                              300,683                 --
     Restricted stock issued in connection with obtaining notes payable                      245,000                 --
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 archive management and transcoding for the global broadcast, media and
entertainment industries. 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's proprietary Bitscream software
enables the conversion of video content between proprietary formats commonly
used by global broadcast entities.

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

Consolidated assets as of June 30, 2004 and revenues for the six month period
then ended included $2.0 million and $3.3 million, respectively, related to the
Company's subsidiary in France.

The condensed 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 condensed
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. Although operating results have continued to improve in the current
quarter and the year-to-date period ended June 30, 2004 and management expects
the Company's operating results to continue to improve during the remainder of
2004, there can be no assurance that the Company will not continue to sustain
operating losses. For the six months ended June 30, 2004, the Company incurred
an operating loss of $262,000 and a net loss of $865,000. In comparison, the
Company generated an operating loss of $1.4 million and a net loss of $3.5
million for the six months ended June 30, 2003. The Company generated positive
cash flow from operating activities for the six months ended June 30, 2004 of
$169,000 (cash flow generated from operating activities for the three months
ended June 30, 2004 totaled $227,000) as compared to negative cash flow from
operating activities of $2.2 million for the comparable prior year period. In
addition, at June 30, 2004, the Company had $1.3 million of unrestricted cash
and its working capital deficit amounted to $1.4 million, significantly reduced
from the $2.3 million reported at December 31, 2003. Included in the working
capital deficit at

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


June 30, 2004 and December 31, 2003 is deferred revenue of $946,000 and
$790,000, respectively. In addition, on May 13, 2004, the Company received $5.0
million of cash through the sale of a convertible note ($1.5 million
unrestricted, $3.5 million restricted). On August 6, 2004, the Company received
$446,000 of the $3.5 million of restricted cash in connection with the
conversion by Laurus Master Fund of $441,000 principal amount of such
convertible note into approximately 893,000 shares of Company common stock.
Also, on August 6, 2004 the Company notified the remaining holders of its 8%
unsecured convertible notes, maturing September 30, 2004, that it was exercising
its option to redeem on August 13, 2004 the remaining $469,000 of principal
balance on these notes. As a result, the entire remaining principal balance on
these notes was converted into 11,166,667 shares of common stock. Nonetheless,
the Company remains in a working capital deficit position, it has required note
principal and interest payments due (unless converted to common stock) and the
early stage of execution of business (particularly in North America), are all
factors which raise substantial doubt about the Company's ability to continue as
a going concern.

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Management of the
Company believes the disclosures are adequate to make the information presented
not misleading. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments are of
a normal and recurring nature. For further information, refer to the financial
statements and footnotes included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2003. Operating results for the six months ended
June 30, 2004 are not necessarily indicative of the operating results to be
expected for the year ending December 31, 2004.

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.

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                2004             2003             2004             2003
<S>                                        <C>              <C>              <C>              <C>
Pro Forma Net Loss:
   Net loss                                $   (509,000)    $ (3,221,000)    $   (865,000)    $ (3,465,000)
   Add: Stock based employee
compensation expense - as reported              199,000               --          233,000            9,000
   Deduct: Total stock based employee
compensation expense - determined under
fair value based method for all awards         (300,000)         (96,000)        (432,000)        (192,000)
                                           ------------     ------------     ------------     ------------
   Pro forma net loss                      $   (610,000)    $ (3,317,000)    $ (1,064,000)    $ (3,648,000)
                                           ============     ============     ============     ============

Pro Forma Net Loss Per Share:
Net Loss per share - basic and diluted,
as reported                                $      (0.01)    $      (0.08)    $      (0.02)    $      (0.10)
Net Loss per share - basic and diluted,
pro forma                                  $      (0.01)    $      (0.08)    $      (0.02)    $      (0.10)
</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 2004 and 2003, and
thus determining historical and pro forma compensation expense under the fair
value method, the Company utilized the Black-Scholes valuation model with the
following weighted average assumptions: dividend yield of 0%, risk free interest
rate of 0.81%, expected volatility between 143% and 134% in 2004 and 2003,
respectively, and expected lives of three years.

In determining the fair value of warrants granted in 2004, the Company utilized
the Black-Scholes valuation model with the following weighted average
assumptions: dividend yield of 0%, risk free interest rate of 1.16%, expected
volatility of 143%, and expected lives of five to seven years.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The accounts of the Company's French subsidiary are translated in U.S. dollars
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 and statements of cash flows be translated at the average exchange
rates in effect during the period. 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. In June, 2004 the Company began
managing its foreign currency cash flow exposure through the use of a

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


$/Euro forward contract set to expire on September 7, 2004. There was an
immaterial net gain on the contract at June 30, 2004 represented by the change
in fair value of the foreign currency forward contract related to the difference
between changes in the spot and forward rates excluded from the assessment of
hedge effectiveness.

At June 30, 2004, the Company reported a cumulative translation gain of $78,000
as a component of accumulated other comprehensive income. The Company is also
subject to foreign exchange transaction exposure when its French 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 three months and six months ended June 30, 2004 and 2003
were not significant.

RECLASSIFICATIONS

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

2.   DISCONTINUED OPERATIONS - FISCAL 2003

During 2003, the Company disposed of two business units: the DIVArchive Medical
business unit and the Media Services business unit. The operating results of the
two business units are accounted for as discontinued operations in the
accompanying condensed 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 have been removed
from the Company's results of continuing operations and cash flows for all
periods presented. All related disclosures have also been adjusted to reflect
the discontinued operations.

During the three months and six months ended June 30, 2004, results of
operations from the discontinued business units were insignificant. Summarized
operating results for the discontinued operations for the three months and six
months ended June 30, 2003 are as follows:

                                  Three months ended         Six months ended
                                     June 30, 2003             June 30, 2003
                                 --------------------       -------------------

Revenues                              $ 1,713,000              $ 3,295,000

Gross margin                            1,346,000                2,541,000
Operating costs                         4,013,000                4,853,000
                                      -----------              -----------
Loss from operations of
   discontinued operations            $ 2,667,000              $ 2,312,000
                                      ===========              ===========


3.   CONCENTRATION OF CREDIT RISK

The Company sells its products and services throughout the United States,
Europe, Asia and the Pacific Rim, Canada and Mexico. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Credit losses have been within

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


management's expectations. For the six months ended June 30, 2004, aggregate
revenues from customers located in Europe or Asia amounted to $3.3 million, or
94% of total revenues, while revenues from customers located in North America
totaled $0.2 million, or 6% of total revenues. For the six months ended June 30,
2003, the Company's revenues from customers located in Europe or Asia amounted
to $731,000, or 59% of total revenues, while revenues from customers located in
North America totaled $505,000, or 41% of total revenues.

For the six months ended June 30, 2004, revenues from four customers, each
exceeding 10% of total revenues, aggregated 16%, 16%, 15% and 11%, respectively.
Accounts receivable from the Company's largest and second largest customers were
$147,000 and $100,000, respectively, as of June 30, 2004, which represented
approximately 22% and 15% of total billed trade receivables, respectively, at
that date. The Company's third largest customer is also a stockholder of the
Company.

For the six months ended June 30, 2003, revenues from two customers, each
exceeding 10% of total revenue, aggregated 16% and 12%, respectively.


4.   PER SHARE DATA

The Company reports its earnings (loss) per share in accordance with SFAS No.
128, "Earnings Per Share". Basic loss per share is computed by dividing the net
loss by the weighted average number of common shares outstanding. For the three
and six months ended June 30, 2004 and 2003, shares from the assumed conversion
of outstanding convertible notes, warrants and options were omitted from the
computations of diluted earnings per share because the effect would be
anti-dilutive. However, if the Company was not in a loss position, 16,672,529
shares from the assumed exercise or conversion of warrants, options and
convertible notes would have been considered dilutive securities at June 30,
2004.


5.   STOCKHOLDERS' EQUITY

On March 1, 2004, the Company issued 94,760 shares of common stock to three
current employees in payment of service-related obligations. Also on March 1,
2004, the Company issued 185,000 shares of common stock to a former employee in
payment of service-related obligations and in settlement of related litigation.

Between January 1 and June 30, 2004, seven noteholders converted $571,000
aggregate principal amount of the Company's 8% unsecured convertible notes into
13,595,238 shares of common stock.

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.

On April 19, 2004, the Company issued 1,833,000 shares of common stock to a
former employee in connection with the disposal of the Media Services business
in 2003.

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


During April and May 2004, a former employee exercised options to purchase
55,000 and 45,000 shares of common stock at a price of $0.28 per share which
provided proceeds of $28,000.

On June 11, 2004, the Company issued 291,000 and 233,000 shares of common stock
to the Company's Chief Executive Officer and Chief Financial Officer,
respectively, which satisfied accrued bonuses payable on December 31, 2003 in
the aggregate amount of $115,000.

On June 15, 2004, the Company issued 490,000 shares of unregistered common stock
in payment of financing costs directly associated with the issuance of a $5
million senior secured convertible note. The Company recorded the fair value of
these restricted common shares of $245,000, which was capitalized as deferred
financing costs and is being amortized over a three year period.

On June 24, 2004, the Company issued an aggregate of 166,666 shares of common
stock under the 2000 Equity Incentive Plan to two former employees of its
international operation in settlement of employment-related claims.


6.   LONG TERM DEBT

On May 13, 2004, the Company consummated a private placement pursuant to which
the Company issued a secured convertible term note due May 13, 2007 in the
principal amount of $5,000,000 (the "Note"), and the Company issued a seven-year
common stock purchase warrant, entitling the holder to purchase 4,435,500 shares
of common stock (the "Warrant") at $0.48 per share, subject to antidilution
adjustments. The Note and the Warrant were sold to a single "accredited
investor" (as such term is defined in the rules promulgated under the Securities
Act of 1933, as amended (the "Act")), Laurus Master Fund, Ltd. ("Laurus"), for a
purchase price of $5,000,000. The principal and unpaid interest on the Note are
convertible into shares of the Company's common stock at a price of $0.50 per
share based on the "Fixed Conversion Price", which is defined as the lesser of
(i) 110% of the closing price of the common stock on the business day
immediately preceding the closing date, and (ii) 100% of the average closing
prices of the common stock for the ten consecutive trading days prior to the
closing date. Such conversion price is subject to antidilution adjustments.

In connection with the issuance of the Note to the Laurus Master Fund, the
Company recorded the fair value of the warrants issued as debt discount in the
amount of approximately $1.8 million. This discount will be amortized to
earnings over the term of the Note.

The Note provides for monthly payments of interest at the prime rate (as
published in The Wall Street Journal), plus 1%, which is subject to reduction if
the market price of the Company's common stock exceeds certain designated
thresholds. The Note also provides for monthly amortization, commencing on
September 1, 2004, of $45,455, plus accrued interest, per month, with the
balance payable on the maturity date. Laurus has the option to receive shares of
the Company's common stock in lieu of debt service payments at the then Fixed
Conversion Price. The Note is collateralized by a security interest in all of
the assets of the Company, including a cash collateral account that was funded
with $3,500,000 of the proceeds of the Note and is subject to release to the
Company only upon conversion of the Note into common stock and other limited
circumstances.

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


Pursuant to a Registration Rights Agreement (the "Registration Rights
Agreement") between the Company and Laurus, the Company: (a) filed a
registration statement under the Act to register the resale of the shares of the
Company's common stock issuable upon conversion of the Note and exercise of the
Warrant (the "Registration Statement"), which Registration Statement became
effective on July 29, 2004, and (b) is required to maintain the effectiveness of
the Registration Statement until the earliest date of when (i) all registrable
securities have been sold, (ii) all registrable securities may be sold
immediately without registration under the Act and without volume restrictions
pursuant to Rule 144(k) or (iii) all amounts payable under the Note have been
paid in full. Laurus, or other holders of the Note and the Warrant, are entitled
to certain specified remedies if the Company does not maintain the effectiveness
of the Registration Statement, subject to certain exceptions.


7.   SUBSEQUENT EVENTS

Acquisition of ManagedStorage International, Inc.:

On August 16, 2004, the Company entered into a definitive agreement (the "Merger
Agreement") to acquire all of the outstanding capital stock of ManagedStorage
International, Inc., a Delaware corporation ("MSI"). The closing date of the
transaction is scheduled for August 18, 2004. The transaction was structured as
a reorganization of MSI with the Company and into and a newly-formed,
wholly-owned subsidiary of the Company.

The aggregate purchase price for the capital stock of MSI was approximately $39
million. Such amount was paid through the issuance to the former MSI
stockholders of 47.3 million restricted shares of the Company's common stock and
2.5 million restricted shares of the Company in newly-designated, voting and
non-interest bearing Series A Redeemable Convertible Preferred Stock, $.001 par
value per share (the "Series A Preferred"). In addition, the Company canceled
13,452,381 shares of Company common stock and canceled warrants to purchase 3.5
million shares of Company common stock that were owned by MSI prior to the
transaction. Also, MSI canceled approximately $190,000 in receivables due to it
from the Company.

The Series A Preferred are convertible into shares of Company common stock on a
twenty-for-one basis. A holder of Series A Preferred may convert his shares at
any time upon written notice to the Company. So long as at least 500,000
originally-issued shares of Series A Preferred are outstanding, the holders of
Series A Preferred have the right to appoint three directors to the Company's
Board

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


of Directors. The Company's Board of Directors will be expanded to seven members
to accommodate these three directors. On or after August 16, 2008, the holders
of at least 80% of the Series A Preferred may elect to have the Company redeem
the Series A Preferred for a price equal to the greater of (i) the original
issue price of $12.60 per share ($31.5 million in the aggregate) and (ii) the
fair market value of the number of shares of the Company's common stock into
which such shares of Series A Preferred are convertible. Other material terms of
the Series A Preferred include a preference upon liquidation or dissolution of
the Company, weighted-average anti-dilution protection and pre-emptive rights
with respect to subsequent issuances of securities by the Company (subject to
certain exceptions).

The holders of Series A Preferred and certain other former MSI stockholders
executed of a lock-up agreement pursuant to which such stockholders may not
transfer their unregistered shares of the Company's capital stock for a period
of 18 months (with limited exceptions).

Concurrently with the consummation of the merger, the Company entered into a
Registration Rights Agreement, with the holders of the Series A Preferred. Under
the terms of such agreement, at any time after February 16, 2006, the holders of
at least 51% of the Series A Preferred have the right to cause the Company to
register under the Securities Act of 1933 the shares of common stock, including
the common stock underlying the Series A Preferred, issued to such holders in
the merger. In addition, such holders have 'piggy-back' and S-3 registration
rights, without limitation.

Thomas P. Sweeney III, the Chairman of the Company's Board of Directors, is also
the Chairman, CEO and President of MSI. Mr. Sweeney will be appointed Chief
Executive Officer of the Company effective upon the consummation of the Merger.
Michael Knaisch, the Company's Chief Executive Officer will be appointed
President. The Company entered into an employment agreement with Mr. Sweeney
concerning Mr. Sweeney's employment as our Chief Executive Officer. Mr. Sweeney
also executed a lock-up agreement with respect to all shares of our capital
stock beneficially owned by him. For the two-year contract period, the Company
is committed to compensate Mr. Sweeney in base salary will be $275,000 and
$300,000, in each of the two years' of his agreement.

Wells Fargo Securities, LLC ("Wells Fargo") acted as the Company's financial
advisors and rendered a fairness opinion to the Company and its Shareholders in
this transaction. In connection with such opinion, the Company paid Wells Fargo
$150,000.

<PAGE>


                            FRONT PORCH DIGITAL, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


The transaction is anticipated to be accounted for as a reverse merger with MSI
being the acquirer and the Company being the acquiree.

The Company's Board of Directors has approved a change in the name of the
Company to Incentra Solutions, Inc. to better reflect the business of the
combined company, subject to shareholder approval at a later date. As a result,
the Company will be required to change its current CUSIP number to reflect the
Incentra Solutions, Inc. name change. The Company will submit its application
for the CUSIP number change concurrently with obtaining formal shareholder
approval of the change of the Company's name.

Additional Subsequent Events:

On August 6, 2004, the Company received $446,000 of the $3.5 million of
restricted cash in connection with the conversion by the Laurus Master Fund of
$441,000 principal amount of the Note into approximately 893,000 shares of
Company common stock.

On August 6, 2004, the Company notified the remaining holders of its 8%
unsecured convertible notes, maturing September 30, 2004, that it was exercising
its option to redeem on August 13, 2004 the remaining $469,000 of principal
balance on these notes. Between August 9 and August 13, 2004 the entire
remaining principal balance on these notes was converted into 11,166,667 shares
of common stock.

<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

GENERAL

When used in this discussion, 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 and continued enhancement of its 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.

Any forward-looking statements herein 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.

OVERVIEW

The Company is an industry leader in the emerging market of digital archive
management and transcoding for the global broadcast, media and entertainment
industries. 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's proprietary Bitscream software enables the conversion of video
content between proprietary formats commonly used by global broadcast entities.


<PAGE>

The Company is in the early stages of executing its business strategy and
anticipates generating significant revenues from the sale of its software
products and services during the next 12 months. This expansion is contingent
upon several factors, including the availability of adequate cash resources, the
price of its products and services relative to those of its competitors, and
general economic and business conditions, among other factors.

BUSINESS OUTLOOK

During the three months ended June 30, 2004, the Company recognized revenues of
$2.0 million, representing a 25% sequential increase over the $1.6 million in
revenues recognized in the first quarter of 2004. Revenues for the three months
ended June 30, 2004 also reflected an 407% increase over the $391,000 of
revenues recognized in the previous years' three months ended June 30, 2003.
Gross margin continued to strengthen, totaling $1.5 million, or 74% of revenues.
Cash flow provided by operating activities was positive $227,000 for the three
months ended June 30, 2004, bringing cash flow provided by operating activities
to $169,000 for the six months ended June 30, 2004. During the three months
ended June 30, 2004, the Company received $1.9 million in new orders for the
Company's software products and services, bringing the year to date total new
orders to $4.4 million (which is equal to the total new orders received for the
year ended December 31, 2003). In addition, in July 2004, the Company received
approximately $700,000 in new orders for the Company's software products and
services, substantially all of which are expected to generate revenue in 2004.
As of June 30, 2004, the Company had accumulated a backlog of contracted orders
of approximately $2.2 million, substantially all of which are expected to
generate revenue in 2004. Also, as of June 30, 2004, the Company had $1.3
million of unrestricted cash and a working capital deficit of $1.4 million,
which was significantly less than the $2.3 million working capital deficit
reported at December 31, 2003. Included in the working capital deficit at June
30, 2004 and December 31, 2003 was deferred revenue of $946,000 and $790,000,
respectively. As of December 31, 2003, the Company had approximately $37 million
in net operating loss carryforwards for international (French tax law), federal
and state tax purposes that may be utilized if the Company can generate income
in future periods. However, there

<PAGE>

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.

On May 13, 2004, the Company consummated a private placement in which the
Company issued a secured convertible term note due May 13, 2007 in the principal
amount of $5,000,000 (the "Note")($1.5 million unrestricted, $3.5 million
restricted), and the Company issued a common stock purchase warrant that
entitles the holder to purchase 4,435,500 shares of common stock (the
"Warrant"). The Note and the Warrant were sold to a single "accredited investor"
(as such term is defined in the rules promulgated under the Securities Act of
1933, as amended (the "Act")), Laurus Master Fund, Ltd. ("Laurus"), for a
purchase price of $5,000,000. See further discussion under Liquidity and Capital
Resources below.

On August 16, 2004, we entered into a definitive agreement to acquire all of the
outstanding capital stock of ManagedStorage International, Inc. See Note 6 to
Condensed Consolidated Financial Statements.

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 were deployed in
connection with the National Association of Broadcasters ("NAB") conference in
April 2004 and will be deployed in connection with 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 areas of 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.


<PAGE>

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 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.

<PAGE>

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 2003

         REVENUE. Total revenue for the three months ended June 30, 2004
increased $1.6 million, or 407%, to $2.0 million compared to total revenue of
$391,000 for the three months ended June 30, 2003. This increase was
attributable to increased orders for the Company's software and related products
and services, and consisted primarily of sales of the Company's DIVArchive
solutions. The increase in revenue from the sale of the DIVArchive product
offerings was derived primarily from software licensing fees, which represented
the up-front cost of purchasing the software. This increase in orders was the
result of increased demand for the Company's software products, as well as an
increase in overall market demand and the acceleration of the adoption of
digital media broadcast systems by broadcasters.

         For the three months ended June 30, 2004, the Company's revenues were
derived largely from the European and Asian geographic markets. During that
period, aggregate revenues from customers located in Europe or Asia amounted to
$1.8 million, or 93% of total revenue, while revenues from customers located in
North America totaled $0.1 million, of 7% or total revenue. In 2004, the Company
expects this concentration of revenues to continue for its software and related
services business; however, over the longer term, the Company expects its
revenue concentration relating to its software products initially to stabilize
at the 70%/30% levels for Europe/Asia and North America, respectively, and
thereafter to move toward 50%/50% as the Company continues to develop its North
American presence and continues to develop and grow its business. For the three
months ended June 30, 2003, the Company's revenues from customers located in
Europe or Asia amounted to $301,000, or 77% of total revenue, while revenues
from customers located in North America totaled $90,000, or 23% of total
revenue.

         GROSS MARGIN. Total gross margin for the three months ended June 30,
2004 of $1.5 million, or 74% of total revenue, increased $1.3 million, or 672%,
compared to total gross margin of $0.2 million for the three months ended June
30, 2003. The increase in gross margin was attributable to increased revenues as
described above. The gross margin as a percentage of total revenue reported for
the second quarter met the Company's anticipated gross margin.

         On the basis of the Company's contracted backlog of orders for its
DIVArchive solutions and the pipeline of potential business that Management
believes will close during 2004, Management believes 2004 software revenues will
remain at levels sufficient to support the Company's cost of revenue for such
business. As a result, the Company anticipates its gross margin on these
products will remain relatively constant during 2004.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the three months ended June 30, 2004
increased $0.6 million to $1.4 million from $0.9 million for the three months
ended June 30, 2003. SG&A expenses for the three months ended June 30, 2004
included $0.8 million in salaries and related benefits for employees not
directly related to the production of revenue, $280,000 in professional fees,
$194,000 in general office expenses, $43,000 in facilities costs, and $82,000
for travel-related costs. SG&A expenses for the three months ended June 30, 2003
included $408,000 in salaries and related benefits for employees not

<PAGE>

directly related to the production of revenue, $270,000 in professional fees,
$68,000 in general office expenses, $49,000 in facilities costs, and $70,000 for
travel-related costs. The increase in SG&A expenses during the three months
ended June 30, 2004 was the direct result of increased costs related to the
generation of the increased revenue levels during the period and increased costs
related to the expansion of the Company's business, including costs incurred to
meet future anticipated revenue from contracted orders. The Company believes
SG&A expenses would remain constant or slightly increase if the Company were to
manage expenses solely to maintain revenues at current levels. However, as the
Company is seeking to increase revenues significantly in 2004, the Company
anticipates increasing costs, particularly in the areas of sales and marketing
and administration, in an effort to support and expand its business.

         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. For the three month
period ended June 30, 2004, the Company has begun to realize significant
revenues, and it expects to continue to realize revenues and generate positive
cash flows from these efforts in 2004. For the three months ended June 30, 2004
and 2003, the Company incurred costs related to its research and development
activities totaling $200,000 and $162,000, respectively, of which, $14,000 and
$73,000, respectively, was recorded as research and development expense and
$186,000 and $89,000, 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 $84,000 for the three months ended June 30, 2004 and
$180,000 for the three months ended June 30, 2003. The decrease of $96,000 was
attributable to reduced depreciation expense in 2004 as a result of a larger
portion of the Company' assets becoming fully depreciated during 2003.

         OPERATING LOSS. During the three months ended June 30, 2004, the
Company incurred a loss from operations of $81,000 as compared to a loss from
operations of $928,000 for the three months ended June 30, 2003. The decrease in
loss from operations for the three months ended June 30, 2004 was primarily due
to the increased revenues and gross margin described above.

         INTEREST EXPENSE. Interest expense was $421,000 for the three months
ended June 30, 2004 compared to $209,000 for the three months ended June 30,
2003. The increase in interest expense was largely attributable to increased
amortization of debt discount. Interest expense during the three months ended
June 30, 2004 included cash interest costs of $50,000 accrued on notes payable
for money borrowed. Interest expense for the three months ended June 30, 2004
also included non-cash interest charges aggregating $371,000, including a
non-cash interest charge of $318,000 related to the amortization of debt
discount, non-cash interest expense of $49,000 related to amortization of
non-cash

<PAGE>

financing costs and non-cash interest expense of $4,000 related to the value of
warrants to purchase common stock issued in conjunction with the restructuring
of certain payables in 2003.

         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. In June, 2004 the Company began managing its foreign
currency cash flow exposure through the use of a $/Euro forward contract set to
expire on September 7, 2004. There was an immaterial net gain on the contract at
June 30, 2004 represented by the change in fair value of the foreign currency
forward contract related to the difference between changes in the spot and
forward rates excluded from the assessment of hedge effectiveness. At June 30,
2004, the Company reported an accumulated translation gain of $78,000 as a
component of accumulated other comprehensive income. 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 French
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 three months ended June 30, 2004 and 2003 were not
significant for the periods presented.

         NET LOSS. During the three months ended June 30, 2004, the Company
incurred a net loss of $509,000 as compared to a net loss of $3.2 million for
the three months ended June 30, 2003. Included in the net loss for the three
months ended June 30, 2003 is a loss from discontinued operations of $2.1
million. The decrease in net loss for the three months ended June 30, 2004 was
primarily due to the increased revenues and gross margin described above.

<PAGE>


RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2003

         REVENUE. Total revenue for the six months ended June 30, 2004 increased
$2.3 million, or 187%, to $3.5 million compared to total revenue of $1.2 million
for the six months ended June 30, 2003. This increase was attributable to
increased orders for the Company's software and related products and services,
and consisted primarily of sales of the Company's DIVArchive solutions. 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. This increase in orders was the result of increased
demand for the Company's software products, as well as an increase in overall
market demand and the acceleration of the adoption of digital media broadcast
systems by broadcasters.

         For the six months ended June 30, 2004, the Company's revenues were
derived largely from the European and Asian geographic markets. During that
period, aggregate revenues from customers located in Europe or Asia amounted to
$3.3 million, or 94% of total revenue, while revenues from customers located in
North America totaled $0.2 million, of 6% or total revenue. In 2004, the Company
expects this concentration of revenues to continue for its software and related
services business; however, over the longer term, the Company expects its
revenue concentration initially to stabilize at the 70%/30% levels for
Europe/Asia and North America, respectively, and thereafter to move toward
50%/50% as the Company continues to develop its North American presence and
continues to develop and grow its business. For the six months ended June 30,
2003, the Company's revenues from customers located in Europe or Asia amounted
to $731,000, or 59% of total revenue, while revenues from customers located in
North America totaled $505,000, or 41% of total revenue.

         GROSS MARGIN. Total gross margin for the six months ended June 30, 2004
of $2.6 million, or 73% of total revenue, increased $1.8 million, or 219%,
compared to total gross margin of $0.8 million for the six months ended June 30,
2003. The increase in gross margin was attributable to increased revenues as
described above. The gross margin as a percentage of total revenue reported for
the period met the Company's anticipated gross margin.

         On the basis of the Company's contracted backlog of orders for its
DIVArchive solutions and the pipeline of potential business that Management
believes will close during 2004, Management believes 2004 software revenues will
be at levels sufficient to support the Company's cost of revenue for such
business. As a result, the Company anticipates its gross margin on these
products will remain relatively constant during 2004.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the six months ended June 30, 2004
increased $0.8 million to $2.6 million from $1.7 million for the six months
ended June 30, 2003. SG&A expenses for the six months ended June 30, 2004
included $1.6 million in salaries and related benefits for employees not
directly related to the production of revenue, $520,000 in professional fees,
$292,000 in general office expenses, $89,000 in facilities costs, and $153,000
for travel-related costs. SG&A expenses for the six months ended June 30, 2003
included $794,000 in salaries and related benefits for employees not directly
related to the production of revenue, $492,000 in professional fees, $245,000 in
general office expenses, $92,000 in facilities costs, and $115,000

<PAGE>

for travel-related costs. The increase in SG&A expenses during the six months
ended June 30, 2004 was the direct result of increased costs related to the
generation of the increased revenue levels during the period and increased costs
related to the expansion of the Company's business, including costs incurred to
meet future anticipated revenue from contracted orders. The Company believes
SG&A expenses would remain constant or slightly increase if the Company were to
manage expenses solely to maintain revenues at current levels. However, as the
Company is seeking to increase revenues significantly in 2004, the Company
anticipates increasing costs, particularly in the areas of sales and marketing
and administration, in an effort to support and expand its business.

         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. For the six month
period ended June 30, 2004, the Company has begun to realize significant
revenues, and it expects to continue to realize revenues and generate positive
cash flows from these efforts in 2004. For the six months ended June 30, 2004
and 2003, the Company incurred costs related to its research and development
activities totaling $385,000 and $151,000, respectively, of which, $68,000 and
$97,000, respectively, was recorded as research and development expense and
$317,000 and $54,000, 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 $179,000 for the six months ended June 30, 2004 and
$351,000 for the six months ended June 30, 2003. The decrease of $172,000 was
attributable to reduced depreciation expense in 2004 as a result of a larger
portion of the Company' assets becoming fully depreciated during 2003.

         OPERATING LOSS. During the six months ended June 30, 2004, the Company
incurred a loss from operations of $262,000 as compared to a loss from
operations of $1.4 million for the six months ended June 30, 2003. The decrease
in loss from operations for the six months ended June 30, 2004 was primarily due
to the increased revenues and gross margin described above.

         INTEREST EXPENSE. Interest expense was $619,000 for the six months
ended June 30, 2004 compared to $362,000 for the six months ended June 30, 2003.
The increase in interest expense was largely attributable to increased
amortization of debt discount. Interest expense during the six months ended June
30, 2004 included cash interest costs of $69,000 accrued on notes payable for
money borrowed. Interest expense for the six months ended June 30, 2004 also
included non-cash interest charges aggregating $550,000, including a non-cash
interest charge of $484,000 related to the amortization of debt discount,
non-cash interest expense of $59,000 related to amortization of non-cash
financing costs and non-cash interest expense of $7,000 related to the value of
warrants to purchase common stock issued in conjunction with the restructuring
of certain payables in 2003.

<PAGE>

         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. In June, 2004 the Company began managing its foreign
currency cash flow exposure through the use of a $/Euro forward contract set to
expire on September 7, 2004. There was an immaterial net gain on the contract at
June 30, 2004 represented by the change in fair value of the foreign currency
forward contract related to the difference between changes in the spot and
forward rates excluded from the assessment of hedge effectiveness. At June 30,
2004, the Company reported an accumulated translation gain of $78,000 as a
component of accumulated other comprehensive income. 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 French
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 six months ended June 30, 2004 and 2003 were not
significant for the periods presented.

         NET LOSS. During the six months ended June 30, 2004, the Company
incurred a net loss of $865,000 as compared to a net loss of $3.5 million for
the six months ended June 30, 2003. Included in the net loss for the six months
ended June 30, 2003 is a loss from discontinued operations of $1.7 million. The
decrease in net loss for the six months ended June 30, 2004 was primarily due to
the increased revenues and gross margin described above.

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 2004, the Company had $1.3 million of cash and cash
equivalents. Increased revenue and the issuance of convertible debt securities
have been principal sources of liquidity for the Company.

         On March 1, 2004, the Company issued an aggregate of 94,760 shares of
common stock to three current employees in payment of service-related
obligations. Also on March 1, 2004, the Company issued 185,000 shares of common
stock to a former employee in payment of service related obligations and in
settlement of related litigation.

         Between January 1 and June 30, 2004 seven noteholders converted
$571,000 aggregate principal amount of the Company's 8% unsecured convertible
notes into 13,595,238 shares of common stock.

         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.

         On April 19, 2004, the Company issued 1,833,000 shares of common stock
to a former employee in connection with the disposal of the Company's former
Media Services business in 2003.

         During April and May 2004, a former employee exercised options to
purchase 55,000 and 45,000 shares of common stock at a price of $0.28 per share,
which provided aggregate proceeds of $28,000.

         On May 13, 2004, the Company consummated a private placement in which
the Company issued a secured convertible term note due May 13, 2007 in the
principal amount of $5,000,000 (the "Note"), and the Company issued a common
stock purchase warrant, entitling the holder to purchase 4,435,500 shares of
common stock (the "Warrant"). See Note 6 to the Condensed Consolidated Financial
Statements.

         On June 11, 2004, the Company issued 291,000 and 233,000 shares of
common stock to the Company's Chief Executive Officer and Chief Financial
Officer, respectively, which satisfied accrued bonuses payable on December 31,
2003 in the aggregate amount of $115,000.

<PAGE>

         On June 15, 2004, the company issued 490,000 shares of unregistered
restricted common stock in payment of financing costs directly associated with
the issuance of the $5 million dollar senior secured convertible note. The
Company recorded the fair value of these restricted common shares of $245,000,
which is capitalized as deferred financing costs and is being amortized over a
three year period.

         On June 24, 2004, the Company issued an aggregate of 166,666 shares of
common stock under the 2000 Equity Incentive Plan to two former employees of its
international operation in settlement of employment related claims.

         On August 6, 2004, the Company received $446,000 of the $3.5 million of
restricted cash in connection with the conversion by the Laurus Master Fund of
$441,000 principal amount of the Note into approximately $892,000 shares of
Company common stock.

         On August 6, 2004 the Company notified the remaining holders of its 8%
unsecured convertible notes, maturing September 30, 2004, that it was exercising
its option to redeem on August 13, 2004 the remaining $469,000 of principal
balance on these notes. Between August 9 and August 13, 2004 the entire
remaining principal balance on these notes was converted into 11,166,667 shares
of common stock.

         On August 16, 2004, the Company entered into a Merger Agreement with
MSI. See Note 6 to Condensed Consolidated Financial Statements.

         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 July 1, 2004 will be sufficient to operate
through June 30, 2005. In addition, with the $5 million proceeds from the sale
of the Note in May 2004, the Company believes it has sufficient capital
available for the execution of its business strategy and its continued growth
and expansion. However, the Company incurred an operating loss of $262,000 for
the six months ended June 30, 2004 and $1.4 million for the comparable prior
year period. 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.

<PAGE>

         The Company expects capital expenditures for its software and related
services business to be approximately $1.0 million during the 12-month period
ending June 30, 2005. 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.

         As of June 30, 2004, the Company had current assets of $3.0 million.
These assets were primarily derived from operations of the Company in the six
month period ended June 30, 2004, the $1.5 million unrestricted proceeds for the
issuance of the $5 million senior secured convertible note in May 2004.
Long-term assets of $5.9 million at June 30, 2004 consisted of $3.5 million in
restricted cash related to the proceeds from the issuance of the $5 million
senior secured convertible note, $940,000 of deferred financing costs, net of
amortization, $416,000 in goodwill associated with DIVArchive assets acquired
during 2002, software and intellectual property, net of $215,000, property and
equipment, net of $158,000, software development costs, net of $628,000 and
other assets of $12,000.

         Current liabilities of $4.4 million at June 30, 2004 consisted of $1.1
million of accounts payable; $0.9 million of deferred revenue, which consisted
of billings in excess of revenue recognized, deposits and progress payments
received on engagements currently in progress; $1.0 million of accrued expenses;
$0.7 million of accrued expenses to employees; $878,000 of unsecured convertible
notes payable, net of debt discount of $280,000; and $140,000 for the current
portion other long-term obligations.

         The Company's working capital deficit was $1.4 million as of June 30,
2004 for the reasons described above.

         The Company generated net cash of $169,000 from operating activities
during the six months ended June 30, 2004, primarily as a result of the
increased revenue during the period. The Company used net cash of $2.2 million
from operating activities during the six months ended June 30, 2003. The
reduction in net cash used in operating activities was attributable to reduced
operating losses for the current period and an increase in deferred revenues as
a result of accelerated billings and collections in advance of revenue
recognition.

         The Company used net cash of $3.9 million in investing activities
during the six months ended June 30, 2004, of which $3.5 million represented
restricted cash received in connection with the $5 million note, $69,000
represented capital expenditures and $316,000 was used for the development of
the Company's suite of video software solutions and other investing activities.
During the six months ended June 30, 2003, the Company used $198,000 in
investing activities, of which $40,000 represented proceeds from the sale of
fixed assets, which was offset by $87,000 used for capital expenditures and

<PAGE>

$151,000 used for the development of the Company's suite of video software
solutions and other investing activities.

         Financing activities provided net cash of $4.5 million during the six
months ended June 30, 2004, primarily from proceeds from the issuance of notes
payable of $5.0 million, which was offset by principal repayments on notes
payable and other long-term liabilities of $103,000 and deferred financing costs
of $425,000. Financing activities provided net cash of $576,000 during the six
months ended June 30, 2003 primarily from proceeds from the issuance of notes
payable offset by principal repayments on notes payable and capital leases.

ITEM 3. 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 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
second quarter of 2004 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.

<PAGE>


PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

        The following exhibits are filed herewith:

        (a)     Exhibits

        10.1    Agreement and Plan of Merger dated as of August 16, 2004 by and
                among the Company, Front Porch Merger Corp. and ManagedStorage
                International Inc.

        31.1    Certification of Chief Executive Officer pursuant to 18 U.S.C.
                1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.

        31.2    Certification of Chief Financial Officer pursuant to 18 U.S.C.
                1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.

        32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C.
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.

        32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C.
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.

        (b)     Current Reports on Form 8-K

                On April 6, 2004, the Company filed a Current Report on Form 8-K
        reporting the dissemination of a press release dated April 1, 2004
        relating to results of operations for the year ended December 31, 2003
        and projections for the first financial quarter of 2004.

                On August 11, 2004, the Company filed a Current Report on Form
        8-K reporting the dissemination of a press release dated August 11, 2004
        relating to results of operations for the three and six months ended
        June 30, 2004.

<PAGE>


                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

Dated:       August 16, 2004    FRONT PORCH DIGITAL INC.

                                BY: /s/ MICHAEL KNAISCH
                                    Michael Knaisch
                                    Chief Executive Officer
                                   (principal executive officer)

                                BY: /s/ MATTHEW RICHMAN
                                    Matthew Richman
                                    Chief Financial Officer and Treasurer
                                    (principal financial and accounting officer)