================================================================================

                     U.S 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, 2004
                                       OR

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

          For the transition period from _____________ to _____________

                           Commission File No. 0-24073

                              DIGITAL FUSION, INC.
                 (Name of Small Business Issuer in Its Charter)

        Delaware                                       13-3817344
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)


                4940-A Corporate Drive, Huntsville, Alabama 35805
          (Address of principal executive offices, including zip code)

                                 (256) 837-2620

              (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:
                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, $.01 par value per share.

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  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 is not contained in this form,  and no disclosure  will be
contained,  to the  best of  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. |_|

     Issuer's revenues for its most recent fiscal year: $6,766,000.

     The aggregate  market value of voting common equity held by  non-affiliates
of the Registrant based upon the closing sale price of common stock on March 15,
2004 as reported by the OTC Bulletin Board was approximately $2,013,000.  Shares
of voting stock held by executive  officers,  board of directors and each person
who owns 5% or more of the  outstanding  voting stock have been excluded in that
such persons may be deemed to be affiliates.  (This  determination  of affiliate
status is not necessarily a conclusive determination for other purposes.)

     As of March 28, 2005,  10,800,548 shares of the Registrant's  common stock,
$.01 par value per share, were outstanding.

     Documents Incorporated by Reference. The information called for by Part
III, Items 9-12, is incorporated by reference from the definitive proxy
Statement for our 2005 Annual Meeting of Stockholders, which will be filed with
the Commission within 120 days after the end of the fiscal year covered by this
form.



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<PAGE>

                              DIGITAL FUSION, INC.
                             INDEX TO ANNUAL REPORT
                                 ON FORM 10-KSB


<TABLE>
<CAPTION>

                                                                                                        Page
                                                                                                        ----
<S>       <C>                                                                                             <C>
     PART I
     Item 1.         Description of Business                                                              2
     Item 1A.        Risk Factors Related to our Business                                                 8
     Item 2.         Description of Property                                                             11
     Item 3.         Legal Proceedings                                                                   12
     Item 4.         Submission of Matters to a Vote of Security Holders                                 12

     PART II
     Item 5.         Market for Common Equity and Related Stockholder Matters                            13
     Item 6.         Management's Discussion and Analysis of Financial Condition and
                     Results of Operations                                                               14
     Item 7.         Financial Statements                                                                22
     Item 8.         Changes in and Disagreements with Accountants on Accounting and Financial
                     Disclosure                                                                          22
     Item 8A.        Controls and Procedures                                                             22

     PART III
     Item 9.         Directors, Executive Officers, Promoters and Control Person;
                     Compliance with Section 16(a) of the Exchange Act                                   23
     Item 10.        Executive Compensation                                                              23
     Item 11.        Security Ownership of Certain Beneficial Owners and Management                      23
     Item 12.        Certain Relationships and Related Transactions                                      23
     Item 13.        Exhibits List and Reports on Form 8-K                                               23
     Item 14.        Principal Accountant Fees and Services                                              25
     Signatures                                                                                          26
     Index to Consolidated Financial Statements                                                          F-1
     Report of Independent Registered Public Accounting Firm                                             F-2

</TABLE>



                                       1
<PAGE>

            Cautionary Statement Regarding Forward-Looking Statements
            ---------------------------------------------------------

     Statements  in this  Annual  Report  on Form  10-KSB  that  are not  purely
historical are  forward-looking  statements within the meaning of Section 27A of
the  Securities  Act of 1933 and Section 21E of the  Securities  Exchange Act of
1934, including statements regarding our (as hereinafter defined)  expectations,
hopes, intentions or strategies regarding the future. Forward-looking statements
include:  the plans and  objectives  of the  Company for future  operations  and
trends  affecting  our  financial  condition  and  results  of  operations.  All
forward-looking  statements in this Report are based on information available to
the Company as of the date this Report is filed with the Securities and Exchange
Commission,   and  the  Company   assumes  no  obligation  to  update  any  such
forward-looking  statements.  Factors that could cause actual  results to differ
materially  from those expressed or implied by such  forward-looking  statements
include,  but are not limited to, those factors listed at "Item 6.  Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Certain Factors Which May Affect the Company's Future  Performance." The Company
undertakes no obligation to release publicly the results of any future revisions
it may make to  forward-looking  statements to reflect  events or  circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

                                     PART I

Item 1.       Description of Business

(a)  Business Development

Digital Fusion, Inc. (used herein, "Digital Fusion", "DFI", and the "Company",
refer to Digital Fusion, Inc.) is an information technology and engineering
services company that helps its customers make the most of technology to meet
their business needs. Digital Fusion's IT Services division provides solutions
to both government and commercial customers, focused in the following areas:
Business Process Automation, Application Development and Data Management,
Application Security, Web Portals and Digital Dashboards, System Integration and
IT Support. Digital Fusion's Engineering Services division supports a variety of
customers with state-of-the-art solutions that include: Computational
Aerodynamics/CFD; Optical Systems Design, Development and Test;
Thermo/structural Dynamics; Modeling and Simulations; Hardware-in-the-Loop
Testing; Program Analysis; and Ground/Flight Planning, Execution, and Data
Analysis. Services are provided to business organizations and public sector
institutions primarily in the Eastern United States.

     The Company is  incorporated  in Delaware with its main offices  located in
Huntsville,  Alabama  and a  regional  office in New  Jersey.  The  Company  has
satellite  offices in Florida  and  Washington  D.C.  Digital  Fusion's  website
address is www.digitalfusion.com.

                        Form and History of Organization

     Digital  Fusion,  Inc.  was  incorporated  in February  1995 in Delaware as
Internet  Broadcasting  Systems,  Inc.  The  company's  name was  changed to IBS
Interactive,  Inc.  when  it went  public  in May  1998.  During  October  2001,
shareholders  approved the  corporate  name change to Digital  Fusion,  Inc. Its
stock is traded on the OTC Bulletin Board under the symbol of "DIGF".

                          Acquisitions and Divestitures

     On January 3, 2005,  pursuant to a Stock Purchase  Agreement  dated October
28, 2004 by and between Digital Fusion and Michael W. Wicks  ("Wicks"),  Digital
Fusion  acquired  all of Wicks'  outstanding  capital  stock of Summit  Research
Corporation ("Summit").

     Under the terms of the Agreement,  the Company paid to Wicks (a) $1,600,000
in cash, (b) 575,000 shares of the Company's  common stock and (c) a convertible
promissory note (the "Note") in the cumulative amount of $2,700,000.  On the six
month  anniversary  of the Closing,  Wicks shall  receive  $600,000 cash plus an
additional  amount equal to the excess of Summit's  tangible net worth as of the
Closing  in  excess  of  $900,000.  The  tangible  net worth of Summit as of the
Closing shall be determined by Summit's independent certified public accountants
(subject to review by the Company's  independent  certified public accountants).
To the extent that  Summit's  tangible  net worth as of the Closing is less than
$900,000, the Note shall be reduced by that same amount.



                                       2
<PAGE>

     The  principal  portion of the Note may be  converted  at any time by Wicks
into a number of shares determined by dividing the converted principal amount of
the Note by the  Conversion  Price of $2.25 per  share.  In the event the entire
Note is  converted,  Wicks  will  receive  a total of  1,200,000  shares  of the
Company's common stock. No interest shall accrue on the Note during any calendar
month in which the  Company's  common  stock is publicly  traded and the average
closing price of the Company's common stock is greater than $2.80 per share.

(b) Business of Issuer
                             Description of Services

Digital Fusion's experience and expertise covers a wide range of technology
services. The company has managed and deployed large-scale, multi-site
infrastructure projects involving complex system integrations and migrations.
Digital Fusion consultants have also designed and developed customized software
applications and implemented third-party solutions to fulfill specific client
needs. In addition, a number of Digital Fusion consultants work onsite in
organizations across the country providing ongoing support and guidance for
in-house projects from Information Technology ("IT") to engineering to modeling
and simulation.

Information Technology Services

Digital Fusion's experience and expertise covers a wide range of IT services,
with proven past performance and current initiatives in both the commercial and
government (local, state, and federal) sectors. It has managed and deployed
large-scale, multi-site infrastructure projects involving complex systems
integrations and migrations. Our consultants have also designed and developed
customized software applications and implemented third-party solutions to
fulfill specific client needs. In addition, a number of Digital Fusion
consultants work onsite in organizations across the country providing ongoing
support and guidance for in-house IT projects. Digital Fusion's main service
lines include:

o        Application Development, Support and Security - Following its proven
         System Development Life Cycle Methodology, Digital Fusion builds
         customized software solutions including database design and
         maintenance, business process automation, Web-enabled client/server
         applications, and complete project outsourcing. With SPI Dynamics'
         WebInspect, the Company performs application security audits and the
         remediation of issues identified.

o        System Migration and Integration - Specializing in Microsoft solutions
         and Intuit Track-It!, Digital Fusion installs and configures a variety
         of software packages, including complete system integration with custom
         front-ends, third-party packages, or other external databases and
         legacy system migrations.

o        Data Management and Support - Enables customers to better understand
         and manage their organization. Digital Fusion creates solutions that
         allow organizations to securely manipulate and manage large amounts of
         financial and business data by creating innovative and easy-to-use
         interfaces to manage and interpret critical data with Digital
         Dashboards, secure Web Portals and interactive financial reporting
         capabilities.

Within these primary IT service categories, Digital Fusion performs a variety of
specific technical services. The following describes some of these in more
detail:

Application Development - Digital Fusion has application development experience,
from building customized software solutions to implementing and integrating
third-party packaged programs, Web based and client/server. It has the technical
expertise, business process, and management experience to help orchestrate all
the elements of the project and balance customized user demands with the most
efficient implementation. In developing applications, Digital Fusion follows a
proven application development methodology in which processes and requirements
are thoroughly defined and documented to ensure the project stays on track.

Data Management - Digital Fusion has substantial experience working on database
analysis, design, integration and administration projects involving a wide range
of technologies, including Sybase, Microsoft, Oracle, DB2 and Informix. It has
expertise in relational database design, stored procedures, database replication
and synchronization, legacy systems migration, data mining, and report
generation. Its consultants' expertise and training encompass databases designed
and tuned for mainframe, client/server, and distributed/Web platforms, from
small databases with a few users to large databases processing many thousands of
transactions per day.



                                       3
<PAGE>

Application Security - By using SPI Dynamics' WebInspect, the company offers
auditing and assessments for Internet application vulnerabilities, remediation
of assessed vulnerabilities, training and mentoring on secure development
methodologies and best practices. Digiframe.Net is Digital Fusion's answer to a
secure and methodical .NET development framework based upon Microsoft Best
Practices. This set of reusable objects allows developers to more efficiently
design secure Internet applications in the Microsoft .Net environment.

Web Design and Development - Digital Fusion designs, develops, and maintains
engaging, interactive, multimedia websites and builds high-performance
internet/intranet applications. The Company is a Macromedia Alliance Partner
with thorough knowledge and experience in Web technologies such as JavaScript,
Java, ASP, DHTML, XML, ColdFusion, Dreamweaver, Flash, and others. Company
solutions also include complete content management features for managing
information and streamlining communications company wide, along with easy-to-use
tools to give non-technical staff full control of website or intranet/extranet
content.

Business Process Analysis - The application a customer implements is only as
effective as the business processes involved with using it. Digital Fusion's
consultants design processes that integrate the capabilities of the software
with the conditions of the customer's unique business environment, creating
streamlined, highly productive operations. The Company shows customers how to
save money by automating processes and implementing efficient solutions. The
Company also evaluates the software and service options in today's crowded
marketplace and recommends the best match for our customer's business.

Enterprise Integration - Many companies have made significant investments over a
long period of time in enterprise resource planning (ERP) systems like order
management and financials. As their business changes or grows, those companies
often need to add new capabilities to their enterprise to help them manage their
growth. However, different software packages, particularly those that have been
customized or home-grown, don't often integrate easily and the company is faced
with either manually transferring data or scrapping their legacy systems and
paying the normal price for a new suite of products. Digital Fusion has the
experience necessary to seamlessly integrate a company's existing enterprise
with new systems; and utilize current technologies and tools to ensure the
final solution meets the company's objectives.

Engineering Services

Digital Fusion's Engineering Services division provides optical system analysis
and technical scientific analysis to a variety of government agencies including
the Defense Intelligence Agency (DIA) and the Missile Defense Agency (MDA).
Engineering Services personnel have a proven track record of creating unique and
effective engineering solutions to satisfy our customer's individual needs. We
specialize in the design, development and integration of advanced sensing
systems as well as aerodynamic analysis and thermal-structural analysis. We
utilize state-of-the-art technology to meet today's challenges. Our primary
Engineering Services are:

o        Optical System Development and Integration--Digital Fusion develops a
         wide range of optical systems for government programs. These systems
         include complex re-imaging assemblies, integration of
         motion-synchronized image capture, and various imaging polarimeters.
         Digital Fusion also develops application software, using LabView and
         C/C++ for imaging systems as well as optical and electrical
         integration.

o        Machine Vision Development--Digital Fusion is leveraging its experience
         in optics, electronics, and software development to enter the Machine
         Vision market. Digital Fusion has recently become a National
         Instruments Alliance member and is using this exposure to enter this
         market.

o        Optical System Characterization and Calibration--Digital Fusion
         personnel have broad experience in characterization and calibration of
         optical systems ranging from the visible to infrared spectra. Digital
         Fusion's services in this area include radiometric analysis, optical
         path characterization including conventional and polarimetric analysis,
         sensor system modeling, focal plane array modeling, and
         radiometric/polarimetric calibration of optical systems.

o        Applied Aerodynamics/Computational Fluid Dynamics--Digital Fusion
         personnel provide aerodynamic and computational fluid dynamic analysis
         to a wide range of aerospace and defense programs. Systems supported
         include military aircraft and missile systems, commercial launch
         vehicles, and ground transportation systems. Digital Fusion also
         develops and supports computational fluid dynamics software for various
         government agencies.



                                       4
<PAGE>

o        Missile Engineering/Thermal-Structural Modeling--Digital Fusion
         provides a spectrum of engineering analysis tools for the prediction of
         aerodynamic and thermal environments. Services include the prediction
         of aerospace vehicle structural and thermal response to applied
         aerodynamic environments.

Within these broad areas Digital Fusion provides specific expertise in the
following areas:

Polarimetric Systems - Digital Fusion is recognized as a leader in the field of
imaging polarimetry. Digital Fusion personnel support a wide range of activities
within this field including the design, fabrication, and testing of numerous
imaging polarimeters; polarimetric characterization and calibration of
polarimetric sensors and optical path; development of polarimetric sensor
performance models. Digital Fusion is involved with the integration of
polarimetric sensors onto several military platforms.

Aeromechanics - Digital Fusion possesses a high level of expertise in the
aeromechanics field. Personnel provide support in a wide range of disciplines
including aerodynamic analysis, thermal-structural analysis, aero-optic
analysis, aero-acoustic analysis, software development, and test support.
Digital Fusion is currently providing aerodynamic analysis to support the
development of several military platforms.

Summit Research

Summit Research Corp., a subsidiary of Digital Fusion, provides high-technology
engineering support and other technical service to DoD and industrial customers.
Summit's initial market focus has been technical support services for the US
Army Aviation and Missile Command, Redstone Arsenal, AL. Our rapid corporate
growth has brought together diverse, but complimentary, technical skills in
various engineering disciplines including modeling & simulation,
hardware-in-the-loop testing, mechanical design & prototype fabrication,
information technology and information management systems, program analysis, and
associated technology transfer into production automation processes. Our primary
services are:

o        Systems Engineering--Summit has established system engineering
         processes to ensure program success through a unified approach that
         completely defines all requirements on the system and establishes a
         system configuration that is proven early-on to be capable of meeting
         those requirements.

o        Software Engineering--Summit personnel develop automated tool suites
         for missile programs to provide a collaborative environment to
         facilitate information exchange to assist with risk mitigation and
         reduction in life cycle costs.

o        Mechanical Design and Analysis--Summit's capabilities include;
         prototype and production fabrication, structural analysis, and CAD data
         translation.

o        Project Management and Program Analysis--Summit understands a program's
         success is measured in terms of cost, schedule and technical
         performance. We have performed many tasks for multiple programs that
         include the tracking, predicting, and managing of cost/schedule
         utilizing a work breakdown structure (WBS) and master schedule
         architecture.

Within these broad areas Summit Research provides specific expertise in the
following areas:

System Simulation and Modeling--Summit supports customers with software
development tools such as the Common Simulation Framework (CSF) and Missile
Component Library (MCLib); which allow simulations to be built with a common
approach and facilitate development and analysis of missile subsystems and their
impact on the overall system. Our efforts allow for more rapid investigations
and trade studies to accurately predict missile and weapon system performance.

Propulsion Systems Technology--Summit provides specialized engineering analysis
and modeling of various propulsion systems. Propulsion models are generated to
simulate propulsion systems, examples include variable-area nozzles (VANs), gel
bipropellants, and advanced boost/sustain solid rocket motors (SRMs).

Guidance Technology--Summit's HardWare-In-the-Loop (HWIL) capabilities perform
test verification and quantification of real-time operation and performance of
missile systems including flight computer, ground station, semi-active laser
seeker, inertial sensors, and control actuation system.



                                       5
<PAGE>

Warheads--Provide design, prototyping, testing, and delivery of missile systems
that meet all system requirements and current Army safety standards.

     During 2004, Digital Fusion completed several strategic hires and continued
to devote  substantial  resources  to further  develop U.S.  federal  government
business  in order  to  accelerate  its  growth.  Digital  Fusion  continued  to
cultivate  existing  competencies and, through hiring and a recent  acquisition,
has gained new competencies  that are very marketable in both the commercial and
government sectors.  As a result of this strategy,  Digital Fusion is increasing
its penetration of the government sector and diversifying its business.

     Digital Fusion's strategic plan for business development continued to focus
on growth of its IT  consulting  services  that  focused on  providing  the best
technical solutions to business problems.  A significant new strategic focus for
the company's IT business is an aggressive  posture on collaboration and teaming
on federal  services  procurement  opportunities.  Digital Fusion places special
emphasis on helping  customers  maximize  their current IT systems to create the
most  cost-effective  solutions  to immediate  business  problems and make their
technology investments perform more efficiently.

                          Federal GSA IT Schedule Award

     During  October 2002,  Digital  Fusion was awarded a five-year  information
technology schedule by the U.S. General Services  Administration (GSA). This GSA
schedule was an intrinsic  part of Digital  Fusion's  strategic  plan to further
develop  its  public-sector  customer  base.  A GSA  schedule is one of the main
procurement  vehicles for  government  agencies.  Created by Congress to improve
government  efficiency,  the GSA helps  federal  agencies  acquire  supplies and
services such as IT consulting, equipment, telecommunications and office space.

                               Sales and Marketing

     Our marketing efforts are focused on creating awareness of opportunities in
commercial and government technology innovation,  establishing Digital Fusion as
a leader and building the Digital Fusion brand.

     We market and sell our  services  through  multiple  channels  by using our
business   development   staff,   leveraging   existing  client   relationships,
capitalizing   on  our  task  order   contracts,   responding   to   competitive
solicitations, attending marketing events and engaging in other public relations
activities.  We  employ  marketing  research  services  to  identify  and  track
potential  contract   opportunities.   We  also  cultivate   relationships  with
leading-edge technology vendors, such as Microsoft, and prime contractors,  such
as Science Applications International Corporation (SAIC), to identify and obtain
project  leads  consistent  with our  capabilities.  We  employ  a team  selling
approach,  whereby our business developers collaborate with our service delivery
professionals  and  management to identify  prospects,  conduct sales and manage
client  relationships.  Our Vice President of Strategic  Planning  initiates and
coordinates  the activities of our business  development.  We allocate  business
developers  to each of our  business  units who pursue new clients and  programs
across their market segments.  Each current client is assigned to a relationship
manager who is  responsible  for ensuring  client  satisfaction  and  successful
project performance, and identifying new business opportunities with the client.

                                   Customers

     Digital  Fusion's  customer  base  consists  primarily  of  businesses  and
government  organizations  with  system  engineering  and  integration,   system
modeling and simulation,  program management,  business application  development
and IT support and  integration  needs.  The company  has greatly  expanded  its
federal  customer  base and has  undertaken  an  aggressive  program  to further
increase  its  customer  base  in all of its  business  lines.  The  GSA  award,
mentioned   above,  is  an  important  part  of  this  effort  to  increase  our
governmental customer base.

         Customers during the year ended December 31, 2004 included:



                                       6
<PAGE>

<TABLE>
<CAPTION>

<S>     <C>    <C>    <C>    <C>    <C>    <C>
         ABN AMRO                        Alabama A & M University         SPARTA
         US Air Force                    Bentley Systems                  Bridgestone/Firestone
         Phifer Wire                     Commerce Bancorp                 Darden Restaurants
         Deutsche Bank                   Echelon/Florida Hospital         State of Florida
         General Dynamics                Hillsborough County, FL          Intergraph Corporation
         Intuit                          EDS                              Kingsway America
         Rheem                           M & R Marketing Systems          COLSA
         Marriott Vacation Club Int'l    National Computer Print          New York University
         Northrup Grumman                Orange County, FL                Progress Energy
         Protective Life                 SAIC                             Solutia
         State of Tennessee              CSC                              Watkins Motor Lines
         U.S. Army                       Vital Works

</TABLE>

                                   Competition

Our current competitors include, and may in the future include, the following:

o    information  technology services providers and large government contractors
     such as Accenture,  Booz, Allen & Hamilton,  Computer Sciences Corporation,
     Electronic Data Systems,  Bearing Point,  International  Business Machines,
     Science Applications International Corporation, Unisys, Lockheed Martin and
     Northrop Grumman; and

o    application services providers.

     Many of our  competitors  have long  operating  histories and strong client
relationships,  greater  financial,  technical,  marketing and public  relations
resources,  larger  client bases and greater brand or name  recognition  than we
have.

     We believe  that the major  competitive  factors in our market  relate to a
company's   distinctive   technical   capabilities,   successful  past  contract
performance,  reputation  for quality and key  management  and marketing  staff.
Under  best-value  procurement  methods,  price is an important,  but secondary,
factor in the selection of a technology service provider.

                                    Employees

     At December 31, 2004, Digital Fusion had 50 full-time  employees  including
six executive officers,  38 billable employees,  three people dedicated to sales
and marketing activities and four administrative personnel.

     To maximize the use of its  resources and evaluate the skills and knowledge
of  certain  prospective  employees,   the  Company  routinely  hires  temporary
personnel to satisfy demand for additional  personnel with new projects.  It has
also  implemented  an internal  skills-tracking  application  and other  support
systems.

                                 Geographic area

     The majority of the  Company's  customers  are from the United  States with
less  than 1%  derived  elsewhere.  This is also  representative  of  where  its
revenues are  derived.  All assets are located in the Eastern part of the United
States.

                                   Seasonality

     Quarterly  operating results are affected by the number of billable days in
the quarter,  holiday seasons and vacations.  Demand for the Company's  services
has  historically  been lower during the fourth  quarter as a result of holidays
and vacations.



                                       7
<PAGE>

Item 1A.
                      Risk Factors Related to Our Business

Revenues would decline if our relationships with agencies of the federal
government were harmed

     Our largest clients are agencies of the federal government.  If the federal
government in general,  or any significant  government agency,  uses less of our
services or  terminates  its  relationship  with us, our revenues  would decline
substantially,  and  our  business  would  be  seriously  harmed.  During  2004,
contracts with the federal  government  and contracts with prime  contractors of
the federal government accounted for approximately 36% of our services revenues.
We believe that federal government contracts are likely to account for a greater
portion of our revenues for the foreseeable  future.  The volume of work that we
perform for a specific client, however, is likely to vary from year to year, and
a significant client in one year may not use our services as extensively,  or at
all, in a subsequent year.

Major changes to the  government's  fundamental  organization  could  negatively
impact revenues

     The recent  establishment  of the  Department  of  Homeland  Security,  the
largest  government   reorganization  since  1947,  required  new  and  enhanced
oversight of technology spending programs at the numerous and disparate agencies
being  rolled  into the new  organization.  In some  cases,  certain  technology
projects are being  temporarily  halted until an Office of Management and Budget
review can be held to determine that technology  spending will not be duplicated
and thus wasted.  This can materially  impact our ability to begin or proceed on
work for clients affected by the reorganization.  Any future reorganization,  or
delays  in  technology  spending  that  might  result as the  reorganization  is
implemented, could adversely impact company revenues.

Our government contracts may be terminated prior to their completion,  and if we
do not replace them, our operating results may be harmed

     We derive some of our revenues from government contracts that typically are
awarded through competitive processes and span a one year base period and one or
more option years.  The unexpected  termination or non-renewal of one or more of
our significant  contracts could result in significant revenue  shortfalls.  Our
clients  generally  have the  right  not to  exercise  the  option  periods.  In
addition,  our contracts  typically contain  provisions  permitting an agency to
terminate the contract on short notice, with or without cause.

     Following termination,  if the client requires further services of the type
provided in the contract,  there is frequently a competitive re-bidding process.
We may not win  any  particular  re-bid  or be able to  successfully  bid on new
contracts  to  replace  those that have been  terminated.  Even if we do win the
re-bid,  we may  experience  revenue  shortfalls in periods where we anticipated
revenues  from  the  contract   rather  than  its   termination  and  subsequent
re-bidding.  These revenue  shortfalls  could harm  operating  results for those
periods.

Our lack of long-term  contracts with clients and our relatively fixed operating
expenses expose us to greater risk of incurring losses

     Our clients  retain us on an  engagement-by-engagement  basis,  rather than
under long-term  contracts.  We incur costs based on our  expectations of future
revenues.  Our operating  expenses are relatively fixed and cannot be reduced on
short notice to compensate for unanticipated variations in the number or size of
engagements  in progress.  These factors make it difficult for us to predict our
revenues and operating results.  If we fail to predict our revenues  accurately,
it may seriously harm our financial condition and results of operation.

A reduction in or the termination of our services could lead to underutilization
of our employees and could harm our operating results

     Our employee  compensation expenses are relatively fixed.  Therefore,  if a
client defers, modifies or cancels an engagement or chooses not to retain us for
additional  phases of a project,  our operating results will be harmed unless we
can rapidly  re-deploy our employees to other  engagements  in order to minimize
underutilization.



                                       8
<PAGE>

Failing to maintain strong  relationships with prime contractors could result in
a decline in our revenues

     We derived  approximately  36% of our services revenues during 2004 through
our  relationships  with prime  contractors,  which, in turn,  have  contractual
relationships  with  end-clients.  We  expect  to  continue  to  depend on these
relationships for a material portion of our revenues in the foreseeable  future.
If any of these prime contractors eliminate or reduce their engagements with us,
or have their engagements  eliminated or reduced by their  end-clients,  we will
lose a source of revenues,  which,  if not replaced,  will adversely  affect our
operating results.

We  must  recruit  and  retain   qualified   professionals  to  succeed  in  our
labor-intensive business

     Our future  success  depends in large  part on our  ability to recruit  and
retain  qualified   professionals  skilled  in  complex  information  technology
services and solutions,  including  encryption and other security systems.  Such
personnel are in great demand and are likely to remain a limited resource in the
foreseeable  future.  Competition for qualified  professionals  is intense.  Any
inability to recruit and retain a sufficient number of these professionals could
hinder the growth of our business.

We may lose money on fixed-price  contracts if we miscalculate  the resources we
need to complete the contract

     We  anticipate  an  immaterial  portion  of our  future  engagements  to be
contracted at a fixed price. Unlike time and materials  contracts,  for which we
are  reimbursed  based on our  actual  expenditures  of  resources,  fixed-price
contracts  require us to price our contracts by predicting our  expenditures  in
advance.  If we  miscalculate  the  resources  we need to  complete  fixed-price
engagements,  our operating results could be seriously harmed because we are not
compensated for the higher costs.

We could lose  revenues  and clients and expose our Company to  liability  if we
fail to meet client expectations

     We create,  implement  and  maintain  technology  solutions  that are often
critical  to our  clients'  operations.  If our  technology  solutions  or other
applications  have  significant  defects or errors or fail to meet our  clients'
expectations, we may:

o    lose revenues due to adverse client reaction;

o    be required to provide  additional  remediation  services to a client at no
     charge;

o    receive negative publicity, which could damage our reputation and adversely
     affect our ability to attract or retain clients; and

o    suffer  claims  for  substantial  damages  against  us,  regardless  of our
     responsibility for the failure.

     While many of our contracts  limit our liability for damages that may arise
from negligent acts, errors,  mistakes or omissions in rendering services to our
clients,  we cannot be sure that these  contractual  provisions  will protect us
from liability for damages if we are sued.  Furthermore,  our general  liability
insurance  coverage may not continue to be available on  reasonable  terms or in
sufficient  amounts  to cover  one or more  large  claims,  or the  insurer  may
disclaim coverage as to any future claim. The successful  assertion of any large
claim against us could seriously harm our business. Even if not successful, such
claims  could  result  in  significant  legal  and  other  costs  and  may  be a
distraction to management.

Security  breaches in sensitive  government  systems could result in the loss of
clients and negative publicity

     Many of the systems we develop involve managing and protecting  information
involved in law enforcement and other sensitive government functions. A security
breach in one of these systems  could cause serious harm to our business,  could
result in negative  publicity and could prevent us from having further access to
such critically  sensitive systems or other similarly  sensitive areas for other
governmental  clients.  Losses that we could  incur from such a security  breach
could  exceed the policy  limits  that we have for  "errors  and  omissions"  or
product liability insurance.



                                       9
<PAGE>

If we cannot obtain the  necessary  security  clearances,  we may not be able to
perform classified work for the government and our revenues may suffer

        Government contracts require us, and some of our employees, to maintain
security clearances. If we lose or are unable to obtain security clearances, the
client can terminate the contract or decide not to renew it upon its expiration.
As a result, to the extent we cannot obtain the required security clearances for
our employees working on a particular engagement, we may not derive the revenue
anticipated from the engagement, which, if not replaced with revenue from other
engagements, could seriously harm our operating results.

We  depend  on our  senior  management  team,  and the  loss of any  member  may
adversely affect our ability to obtain and maintain clients

     We believe that our success will depend on the continued  employment of our
senior  management  team,  including  Roy E. Crippen,  III, our Chief  Executive
Officer,  and Gary S. Ryan,  our President  and Chief  Operating  Officer.  This
dependence  is  particularly   important  to  our  business   because   personal
relationships  are a  critical  element  of  obtaining  and  maintaining  client
engagements. If one or more members of our senior management team were unable or
unwilling  to  continue  in  their  present  positions,  such  persons  would be
difficult to replace and our business  could be seriously  harmed.  Furthermore,
clients or other companies  seeking to develop  in-house  capabilities  may hire
away some of our key  employees.  Employee  defections to clients or competitors
would not only result in the loss of key  employees but could also result in the
loss of a client  relationship  or a new  business  opportunity.  Any  losses of
client relationships could seriously harm our business.

We may  not be  able to  successfully  identify,  manage, finance and integrate
future acquisitions, which may harm our operating results

     We may use a portion of the proceeds from public  offerings and  operations
to acquire companies or businesses that are complementary to ours.  However,  we
have no  immediate  plans  or  current  agreements  to  acquire  any  additional
companies  or  businesses,  and we  cannot  assure  you  that we  will  identify
appropriate acquisition candidates. If we do identify an appropriate acquisition
candidate,  we cannot assure you that we would be able to successfully negotiate
the terms of an  acquisition,  finance the acquisition or integrate the acquired
business into our existing business.  Negotiations of potential acquisitions and
the integration of an acquired  business could disrupt our business by diverting
management away from  day-to-day  operations.  Further,  failure to successfully
integrate any acquisition may cause  significant  operating  inefficiencies  and
adversely  affect our  profitability.  Consummating a merger could require us to
raise additional funds through  additional equity or debt financing.  Additional
equity financing could result in further dilution of the per share value of your
stock.   Additional  debt  financing  could  force  us  to  accept   contractual
limitations that could harm our ability to grow.

Audits of our  government  contracts  may result in a  reduction  in revenues we
receive from those  contracts or may result in civil or criminal  penalties that
could harm our reputation

     Federal  government  agencies routinely audit government  contracts.  These
agencies review a contractor's  performance on its contract,  pricing practices,
cost structure and compliance with applicable  laws,  regulations and standards.
An audit could result in a substantial  adjustment  to our revenues  because any
costs  found to be  improperly  allocated  to a  specific  contract  will not be
reimbursed,  while  improper  costs already  reimbursed  must be refunded.  If a
government audit uncovers improper or illegal  activities,  we may be subject to
civil and criminal penalties and administrative sanctions, including termination
of  contracts,   forfeiture  of  profits,  suspension  of  payments,  fines  and
suspension or debarment from doing business with federal government agencies. In
addition,   we  could  suffer  serious   reputational  harm  if  allegations  of
impropriety were made against us.

We may be  liable  for  penalties  under a  variety  of  procurement  rules  and
regulations,  and  changes in  government  regulations  could slow our growth or
reduce our profitability

     We must comply  with and are  affected  by federal  government  regulations
relating  to  the  formation,   administration  and  performance  of  government
contracts.  These regulations affect how we do business with our clients and may
impose added costs on our business.  Any failure to comply with  applicable laws
and regulations could result in contract termination, price or fee reductions or
suspension or debarment from contracting with the federal  government.  Further,
the  federal  government  may  reform  its  procurement  practices  or adopt new



                                       10
<PAGE>

contracting  methods  relating  to the GSA  schedule  or  other  government-wide
contract vehicles.  If we are unable to successfully adapt to those changes, our
business could be seriously harmed.

Our failure to adequately  protect our confidential  information and proprietary
rights may harm our competitive position

     While our employees execute confidentiality agreements, we cannot guarantee
that  this  will be  adequate  to  deter  misappropriation  of our  confidential
information.  In addition,  we may not be able to detect unauthorized use of our
intellectual  property in order to take appropriate steps to enforce our rights.
If third parties infringe or misappropriate our copyrights,  trademarks or other
proprietary information,  our competitive position could be seriously harmed. In
addition,  other parties may assert infringement claims against us or claim that
we have violated their intellectual  property rights.  Such claims,  even if not
true, could result in significant legal and other costs and may be a distraction
to management.

Changes to federal  government  procurement  rules and regulations  could impact
revenues

     While  the  government  procurement  changes  of  the  mid-1990s  generally
benefited  companies  servicing  the  federal  government  (such  as  government
agencies being able to award  outsourcing  contracts  based on "best value" over
lowest  price),  any future  changes  that sought to limit or reduce  government
outsourcing,  perhaps,  for  example,  bringing  more  technology  systems  work
"in-house," could have a negative impact on company revenues.

Continued involvement in Iraq, or other nations, could impact federal government
spending on our civilian and defense programs

     Although  our  work  focuses  primarily  on our  clients'  mission-critical
programs, continued involvement in Iraq or a war in another country could change
the federal government's spending priorities for domestic and military programs.
Spending  on  our  clients'  programs  could  also  be  negatively  impacted  by
Congress's  unwillingness to pass the necessary  appropriation bills required to
pay for a war effort.

Website Access to Reports

     Our filings with the U.S.  Securities and Exchange  Commission  (the "SEC")
and other information,  including our Ethics Policy, can be found on the Digital
Fusion  website  (www.digitalfusion.com).  Information  on our website  does not
constitute part of this report.

     We make available free of charge,  on or through our Internet  website,  as
soon as reasonably  practicable after they are electronically filed or furnished
to the SEC,  our annual  reports on Form 10-K,  quarterly  reports on Form 10-Q,
current  reports on Form 8-K and  amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934.

Item 2.       Description of Property

     Digital  Fusion  serves its customers  through its corporate  headquarters,
located in  Huntsville,  Alabama,  and regional  offices  located in New Jersey.
Digital  Fusion also  conducts  business in Florida and  Washington,  DC through
satellite offices.

     The Company does not own any real property and is currently  conducting its
operations at the following leased premises:



                                       11
<PAGE>

<TABLE>
<CAPTION>

                                                                                    Approximate
                                                                   Approximate        Annual
Location                            Description of Facility       Square Footage    Lease Cost       Lease Term
--------                            -----------------------       --------------    -----------      ----------
<S>                                                                  <C>                <C>        <C>   <C>  <C>  <C>
4940-A Corporate Drive              Corporate                        3,239              $38,484    12/31/04 - 6/30/07
Huntsville, AL 35805                headquarters,
                                    administration, sales,
                                    customer support, and
                                    programming services

7067 Old Madison Pike               Sales, customer support          11,115            $131,712    10/1/04 - 9/30/07
Suite 170                           and programming services
Huntsville, AL 35806

3 South Broad Street                Sales, customer                  1,390              $20,850    9/1/03 - 8/31/06
Suite 2D                            support, and
Woodbury, NJ  08096                 programming services

3430 Sunset Avenue                  Administration, sales             300                $3,780    Month-to-Month
Suite 20                            and  customer support
Ocean, NJ  07712
</TABLE>


The Company believes that all of its leased premises are in generally good
condition, well maintained, and adequate for current operations.


Item 3.       Legal Proceedings

     The Company is involved in certain legal actions  arising from the ordinary
course of business.  There are  currently no legal items in which the Company is
defending itself, however the Company is pursuing certain proceedings.  While it
is not  feasible  to predict or  determine  the  outcome of these  matters,  any
outcome would have a favorable impact on the Company, the amount which currently
cannot be determined.

Item 4.       Submission of Matters to a Vote of Security Holders


     No matters were submitted to a vote of security  holders during the quarter
ended December 31, 2004.



                                       12
<PAGE>

                                     PART II


Item 5.       Market for Common Equity and Related Stockholder Matters

     Digital  Fusion's  common  stock was traded on The NASDAQ  Small Cap Market
under the symbol "DIGF" from May 15, 1998 to May 8, 2003.  Prior to May 15, 1998
there was no established market for its common stock.

     Effective  May 9, 2003,  the Company was  de-listed by The NASDAQ Small Cap
Market, and is currently being traded on the OTC Bulletin Board under the symbol
"DIGF." The following  table  indicates  high and low sales  quotations  for the
periods indicated.  Such quotations reflect inter-dealer prices,  without retail
mark-up,  mark-down or  commission,  and may not  necessarily  represent  actual
transactions.

<TABLE>
<CAPTION>

                              2004                       High                      Low
                              ----                       ----                      ---
<S>                                                      <C>                      <C>
                    First Quarter                        $0.45                    $0.29

                    Second Quarter                       $1.41                    $0.35

                    Third Quarter                        $1.50                    $0.86

                    Fourth Quarter                       $3.30                    $1.03


                              2003                       High                      Low
                              ----                       ----                      ---
                    First Quarter                        $0.46                    $0.19

                    Second Quarter                       $0.45                    $0.15

                    Third Quarter                        $0.44                    $0.30

                    Fourth Quarter                       $0.45                    $0.22

</TABLE>


     The number of holders of record of common stock on March 7, 2005 was 103.

     There were no dividends or other  distributions  made by the Company during
the fiscal year ended  December 31, 2004 with respect to its common  stock.  The
Company  currently  intends to retain any earnings to provide for the  operation
and expansion of its business and does not anticipate  paying any cash dividends
to the holders of its common stock in the foreseeable future.


Sales of Unregistered Stock

     Sales of unregistered  stock during the preceding  three-year period (other
than sales of  unregistered  stock issued  during the fourth  quarter 2004) have
been previously  reported on Forms 10-KSB and 10-QSB and are  incorporated  into
this 10-KSB by reference.

     On October  21,  2004,  the Company  sold 1.65 million shares of its common
stock at $1.00 per share. The Company received proceeds of $1.65 million.



                                       13
<PAGE>

Item 6. Management's  Discussion and Analysis of Financial Condition
        and Results of Operations

     The  following  discussion  and analysis  should be read  together with the
consolidated  financial  statements  and  notes  to  such  statements  appearing
elsewhere herein.

                                    OVERVIEW

     Digital  Fusion,  Inc.  (used  herein,  "Digital  Fusion",  "DFI",  and the
"Company",  refer to Digital  Fusion,  Inc.) is an  information  technology  and
engineering  services  company  that  helps  its  customers  make  the  most  of
technology to meet their  business  needs.  The  Company's IT Services  division
provides solutions to both government and commercial  customers,  focused in the
following areas: Business process Automation,  Application  Development and Data
Management,  Application  Security,  Web Portals and Digital Dashboards,  System
Integration  and IT Support.  Digital  Fusion's  Engineering  Services  division
supports a variety of customers  with  state-of-the  art solutions  that include
Computational  Aerodynamics/CFD,  Optical Systems Design,  Development and Test,
Thermo/structural Dynamics, Models and Simulations,  and Ground/Flight Planning,
Execution, and Data Analysis. Based in Huntsville,  Alabama, Digital Fusion also
has an office in New Jersey and satellite offices in Florida and Washington DC.

     Revenues  are derived  primarily  from fees earned in  connection  with the
performance of services provided to customers. The Company typically invoices on
a time and materials basis. The majority of costs are associated with personnel.
Attracting  and  retaining  billable  employees is vital for the Company to move
forward. Quarterly operating results are affected by the number of billable days
in the  quarter,  holiday  seasons,  and  vacations.  Demand  for the  Company's
services  has  historically  been lower  during the  fourth  quarter  because of
holidays  and  vacations.  During  2004,  all  Track-It!  product  sales were to
governmental entities where margins are lower.

     On May 5, 2004,  Digital  Fusion  hired Mr. Gary Ryan as  President  and on
September 13, 2004,  Digital Fusion employed Mr. Edward G. Rawlinson as its Vice
President of its newly created Engineering Services Division. With the hiring of
these two  individuals,  Digital  Fusion is poised to exploit the  opportunities
that the Engineering Services market has.

     During  2004,  due to  increased  competition  and  the  Company's  largest
customer  moving their IT support  services  work  in-house,  our IT Support and
Integration division was phased out.

     The Company  incurred  losses of $1,044,000  and $395,000 in 2004 and 2003,
respectively,  and cash  flow  deficiencies  from  operations  of  $990,000  and
$107,000 in 2004 and 2003,  respectively.  With the creation of the  Engineering
Services  Division during  September 2004 and the acquisition of Summit Research
Corp. on January 3, 2005, Digital Fusion greatly expanded its services offerings
and past  performance with  governmental  customers and federal prime contracts.
The Engineering  Services  Division  specializes in the design,  development and
integration  of advanced  sensing  systems as well as  aerodynamic  analysis and
thermal-structural  analysis.  The Summit Engineering  Division provide services
that include  modeling & simulation,  hardware-in-the-loop  testing,  mechanical
design  &  prototype   fabrication,   information   technology  and  information
management systems,  program analysis,  and associated  technology transfer into
production  automation  processes.  These new  divisions  give the  Company  the
ability to capitalize on the increased  spending by the governmental  sector due
to increased military and homeland security spending.

     With the newly formed Engineering  Services Division and the acquisition of
Summit, the Company believes it has taken the necessary steps to attain positive
cash flow from  continuing  operations  during  early  2005.  The  Company  will
continue to focus on consistent collections of accounts receivable and continued
improvements in its operational  performance.  Company management believes that,
as a result of these  actions  and  assuming  it can grow its client base in the
private  and federal  sectors,  it  currently  has  sufficient  cash to meet its
funding  requirements  over the next year,  although the Company has experienced
negative cash flows from operations and incurred large net losses in the past.



                                       14
<PAGE>

                              RESULTS OF OPERATIONS

Revenues.

     Consulting revenues decreased $1.1 million or 18%, from $6.1 million during
2003, to $5.0 million during 2004.  During 2004, our largest customer  gradually
reduced its  outside IT  assistance  to -0- by the end of the year.  The revenue
recorded by Digital  Fusion from this  customer was $1.2  million  lower in 2004
compared to 2003.  This customer  accounted  for 28% of the  Company's  revenues
during 2003. No customer accounted for over 10% of the Company's revenues during
2004.  The  Engineering  Services  Division,  which was formed in late September
2004, contributed  approximately $450,000 of revenues during 2004. The remaining
decrease of  approximately  $300,000  was mainly from the closing of the Florida
and New York  offices  and reduced  revenues  from other  customers  from the IT
Support and Integration division that was phased out during 2004.

     During  the  second  quarter  of 2003,  the  Company  began  reselling  the
Track-It!  software from Intuit.  Total sales for the  year-ending  December 31,
2004 and 2003 were  $1,775,000  and  $345,000,  respectively.  The $1.4  million
increase in products  sales  during 2004  compared to 2003 is due to the Company
having  a full  year of  sales  during  2004 and the  Company  pursuing  federal
business through its GSA schedule.

Cost of Services.

     Cost of services and goods sold consists primarily of salaries and expenses
of programming and technical personnel, expenses related to applications sold to
customers,  and fees paid to outside  consultants engaged for customer projects.
Consulting cost of services decreased by $.3 million or 5% from $4.6 million for
2003 to $4.3 million for 2004.  The  decrease is mainly due to the  reduction of
consulting services personnel as revenues decreased.

     The product cost of goods sold represents the cost to Digital Fusion to buy
the Intuit product Track-It!. The product cost of goods sold increased from $0.3
million during 2003 to $1.7 million  during 2004.  This increase in product cost
of goods sold is from i) increased  products  sales and ii) Digital Fusion began
reselling  the Intuit  product  Track-It!  during  the  second  quarter of 2003,
therefore 2003 does not have a full year of product revenue

Gross Profit.

     Services  gross profit is $0.7 million or 13% of revenues in 2004  compared
to $1.5  million or 25% of services  revenues in 2003.  The decrease in services
gross  profit as a percent  of  revenues  is due to  decreased  sales  without a
corresponding decrease in direct labor costs.

     During the second quarter of 2003,  the Company began  reselling the Intuit
product Track-It! to governmental organizations.  Gross profit for product sales
in 2003 is 5.8% and 2004 is 5.7%.  The low  profit  margin on  product  sales is
attributable to the low mark-up required on sales to governmental entities.

Selling, General and Administrative.

     Selling,  general and  administrative  (SG&A) expenses consist primarily of
salaries of accounting,  finance, sales, and administrative personnel,  expenses
associated with marketing  literature,  advertising,  and direct  mailings,  and
professional  fees and costs associated with the  administration of the Company.
SG&A  expenses  were  approximately  the same for 2004 and 2003 at $1.7  million
during both years. During the first nine months of 2004, the SG&A was lower than
for the same period during 2003 by approximately $0.2 million due to closing the
Tampa  headquarters  during 2003 and some assets were fully  depreciated in 2004
compared to 2003. The SG&A expenses  increased during the fourth quarter of 2004
compared to 2003 due to creating the Engineering Services Division which had its
own facility and associated costs.

Interest Expense.

     Interest   expense  was  $147,000  and  $195,000   during  2004  and  2003,
respectively.  The  majority  of this  interest  is related  to a  convertible
debenture (which includes the  amortization of deferred  financing fees) and the
notes  associated  with  buying a  division  in a prior  year.  The  convertible
debenture was paid off during 2004. The Company expects its interest  expense to
be higher  during 2005 than 2004 as it has  acquired Summit and used its line
of credit to fund part of the purchase.



                                       15
<PAGE>

Income Tax Provision.

         The Company has not recognized an income tax benefit for its operating
losses generated during 2004 and 2003 based on uncertainties concerning its
ability to generate taxable income in future periods. The tax benefit for 2004
and 2003 is offset by a valuation allowance established against deferred tax
assets arising from operating losses and other temporary differences, the
realization of which could not be considered more likely than not. In future
periods, tax benefits and related deferred tax assets will be recognized when
management considers realization of such amounts to be more likely than not.

Net loss.

     The Company has incurred net losses of $1,044,000 for 2004 and $395,000 for
2003.  The  increase  in the net loss  from  2003 to 2004 is  mainly  due to the
decreased revenue from the services business without a corresponding decrease in
direct labor costs. This decrease was offset by an increase in product revenues,
however the margins are much lower for this division  which is  attributable  to
the low mark-up required on sales to governmental entities.

Liquidity and Capital Resources.

     Net cash used in operating  activities  increased  from $107,000 in 2003 to
$990,000 in 2004.  This increase in cash used in operations is mainly due to the
reduction in services revenues without a corresponding  decrease in direct labor
costs and an increase in the Company's accounts receivable balance due to higher
revenues  during the fourth quarter of 2004 compared to 2003 and a different mix
of customers which includes more governmental  customers  accessed through prime
contractors.

     Net cash  used in  investing  activities  was  $436,000  in 2004.  This was
primarily for the purchase of upgraded  computer  equipment for the consultants.
The Company does not anticipate having  significant  equipment  purchases during
2005.  However,  to support  substantial  growth going  forward,  investments in
certain equipment will be required.

     During 2004, the Company entered into an acquisition  agreement to purchase
Summit.  The Company incurred $35,000 of acquisition  costs and paid $250,000 to
an escrow for this acquisition.

     Under the terms of the Summit acquisition  agreement,  the Company will pay
(a) $1,600,000 in cash at the closing of the transaction  (the  "Closing"),  (b)
575,000  shares of the  Company's  common  stock as of the  Closing,  (c) on the
six-month  anniversary of the Closing,  $600,000 cash plus an additional  amount
equal to the excess of Summit's  tangible  net worth as of the Closing in excess
of $900,000 and (d) a convertible  promissory  note in the cumulative  amount of
$2,700,000.  To the extent that Summit's tangible net worth as of the Closing is
less than $900,000,  the convertible  note shall be reduced by that same amount.
This  transaction  closed on January 3, 2005.  The  convertible  note requires a
$600,000 principal payment on December 31, 2005.

     The principal  portion of the convertible note may be converted at any time
by Wicks into a number of shares determined by dividing the converted  principal
amount of the  convertible  note by the conversion  price of $2.25 per share. In
the event the entire  convertible  note is  converted,  the Company  would issue
1,200,000  shares of the Company's common stock. No interest shall accrue on the
convertible  note during any calendar month in which the Company's  common stock
is publicly traded and the average  closing price of the Company's  common stock
is greater than $2.80 per share.

     On July 1, 2004,  Digital Fusion  entered into a secured  revolving line of
credit with a local bank.  The line of credit has an interest rate of prime plus
one percent, is secured by the Company's receivables and certain guarantees, and
is not to exceed  $800,000  which was  increased to the lower of 80% of accounts
receivable or  $2,500,000  on December 22, 2004. On March 10, 2005,  DFI amended
this loan  agreement.  The Amendment (i) extended the maturity date to April 10,
2006,  (ii)  stated the rate of  interest  at prime,  payable  monthly and (iii)
secured the line of credit by the Company's  receivables and certain guarantees.
The Company  used  $700,000 of this line of credit to finance part of the Summit
acquisition in January 2005.

     During  2004,  the  Company  paid in full the  convertible  notes  from its
primary  lender and  restructured  its  PowerCerv  note payable  which  requires
principal  payments of $4,400 plus interest during 2005. The total debt payments
during 2004 were $542,000.



                                       16
<PAGE>

     During 2004, the Company  received  $2,086,000 (net of offering costs) from
the sale of common stock.

     Going  forward,  Digital  Fusion's  ability  to grow  substantially  may be
dependent  upon  obtaining  cash flow  from its  operations  and other  external
sources.

     The  Company's  working  capital  deficit at December  31, 2004 is $60,000;
however the Company is in the process of extending for two years a note that has
approximately $440,000 of principal due currently.  The note holders have agreed
to extend their debt;  however the final terms of this  extension  have not been
completed and may include an option to convert the debt to common stock.

     The net accounts  receivable  balance  outstanding  at December 31, 2004 is
$1.1  million.  The  Company  has  funded  its  cash  needs  through  consistent
collections of accounts  receivable,  through the convertible note issued by its
former  primary  lender in July 2002,  restructured  in April 2003 and 2004, and
paid in full July 1, 2004,  through the  completion  of its two equity  sales to
Madison Run, LLC, and with  obtaining a line of credit with a local bank secured
by the  Company's  receivables  and certain  guarantees,  at an interest rate of
prime, not to exceed $2,500,000.

     Management is currently building  relationships  where Digital Fusion would
be the service  provider  in the  relationship.  During  October  2002,  DFI was
awarded  its  five-year  information  technology  schedule  by the U.S.  General
Services  Administration  (GSA),  which  makes the  Company's  services  readily
available to federal agencies.

     During  the third  quarter  2004,  Digital  Fusion  began  selling  the SPI
Dynamics  Information  Assurance  product line  WebInspect.  Digital Fusion is a
Value  Added  Reseller  (VAR)  for SPI  Dynamics.  WebInspect  audits  web based
applications  and determines  security  vulnerabilities.  Digital Fusion markets
these  products  along with  remediation  services to commercial  and government
customers.

     The federal  services market is expected to increase with the employment of
Gary  Ryan as the  Company's  president  on May 5,  2004,  the  addition  of the
Company's  Engineering  Services Division and the acquisition of Summit Research
Corporation.

     The Company has taken numerous  actions to  restructure  and streamline the
Company, adding an Engineering Services Division, which includes the acquisition
of a high technology  engineering firm,  completing two equity sales,  paying in
full its outstanding debt to its former primary lender,  and establishing a line
of credit with a local bank.  Because of these actions,  management  believes it
has  enough  cash to meet its  funding  requirements  over the  next  year.  The
Company's current growth has been funded through internally generated funds, the
completion  of two equity sales,  and its line of credit.  Future growth will be
supported with revenue from continuing operations, the Company's new Engineering
Services  division and the acquisition of Summit, a high technology  engineering
firm. If the Company fails to meet its goals,  seeks to expand its operations at
a level above its  current  cash flow from  operations,  or does not collect its
accounts  receivable in a timely  manner,  it may require an infusion of working
capital the availability and terms of which can not be predicted.

Off-Balance Sheet Arrangements

     The company does not have any off-balance sheet arrangements.

Fluctuations in Operating Results.

     The Company's operating results may fluctuate  significantly from period to
period as a result of the length of its sales cycles, customer budgeting cycles,
the  introduction  of new products and  services by  competitors,  the timing of
expenditures,  pricing  changes in the  industry,  technical  difficulties,  and
general  economic  conditions.  The nature of the Company's  business  generally
requires making expenditures and using significant resources prior to receipt of
corresponding  revenues.  Operating  results can also  fluctuate  based upon the
number of billable days in a reporting period and the fourth quarter results are
normally lower due to the holiday season and vacation time.

Inflation.

     Inflation  has not had a  significant  impact on the  Company's  results of
operations.



                                       17
<PAGE>

Certain Factors Which May Affect the Company's Future Performance

CRITICAL ACCOUNTING POLICIES

     The  Securities  and Exchange  Commission  has  indicated  that a "critical
accounting  policy"  is one  which  is  both  important  to the  portrayal  of a
company's  financial  condition  and  results  and  requires  management's  most
difficult,  subjective,  or complex judgments,  often as a result of the need to
make estimates  about the effect of matters that are inherently  uncertain.  The
Company believes that the following accounting policies fit this definition:


Allowance for doubtful accounts.

     Certain of the Company's trade accounts  receivable are subject to bad debt
losses. A reserve has been recorded to reflect expected bad debt losses based on
past experience with similar accounts  receivable.  The reserve is reviewed on a
regular  basis and  adjusted as  necessary.  Although  management  believes  the
reserve  is a  reasonable  approximation,  there  can be no  assurance  that the
Company can accurately estimate bad debt losses on its accounts receivable.

Valuation of Goodwill.

     The  Company's  goodwill  is  reviewed  annually  for  impairment  or  more
frequently  if  impairment  indicators  arise.  The  annual  impairment  test is
performed  in the fourth  quarter of each fiscal year.  The goodwill  impairment
test  requires a  comparison  of the fair value of the  Company to the amount of
goodwill  recorded.  If the  comparison  reflects  impairment,  then the loss is
calculated  as the excess of  recorded  goodwill  over its  implied  fair value.
Although  management  believes valuation is a reasonable  approximation,  actual
results could differ from those projected.

DIGITAL FUSION HAS A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE ITS BUSINESS.

     The Company has been in operation  since 1995 and many of its services have
only been offered since 1997 or later.  In 1999 and 2000,  the Company  acquired
multiple  companies.  In 2000 and  2001,  it sold  off  multiple  divisions  and
underwent significant restructurings.  In 2001 and 2004, there was a significant
change in  management.  As a result of the  change in  management  and  business
units, prior operating history may not be representative of current  operations,
which makes it difficult to evaluate the Company and forecast future results.

THE COMPANY HAS EXPERIENCED SIGNIFICANT PRIOR OPERATING LOSSES. IF IT DOES NOT
GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS OR IS UNABLE TO RAISE CAPITAL IN
SUFFICIENT AMOUNTS, IT MAY BE UNABLE TO CONTINUE TO OPERATE.

     Digital Fusion has experienced significant losses in its operations. It may
continue to incur losses for the foreseeable future. For the year ended December
31,  2003  and  2004  losses  from  continuing  operations  were  $395,000,  and
$1,044,000  respectively.  Its  expenses  may  increase  as it seeks to grow its
business and as business grows. Even if the Company becomes  profitable,  it may
be unable to sustain  profitability.  It may not generate  sufficient  cash flow
from  operations or be able to raise capital in sufficient  amounts to enable it
to continue to operate. An inability to sustain profitability may also result in
an impairment loss in the value of long-lived assets, such as goodwill, property
and  equipment,  and other tangible and  intangible  assets.  If it is unable to
generate  sufficient  cash flow from  operations  or raise capital in sufficient
amounts, the Company may be unable to continue as a going concern.

A LOSS OF A SIGNIFICANT CUSTOMER COULD SUBSTANTIALLY DECREASE REVENUES.

     The Company  expects it will have several large  customers  associated with
its Engineering services department and the Summit acquisition. A termination by
a major customer could substantially decrease revenues.



                                       18
<PAGE>

IF REVENUES DO NOT MEET FORECASTED REVENUE, IT MAY HAVE AN ADVERSE EFFECT ON THE
COMPANY'S FINANCIAL CONDITION, AND COULD CAUSE MATERIAL LOSSES.

     A large  portion of the revenues  derived from the  consulting  business is
generally non-recurring in nature. There can be no assurance that Digital Fusion
will  obtain  additional  contracts  for  projects  similar  in  scope  to those
previously  obtained from any of its  customers,  that it will be able to retain
existing customers or attract new customers,  or that it will not remain largely
dependent  on a limited  customer  base,  which may  continue  to account  for a
substantial portion of revenues.  In addition,  the Company is generally subject
to delays in customer  funding,  lengthy  customer review processes for awarding
contracts,  non-renewal,  delay,  termination,   reduction  or  modification  of
contracts  in the  event of  changes  in  customer  policies  or as a result  of
budgetary constraints,  and increased or unexpected costs resulting in losses in
the event of "fixed-price" contracts.

     The Company may increase its  operating  expenses to increase the number of
its sales,  marketing and technical  personnel to sell,  provide and support its
products and services.  It may not be able to adjust spending  quickly enough to
offset  any  unexpected  revenue  shortfall.  It may have  significant  accounts
receivable  balances  with  customers  that  expose it to  credit  risks if such
customers  are  unable to settle  such  obligations.  If there is an  unexpected
shortfall in revenues in relation to expenses,  or significant bad debt expense,
there could be a material adverse effect on the Company's  financial  condition,
and it could suffer material losses.

IF DIGITAL FUSION FAILS TO ADEQUATELY KEEP UP WITH THE RAPIDLY CHANGING,
EVOLVING INFORMATION TECHNOLOGY MARKET, IT MAY NOT BE ABLE TO ATTAIN
PROFITABILITY.

     The markets for some of the  Company's  services  are rapidly  changing and
evolving, and therefore the ultimate level of demand for its services is subject
to a  high  degree  of  uncertainty.  Any  significant  decline  in  demand  for
programming  and  applications   development  and  IT  support  and  integration
consulting services could materially adversely affect its business and prospects
and it may not be able to attain profitability.

     The Company's  success is dependent on its ability to  continually  attract
and retain new customers as well as to replace customers that do not renew their
contracts.  Achieving  significant  market  acceptance will require  substantial
efforts and expenditures to create awareness of its services.

THE COMPANY MAY NOT HAVE THE RESOURCES TO COMPETE EFFECTIVELY WITH LARGER
COMPETITORS, WHICH COULD RESULT IN LOST MARKET SHARE AND DECREASED PRICING.

     Competition for the Internet and IT consulting services that Digital Fusion
provides is significant,  and the Company expects that competition will continue
to  intensify  due to the  ease of  entering  that  market.  It may not have the
financial  resources,  technical  expertise,  sales and  marketing,  or  support
capabilities to successfully meet this  competition.  If it is unable to compete
successfully  against  such  competitors,  it will  lose its  market  share.  It
competes against numerous large companies that have substantially greater market
presence,  longer  operating  histories,  more  significant  customer bases, and
greater  financial,   technical,   facilities,   marketing,  capital  and  other
resources.

     The  Company's  competitors  may respond more quickly than it can to new or
emerging technologies and changes in customer requirements.  The competitors may
also devote greater resources to the development,  promotion,  and sale of their
products and services.  They may develop Internet products and services that are
superior to or have greater market acceptance than Digital Fusion's. Competitors
may also engage in more  extensive  research  and  development,  undertake  more
extensive marketing campaigns,  adopt more aggressive pricing policies, and make
more  attractive  offers to  existing  and  potential  employees  and  strategic
partners.

     New competitors,  including large computer software, professional services,
and other technology and telecommunications  companies,  may enter the Company's
markets and rapidly acquire  significant  market share. As a result of increased
competition  and vertical and horizontal  integration  in the industry,  Digital
Fusion could encounter  significant  pricing pressures.  These pricing pressures
could result in significantly  lower average selling prices for its products and
services.  It may not be able to offset the effects of any price reductions with
an increase in the number of customers, higher revenue from consulting services,
cost reductions or otherwise. In addition,  professional services businesses are
likely to  encounter  consolidation  in the near  future,  which could result in
decreased pricing and other competition.



                                       19
<PAGE>

IF THE COMPANY IS UNABLE TO MAINTAIN EFFICIENT AND UNINTERRUPTED OPERATION OF
ITS COMPUTER SYSTEMS, IT COULD CAUSE THE LOSS OF CERTAIN CUSTOMERS.

     Some of the Company's  business depends on the efficient and  uninterrupted
operation   of  its   computer   and   communications   hardware   systems   and
infrastructure.  Currently,  most  of  its  computer  systems  are  located  and
maintained  in  its  corporate   headquarters  in  Huntsville,   Alabama.  While
precautions have been taken against systems failure,  interruptions could result
from  natural  disasters as well as power loss,  telecommunications  failure and
similar events. A disaster recovery plan is being implemented to avoid any major
interruptions.  The Company also leases  telecommunications lines from local and
regional carriers, whose service may be interrupted.  Any damage or failure that
interrupts or delays network operations could result in an unacceptable level of
service to customers and their possible loss.

IF THE COMPANY IS UNABLE TO MAINTAIN THE SECURITY INTEGRITY OF ITS SYSTEMS, IT
MAY RESULT IN A LIABILITY TO THE COMPANY OR A LOSS OF CUSTOMERS.

     Although measures have been taken to protect the integrity of the Company's
infrastructure  and the privacy of confidential  information,  it is potentially
vulnerable to physical or electronic  intrusions,  computer viruses,  or similar
issues.  If the security  measures are circumvented the security of confidential
information stored on the system could be jeopardized,  proprietary  information
misappropriated,  or operations interrupted. The Company may be required to make
significant  additional  investments  and  efforts to protect  against or remedy
security  breaches.  Security  breaches  that  result in access to  confidential
information  could  damage  its  reputation  and  expose it to a risk of loss or
liability.

     The security services that are offered in connection with customers' use of
the  networks  cannot  guarantee  complete  protection  from  computer  viruses,
break-ins and other  disruptive  problems.  Although an attempt is made to limit
contractually the liability in such instances,  the occurrence of these problems
may result in claims against the Company or liability on its part. These claims,
regardless of their  ultimate  outcome,  could result in costly  litigation  and
could have a material  adverse  effect on its financial  position and reputation
and on its ability to attract and retain customers.

IF DIGITAL FUSION IS UNABLE TO RETAIN THE SERVICES OF KEY PERSONNEL, BUSINESS
OPERATIONS MAY BE DISRUPTED.

     The  loss of  existing  personnel  or the  failure  to  recruit  additional
qualified  technical,  managerial  and sales  personnel  could disrupt  business
operations  as  well  as  increase  the  expenses  in  connection   with  hiring
replacement  personnel.  The Company depends on the performance of its executive
officers  and key  employees,  some of whom  have not  entered  into  employment
agreements. The loss of these executives or key employees could disrupt business
operations.

THE COMPANY MAY NEED ADDITIONAL CAPITAL AND NOT BE ABLE TO ATTAIN IT, WHICH
COULD AFFECT ITS ABILITY TO CONTINUE AS A GOING CONCERN.

     Future  capital  uses and  requirements  will depend on  numerous  factors,
including:

o    The extent to which solutions and services gain market acceptance.
o    The level of revenues from present and future solutions and services.
o    The expansion of operations.
o    The costs and timing of product  and  service  developments,  and sales and
     marketing activities.
o    Costs related to acquisitions of technology or businesses.
o    Competitive developments.
o    Costs related to downsizing and discontinuation or sale of business units.
o    Need for working capital.
o    Timing of accounts receivable collections.
o    Timing of debt payments.

     In order to continue to increase  sales and marketing  efforts and continue
to expand and enhance the solutions  and services  offered to present and future
customers,  the Company may require additional capital that may not be available
on acceptable terms, or at all. In addition, if unforeseen difficulties arise in



                                       20
<PAGE>

the course of these or other  aspects of  business,  it may be required to spend
funds  that are  greater  than  originally  anticipated.  Therefore,  it will be
required to raise  additional  capital  through public or private equity or debt
financings,  collaborative relationships, bank facilities or other arrangements.
There can be no  assurances  that such  additional  capital will be available on
acceptable  terms, or at all. Any additional  equity financing is expected to be
dilutive  to  stockholders,  and  debt  financing,  if  available,  may  involve
restrictive  covenants  and  increased  interest  costs.  Operations  have  been
financed to date primarily through private sales of equity securities,  proceeds
from the initial public offering in May 1998, and debt facilities.

     There can be no  assurance  that  additional  funding  will be available to
finance  ongoing  operations  when needed or that adequate funds for operations,
whether  from  financial  markets,  collaborative  or  other  arrangements  with
corporate  partners,  or other  sources,  will be available  when needed,  or on
acceptable  terms.  The  inability  to obtain  sufficient  funds may require the
Company to delay, reduce, or eliminate some or all of its expansion programs, to
limit the marketing of its  products,  or to license to third parties the rights
to  commercialize  products  or  technologies  that it would  otherwise  seek to
develop and market.

THE UNPREDICTABILITY OF QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
DIGITAL FUSION'S COMMON STOCK TO FLUCTUATE.

     Revenues and operating results vary significantly  from  quarter-to-quarter
due to a number of  factors,  many of which are  beyond the  Company's  control.
Investors  should  not rely on  quarter-to-quarter  comparisons  of  results  of
operations as an indication of future  performance.  It is possible that in some
future  periods,  results of operations may be below the  expectations of public
market  analysts and  investors.  In that event,  the market price of its common
stock may fall.

     Factors that could cause quarterly results to fluctuate include:

o    Change in customer demand for products and services.
o    Timing of the expansion of operations.
o    Seasonality  in  revenues,  principally  during  the  summer  and  year-end
     holidays.
o    The mix of products and services revenues from operating divisions.
o    Changes in pricing by competitors or the Company.
o    Introduction of new products or services by competitors or the Company.
o    Costs related to acquisitions of technology or businesses.
o    Recession or slow-down in economy.
o    Termination of customer contracts.

THE COMPANY HAS LIMITED INTELLECTUAL PROPERTY PROTECTION AND MAY NOT BE ABLE TO
SUCCESSFULLY PROTECT PROPRIETARY INFORMATION, WHICH COULD RESULT IN LOST SALES
AND LOST COMPETITIVE ADVANTAGE.

     The Company relies on a combination of copyright and trademark laws,  trade
secrets  laws,  and  license  and   nondisclosure   agreements  to  protect  its
proprietary information, particularly the computer software applications that it
has  developed.  It currently has no registered  copyrights or patents or patent
applications  pending. It may be possible for unauthorized third parties to copy
aspects  of,  or  otherwise  obtain  and use,  proprietary  information  without
authorization.   The  majority  of  current  contracts  with  customers  contain
provisions granting to the customer  intellectual  property rights to certain of
the Company's work product, including the customized programming that is created
for such customer.  It is anticipated  that contracts with future customers will
contain similar provisions.  Other existing agreements and future agreements may
be silent as to the  ownership of such rights.  To the extent that the ownership
of such  intellectual  property rights is expressly  granted to a customer or is
ambiguous, the ability to reuse or resell such rights may be limited.

     The  Company's  policy is to execute  confidentiality  agreements  with its
employees and consultants  upon the  commencement of an employment or consulting
relationship.   These  agreements   generally   require  that  all  confidential
information developed or made known to the individual by it during the course of
the  individual's  relationship  with the Company be kept  confidential  and not
disclosed  to third  parties.  These  agreements  also  generally  provide  that
inventions  conceived by the  individual in the course of rendering  services to
Digital  Fusion  shall be the  Company's  exclusive  property.  There  can be no
assurance  that  such  agreements  will not be  breached,  that  there  would be



                                       21
<PAGE>

adequate remedies for any breach or that trade secrets will not otherwise become
known to or be independently  developed by competitors  which may result in lost
sales and lost competitive advantage.

IF THE COMPANY FAILS TO PERFORM TO CUSTOMERS' EXPECTATIONS IT COULD RESULT IN
CLAIMS AGAINST IT WHICH COULD REDUCE ITS EARNINGS.

     Digital  Fusion's   services  involve   development,   implementation   and
maintenance of computer  systems and computer  software that are critical to the
operations  of  its  customers'  businesses.  Failure  or  inability  to  meet a
customer's  expectations  in the  performance  of its  services  could  harm its
business reputation or result in a claim for substantial damages,  regardless of
its responsibility for such failure or inability.  In addition, in the course of
performing  services,  company  personnel often gain access to technologies  and
content that includes confidential or proprietary customer information. Although
policies have been  implemented to prevent such customer  information from being
disclosed to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial  damages.  The Company
attempts  to limit  contractually  any damages  that could arise from  negligent
acts, errors, mistakes, or omissions in rendering services and, although general
liability  insurance  coverage is maintained,  including coverage for errors and
omissions,  there can be no assurance  that such  coverage  will  continue to be
available on  reasonable  terms or will be available  in  sufficient  amounts to
cover one or more large claims.  The  successful  assertion of one or more large
claims  against the  Company  that are  uninsured,  exceed  available  insurance
coverage,  or result in  changes  to  corporate  insurance  policies,  including
premium  increases  or the  imposition  of a large  deductible  or  co-insurance
requirements, would have a material adverse effect on the financial condition of
the Company.

LARGE QUANTITIES OF COMMON STOCK SALES BY COMPANY SHAREHOLDERS COULD CAUSE ITS
COMMON STOCK PRICE TO DECREASE DUE TO THE LACK OF A LIQUID MARKET FOR ITS COMMON
STOCK.

     The market price of the Company's common stock could decline as a result of
sales of a large  number  of  shares of its  common  stock in the  market or the
perception  that  these  sales may  occur.  These  sales also might make it more
difficult  for it to sell  equity  securities  in the  future at a time and at a
price that it deems appropriate.

     The Company has holders of options and warrants  that if  exercised,  could
also have an adverse effect on the market price of its common stock.

ANTI-TAKEOVER PROVISIONS.

     Provisions of Digital Fusion's Restated  Certificate of Incorporation,  its
Amended and Restated  By-laws,  and Delaware law,  could make it difficult for a
third  party  to  acquire  it,  even if doing  so  would  be  beneficial  to its
stockholders.

Item 7. Financial Statements

     Financial Statements are attached hereto at page F-1.

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

     There were no changes in or disagreements with the Company's accountants on
accounting and financial disclosures during 2003 or 2004.

Item 8A. Controls and Procedures

     We maintain  disclosure  controls  and  procedures  designed to ensure that
material  information  related  to us is  recorded,  processed,  summarized  and
reported  in  accordance  with SEC rules and  forms.  Our  management,  with the
supervision of the Chief Executive officer,  Roy E. Crippen,  III, has evaluated
the effectiveness of our disclosure controls and procedures as of the end of the
period  covered by this  report.  Based upon that  evaluation,  Mr.  Crippen has
concluded that our  disclosure  controls and procedures are effective in causing
material information to be recorded, processed, summarized and reported so as to
ensure the quality and timeliness of our public  disclosures in compliance  with
SEC rules and forms.



                                       22
<PAGE>

     There was no change in our internal  control over financial  reporting that
occurred during our most recent fiscal quarter that has materially affected,  or
is reasonably  likely to materially  affect our internal  control over financial
reporting.

Code of Ethics

     The  Company  has a code of ethics  that  applies  to all of the  Company's
principal executive,  financial and accounting  officers,  controller and others
performing similar functions.  The code of ethics was amended on April 12, 2004,
effective  as of March 24,  2004.  In lieu of filing a form 8-K, the Company has
posted      the     code     of      ethics      on     its      website      at
http://www.digitalfusion.com/corporategovernance.htm  and  is  available  to the
public without charge,  by request to Digital Fusion,  Inc.,  Legal  Department,
4940-A Corporate Drive, Huntsville,  Alabama 35805. A copy of this code is filed
incorporated as reference as an exhibit to this annual report on Form 10-KSB.


                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

     The response to this item will be contained in the Proxy  Statement for the
2005  Annual  Meeting  of  Stockholders  (the  "2005  Proxy  Statement")  and is
incorporated by reference.


Item 10. Executive Compensation

     The response to this item will be contained in the 2005 Proxy Statement and
is incorporated by reference.


Item 11. Security Ownership of Certain Beneficial Owners and Management

     The response to this item will be contained in the 2005 Proxy Statement and
is incorporated by reference.


Item 12. Certain Relationships and Related Transactions

     The response to this item will be contained in the 2005 Proxy Statement and
is incorporated by reference.


Item 13. Exhibits List and Reports on Form 8-K

(a)      Exhibits

         The following is a list of Exhibits filed as a part of this Report.


Exhibit No.                     Description
-----------                     -----------

*3.1 Restated  Certificate of Incorporation of the Company (filed as Exhibit 3.1
     to our Registration  Statement on Form SB-2, File No.  333-47741,  filed on
     April 23, 1998 (the "Registration Statement")).

*3.2 Amended and  Restated  By-Laws of the Company  (filed as Exhibit 3.2 to our
     Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999).

*3.3 Amendment to Restated Certificate of Incorporation (filed as Exhibit 3.1 to
     our Report on 8-K, filed November 8, 2001).

4.1  See  Exhibit  numbers  3.1,  3.2  and 3.3 for  provisions  of the  Restated
     Certificate  of  Incorporation  and  Restated  By-Laws of the  Company,  as
     amended, defining the rights of the holders of common stock.

*4.2 Specimen form of  certificate  evidencing the shares of common stock of the
     Company (filed as Exhibit 4.1 to our Registration Statement).



                                       23
<PAGE>

*4.3 Promissory  Note dated  January  15,  2004  between  the Company and Roy E.
     Crippen, III.

*4.4 Security  Agreement  dated  January 15, 2004 between the Company and Roy E.
     Crippen, III.

*4.5 Subordination  Agreement dated January 15, 2004 between the Company and Roy
     E. Crippen, III.

*4.6 Release   dated   January  15,  2004  between  the  Company  and  PowerCerv
     Corporation.

*10.1 Digital Fusion, Inc. 1998 Stock Option Plan (filed as Exhibit 10.14 to our
      Registration Statement).+

*10.2 Digital Fusion, Inc. 1999 Stock Option Plan (filed as part of our Proxy
      Statement for the Annual Meeting of Stockholders held on June 4, 1999).+

*10.3 Digital Fusion, Inc. 2000 Stock  Option Plan (filed as part of our Proxy
      Statement for the Annual Meeting of Stockholders held June 9, 2000). +

*10.4 Employment Agreement, dated as of May 4, 2004, by and  between  Digital
      Fusion and Jeffrey L. Williams.+

*10.5 Subscription Agreement, dated as of May 11, 2004, by and between  Digital
      Fusion and Madison Run LLC.

*10.6 Form of Warrant to Purchase Shares of Common Stock, dated as of May 11,
      2004

**10.7 Employment  Agreement  dated as of August 1, 2004, by and between Digital
       Fusion and Edward G. Rawlinson. +

**10.8 Additional Subscription  Agreement,  dated as of October 21, 2004, by and
       between Digital Fusion and Madison Run LLC.

**10.9 Form of Warrant to Purchase  Shares of Common Stock,  dated as of October
       15, 2004.

**10.10 Stock  Transfer  Agreement  dated as of December  2, 2004,  by and among
        Digital Fusion, Madison Run, LLC and Longstreet Investors, LLC.

**10.11 Stock  Transfer  Agreement,  dated as of December 2, 2004,  by and among
        Digital Fusion, Madison Run, LLC and AABBRR, LLC.

*10.12 Stock  Purchase  Agreement,  dated as of October 28, 2004, by and between
       Digital Fusion and Michael W. Wicks.

*10.13  Convertible  Promissory  Note,  dated  January 3, 2005,  by and  between
        Digital Fusion and Michael W. Wicks.

*10.14  Registration  Rights  Agreement,  dated  January 3, 2005, by and between
        Digital Fusion and Michael W. Wicks.

*10.15 Escrow  Agreement,  dated October 28, 2004, by and among Digital  Fusion,
       Michael W. Wicks and Synovus Trust Company.

*10.16  Employment  Agreement,  dated  January 3, 2005,  by and between  Digital
        Fusion and Michael W. Wicks. +

*10.17  Employment  Agreement,  dated  January 3, 2005,  by and between  Digital
        Fusion and Steven Thornton. +

**10.18 Employment  Agreement,  dated  January 3, 2005,  by and between  Digital
        Fusion and Joseph L. Summers. +

*10.19 Loan Agreement, security agreements and guarantees, each dated March 10,
       2005 among First Commercial Bank of Huntsville and the  Company,  for a
       $2,500,000 revolving line of credit.

**10.20 Amended and Restated Employment  Agreement,  dated February 28, 2005, by
        and between Digital Fusion and Roy E. Crippen, III. +

**10.21 Amended and Restated Employment  Agreement,  dated February 28, 2005, by
        and between Digital Fusion and Gary S. Ryan. +

*14.1 Digital Fusion, Inc. Code of Ethics for Principal Executive and Financial
      Officers.

**21.1 Subsidiaries of the Company.

**23.1 Consent of Pender Newkirk and Company

**24.1 Power of Attorney (appears on signature page).

**31.1 Written  Statement of Chief Executive  Officer pursuant to Section 906 of
       the Sarbanes-Oxley Act of 2002.

**32.1 Certification of Principal  Executive  Officer pursuant to Rule 13a-14(a)
       under the Securities Exchange Act of 1934, an amended.

-------------
*   Incorporated by reference.
**  Filed herewith.
+   Management contract or compensatory plan or arrangement.

(b)        Reports on Form 8-K

1.   Report on Form 8-K filed  March 17,  2004  respect to quarter  end and year
     ended December 31, 2003 financial operating results.




                                       24


<PAGE>

2.   Report on Form 8-K filed May 3, 2004 with  respect  to the  appointment  of
     Gary S. Ryan as a member of the board of directors and the letter of intent
     to make an equity investment in the Company by Madison Run, LLC.

3.   Report  on Form 8-K  filed  May 14,  2004  with  respect  to first  quarter
     financial operating results.

4.   Report on Form 8-K filed July 22, 2004 with  respect to the  redemption  of
     its convertible debt owed to a New York based institutional  private equity
     fund and the  entering  of a secured  revolving  line of credit  with First
     Commercial Bank in Huntsville,  Alabama,  an affiliate of Synovus Financial
     Corp.

5.   Report on Form 8-K filed  August 13,  2004 with  respect to second  quarter
     financial operating results.

6.   Report on Form 8-K filed  September  30,  2004 with  respect  to the equity
     financing  commitment from Madison Run, LLC and hiring of Edward  Rawlinson
     as VP of Engineering Services.

7.   Report on Form 8-K filed October 22, 2004 with respect to the completion of
     a $1.65 million equity financing transaction with Madison Run, LLC.

8.   Report on Form 8-K filed  November  3, 2004  with  respect  to the  Company
     entering into a Stock Purchase  Agreement  with Michael W. Wicks  ("Wicks")
     pursuant to which Wicks agreed to sell all of his outstanding capital stock
     of Summit Research Corporation.

9.   Report on Form 8-K filed  December 30, 2004 with respect to the election of
     Charles F. Lofty as a member of the board by the Board of  Directors of the
     Company.


Item 14.      Principal Accountant Fees and Services

Audit Fees
----------

During 2003, Digital Fusion was billed by Pender Newkirk & Company,
approximately $50,000 for audit and review fees associated with its 10-QSB,
10-KSB filings and Employee Benefit Plan. During 2004, Digital Fusion was billed
by Pender Newkirk & Company, approximately $80,000 for audit and review fees
associated with its 10-QSB, 10-KSB filings and Employee Benefit Plan.

Audit related fees
------------------

None

Tax Fees
--------

None

All Other Fees
--------------

None



                                       25
<PAGE>

                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on our behalf by the undersigned, thereunto duly
authorized.


                                                DIGITAL FUSION, INC.



Dated:  March 31, 2005                  by:/s/ Roy E. Crippen, III
                                           ------------------------------------
                                           Roy E. Crippen, III
                                           Chief Executive Officer
                                           (Principal Executive Officer)



                                       26
<PAGE>

     KNOWN  BY ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes  and appoints  both Roy E. Crippen,  III his true and
lawful   attorney-in-fact  and  agent,  with  full  power  of  substitution  and
re-substitution,  for him  and in his  name,  place  and  stead,  in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-KSB,
and to file  the  same,  with  all  exhibits  thereto  and  other  documents  in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every  act and thing  requisite  and  necessary  to be done in and about the
premises,  as fully as he might or  could do in  person,  hereby  ratifying  and
confirming all that said  attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.

     In  accordance  with the Exchange Act, this Report has been signed below by
the  following  persons  on  behalf  of the  Registrant  and  in the  capacities
indicated on the 31st day of March 2005.


         Signature                                            Title(s)
         ---------                                            --------




/S/ROY E. CRIPPEN III                           Chief Executive Officer and
---------------------------                     Chairman of the Board of
Roy E. Crippen III                              Directors (Principal Executive
                                                Officer)


/S/ O.G. GREENE                                 Director
---------------------------
O.G. Greene


/S/ CHARLES F. LOFTY                            Director
---------------------------
Charles F. Lofty


/S/ GARY S. RYAN                                President, Chief Operating
---------------------------                     Officer and Director
Gary S. Ryan



                                       27
<PAGE>

FINANCIAL STATEMENTS AND EXHIBITS

The following are the consolidated financial statements and exhibits of Digital
Fusion, Inc. and Subsidiaries, which are filed as part of this report.

<TABLE>
<CAPTION>

                                                                                                    Page
                                                                                                    ----
<S>                                                                                                    <C>
Report of Independent Registered Public Accounting Firms............................................ F-2
Consolidated Balance Sheet as of December 31, 2004.................................................. F-3
Consolidated Statements of Operations for the years ended
      December 31, 2004 and 2003.................................................................... F-4
Consolidated Statement of Stockholders' Equity for the years
      ended December 31, 2003 and 2004.............................................................. F-5
Consolidated Statements of Cash Flows for the years
      ended December 31, 2004 and 2003.............................................................. F-6
Notes to Consolidated Financial Statements.......................................................... F-7

</TABLE>



                                      F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm


Board of Directors
Digital Fusion, Inc.
Huntsville, Alabama


We have audited the accompanying balance sheet of Digital Fusion, Inc. and
Subsidiaries as of December 31, 2004 and the related statements of operations,
changes in stockholders' equity, and cash flows for the years ended December 31,
2004 and 2003. These financial statements are the responsibility of the
management of Digital Fusion, Inc. and Subsidiaries. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Fusion, Inc and
Subsidiaries as of December 31, 2004 and the results of its operations and its
cash flows for the years ended December 31, 2004 and 2003 in conformity with
United States generally accepted accounting principles.


Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
January 26, 2005 (except for notes 6(b), 6(e) and 15, as to which the date is
March 10, 2005)



                                      F-2
<PAGE>

                              DIGITAL FUSION, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004


                           ASSETS
Current Assets:
    Cash and cash equivalents                                 $       252,000
    Accounts receivable (net of allowance for doubtful
    accounts of $54,000)                                            1,050,000
    Prepaid expenses and other current assets                          27,000
                                                                ---------------
         Total current assets                                       1,329,000

Property and equipment, net                                           417,000
Prepaid acquisition costs and acquisition deposit                     285,000
Intangible assets, net                                              3,347,000
Other assets                                                           13,000
                                                                ---------------
         Total assets                                         $     5,391,000
                                                                ===============

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Current maturities of long-term debt                      $       647,000
    Accounts payable                                                  609,000
    Deferred revenue                                                   21,000
    Accrued compensation and related expenses                          97,000
    Other current liabilities                                         266,000
                                                                ---------------
         Total current liabilities
                                                                    1,640,000

Long-term debt, less current maturities                                81,000
Pension obligation                                                    302,000
                                                                ---------------
         Total liabilities
                                                                    2,023,000
                                                                ---------------


Stockholders' Equity:
    Preferred Stock - $.01 par value; authorized
        1,000,000 shares, no shares issued and outstanding                  -
    Common Stock - $.01 par value; authorized
        16,000,000 shares; 9,721,244 shares issued and
        outstanding  at 2004                                           97,000
    Additional paid in capital                                     42,050,000
    Accumulated deficit                                           (38,779,000)
                                                                ---------------
         Total stockholders' equity                                 3,368,000

                                                                ---------------
         Total liabilities and stockholders' equity           $     5,391,000
                                                                ===============

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      F-3
<PAGE>

                              DIGITAL FUSION, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>

                                                                    2004              2003
                                                                    ----              ----
<S>                                                         <C>               <C>      <C>
Revenues
  Services                                                  $      4,991,000  $       6,075,000
  Product                                                          1,775,000            345,000
                                                               ---------------    --------------
       Total Revenues                                              6,766,000          6,420,000
                                                               ---------------    --------------
Cost of services and goods sold
  Services                                                         4,335,000          4,580,000
  Product                                                          1,673,000            325,000
                                                               ---------------    --------------
       Total cost of services and goods sold                       6,008,000          4,905,000
                                                               ---------------    --------------
       Gross Profit                                                  758,000          1,515,000

Selling, general and administrative                                1,655,000          1,715,000
                                                               ---------------    --------------

       Operating loss                                               (897,000)          (200,000)

Interest expense                                                    (147,000)          (195,000)
                                                               ---------------    --------------

       Loss before income taxes                                   (1,044,000)          (395,000)

Income tax provision                                                       -                  -
                                                               ---------------    --------------

       Net loss                                              $    (1,044,000)   $      (395,000)
                                                               ===============    ==============


Loss per share:
     Basic and diluted
                                                             $         (0.13)   $         (0.06)
                                                               ===============    ==============
Weighted average common stock outstanding:
     Basic and diluted                                             8,025,000          7,168,000
                                                               ===============    ==============

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                      F-4
<PAGE>




                              DIGITAL FUSION, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004

<TABLE>
<CAPTION>


                                                              Common stock
                                                        -------------------------    Additional
                                                         No. of                       Paid-in       Accumulated     Stockholders'
                                                         shares         Amount        Capital         Deficit          Equity
------------------------------------------------------ ------------ ------------- -------------- ---------------- ---------------
<S>               <C> <C>                                <C>            <C>         <C>             <C>              <C>
Balance, December 31, 2002                               7,167,671      $72,000     $39,904,000     $(37,340,000)    $2,636,000
   Warrants issued in connection with debt financing             -            -          15,000                -         15,000
Net loss                                                         -            -               -         (395,000)      (395,000)
------------------------------------------------------ ------------ ------------- -------------- ---------------- ---------------
Balance, December 31, 2003                               7,167,671       72,000      39,919,000      (37,735,000)     2,256,000
Shares issued from exercise of options                      11,975                        4,000                -          4,000
Shares issued from exercise of warrants                    200,000        2,000          68,000                          70,000
Shares issued from cashless exercise of warrants            83,490        1,000          (1,000)                              -
Shares issued from sale of stock                         2,258,108       22,000       2,078,000                       2,100,000
Stock issuance costs                                                                    (18,000)                        (18,000)
Net loss                                                         -            -               -       (1,044,000)    (1,044,000)
------------------------------------------------------ ------------ ------------- -------------- ---------------- ---------------
Balance, December 31, 2004                               9,721,244      $97,000     $42,050,000     $(38,779,000)    $3,368,000
====================================================== ============ ============= ============== ================ ===============

</TABLE>

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      F-5
<PAGE>

                              DIGITAL FUSION, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>

                                                                                  2004               2003
                                                                                  ----               ----
Cash flows from operating activities:
<S>                                                                       <C>                <C>
     Net loss                                                             $     (1,044,000)  $       (395,000)
     Adjustments to reconcile net loss to net cash used in operating
        activities:
           Depreciation                                                             48,000            160,000
           Recovery of bad debt, reduction of allowance                            (32,000)           (50,000)
           Gain on write-offs and adjustments                                            -           (227,000)
           Stock options issued for services                                             -              2,000
           Amortization of deferred financing costs                                 51,000             66,000
           Changes in operating assets and liabilities
                 Accounts receivable                                              (281,000)           291,000
                 Prepaid expenses and other assets                                 (14,000)            21,000
                 Accounts payable, accrued expenses, and
                      other liabilities                                            275,000             10,000
                 Pension obligation                                                  7,000             15,000
                                                                             ----------------   ----------------
                     Net cash used in operating activities                        (990,000)          (107,000)
                                                                             ----------------   ----------------

Cash flows from investing activities:
     Capital expenditures - property and equipment                                (436,000)            (4,000)
     Acquisition costs and acquisition deposit                                    (285,000)                 -
                                                                             ----------------   ----------------
                     Net cash used in investing activities                        (721,000)            (4,000)
                                                                             ----------------   ----------------

Cash flows from financing activities:
     Proceeds from sales of stock, net of costs                                  2,086,000                  -
     Repayments of notes payable                                                  (542,000)          (379,000)
     Net proceeds from note issued                                                       -            256,000
                                                                             ----------------   ----------------
                     Net cash provided by (used in)  financing activities        1,544,000           (123,000)
                                                                             ----------------   ----------------

Net decrease in cash and cash equivalents                                         (167,000)          (234,000)
Cash and cash equivalents, at beginning of year                                    419,000            653,000
                                                                             ----------------   ----------------

Cash and cash equivalents, at end of year                                 $        252,000   $        419,000
                                                                            =================   ================
</TABLE>


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                      F-6
<PAGE>

                              DIGITAL FUSION, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

(1)     ORGANIZATION, BACKGROUND AND BASIS OF PRESENTATION


Digital Fusion, Inc. (used herein, "Digital Fusion", "DFI", and the "Company",
refer to Digital Fusion, Inc.) and its subsidiaries are an information
technology and engineering services company that helps its customers make the
most of technology to meet their business needs. Digital Fusion's IT Services
division provides solutions to both government and commercial customers, focused
in the following areas: Business Process Automation, Application Development and
Data Management, Application Security, Web Portals and Digital Dashboards,
System Integration and IT Support. Digital Fusion's Engineering Services
division supports a variety of customers with state-of-the-art solutions that
include: Computational Aerodynamics/CFD; Optical Systems Design, Development and
Test; Thermo/structural Dynamics; Modeling and Simulations; Hardware-in-the-Loop
Testing; Program Analysis; and Ground/Flight Planning, Execution, and Data
Analysis. Services are provided to business organizations and public sector
institutions primarily in the Eastern United States. The Company was
incorporated in 1995 under the name Internet Broadcasting System, Inc. and
changed its name to IBS Interactive, Inc. when it went public in May 1998.
During 2001, the shareholders approved a name change to Digital Fusion, Inc.
("DFI"). The Company is incorporated in Delaware with its main administrative
office located in Huntsville, Alabama and regional in Florida and New Jersey.


(2)   SIGNIFICANT ACCOUNTING POLICIES

       (a)    PRINCIPLES OF CONSOLIDATION

              The accompanying consolidated financial statements include the
              accounts of the Company and all of its wholly-owned subsidiaries.
              All significant inter-company accounts and transactions are
              eliminated in consolidation.

       (b)    REVENUE RECOGNITION

              Revenue is recognized as services are provided to customers
              primarily on a time and material basis. In the event that there
              are significant performance obligations yet to be fulfilled on
              consulting and design projects, revenue recognition is deferred
              until such conditions are removed. A small portion of DFI's
              contracts are on a fixed fee basis. Revenues on these contracts
              are recognized on a percentage of completion basis. For projects
              that the customer has prepaid, but the services have not been
              performed, deferred revenue is recorded on the balance sheet.

              Product revenue is recognized when we have persuasive evidence an
              order exists including a fixed price, collection is reasonably
              assured, the products have been delivered to the customer and no
              additional performance is required by us.


       (c)    STOCK BASED COMPENSATION

              The Company accounts for its stock option awards to employees
              under the intrinsic value based method of accounting prescribed by
              Accounting Principles Board Opinion No. 25, Accounting for Stock
              Issued to Employees. Under the intrinsic value based method,
              compensation cost is the excess, if any, of the quoted market
              price of the stock at grant date or other measurement date over
              the amount an employee must pay to acquire the stock. The Company
              provides pro forma disclosures of net loss and loss per share as
              if the fair value based method of accounting had been applied, as
              required by SFAS No. 123, Accounting for Stock-Based Compensation.

              The following table represents the effect on net income and
              earnings per share if the Company had applied the fair value based
              method and recognition provisions of Statement of Financial
              Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
              Compensation", to stock-based employee compensation:

<TABLE>
<CAPTION>

                                                                       2004                          2003
                                                                 ------------------            -----------------
<S>                                                               <C>                           <C>
             Net loss. as reported                                $    (1,044,000)              $     (395,000)
             Deduct:  Total stock-based employee
                   compensation expense determined under

</TABLE>



                                      F-7
<PAGE>

<TABLE>
<CAPTION>

<S>                                                                     <C>                           <C>
                   fair value based methods for all awards,
                   net of related tax effects                            (277,000)                    (315,000)
                                                                 ------------------            -----------------
             Pro forma net loss                                      $ (1,321,000)              $     (710,000)
                                                                 ==================            =================
             Net loss per common share
             Basic and diluted loss, as reported                     $      (0.13)              $        (0.06)
                                                                 ==================            =================
             Basic and diluted (loss), pro forma                     $      (0.16)              $        (0.10)
                                                                 ==================            =================

</TABLE>

              The Company estimates the fair value of each stock option at the
              grant date by using the Black-Scholes option-pricing model with
              the following weighted-average assumptions:

                                                              2004      2003
                                                              ----      ----

              Dividend yield                                     0%        0%
              Expected volatility                               58%       61%
              Risk-free interest rate                         4.29%     3.52%
              Expected life-years                               10        10
              Weighted average fair value of options granted  $0.55    $0.23


              Results may vary depending on the assumptions applied within the
              model. Compensation expense recognized in providing pro forma
              disclosures may not be representative of the effects on net income
              for future years.

              The values ascribed to restricted stock awards are based on the
              fair value of the Company's common stock at the date of the grant.
              The intangible asset related to the value of the stock awards is
              amortized on a straight-line basis over the required service
              periods. The Company's liability related to such awards will be
              converted to common stock and additional paid in capital upon the
              formal issuance of the common stock.

       (d)    WARRANTS

              The fair values ascribed to warrants that are used in connection
              with financing arrangements and professional services agreements
              (see Note 8) are amortized over the expected life of the
              underlying debt or the term of the agreement.

       (e)    INCOME TAXES

              The Company accounts for income taxes using the liability method.
              Deferred income taxes are recognized for the tax consequences of
              "temporary differences" by applying enacted statutory rates
              applicable to future years to differences between the financial
              statement carrying amounts and the tax bases of existing assets
              and liabilities.

              Valuation allowances have been established against the Company's
              deferred tax assets due to uncertainties in the Company's ability
              to generate sufficient taxable income in future periods to make
              realization of such assets more likely than not. The Company has
              not recognized an income tax benefit for its operating losses
              generated during 2004 and 2003 based on uncertainties concerning
              its ability to generate taxable income in future periods. There
              was no income tax receivable at December 31, 2004 and 2003. In
              future periods, tax benefits and related deferred tax assets will
              be recognized when management considers realization of such
              amounts to be more likely than not.

       (f)    CASH EQUIVALENTS

              The Company considers all highly liquid debt instruments and other
              short-term investments with an initial maturity date of three
              months or less from the purchase date to be cash equivalents. The
              cash and short-term investments are maintained with major
              financial institutions in the United States. Deposits with these
              banks may exceed the amount of FDIC insurance provided on such
              deposits. Generally, these deposits may be redeemed upon demand
              and, therefore, bear minimal risk.

       (g)    CONCENTRATIONS OF CREDIT RISK



                                      F-8
<PAGE>

              Financial instruments, which potentially subject the Company to
              credit risk, consist primarily of a concentration of unsecured
              trade accounts receivables. At December 31, 2004, one customer
              accounted for 28% of total net accounts receivable and a different
              customer accounted for 15% of total net accounts receivable at
              December 31, 2003.

              The Company performs credit evaluations of its customers on a
              regular basis and generally does not require collateral on
              accounts receivable. The Company monitors the allowance for
              potential credit losses and adjusts the allowance accordingly each
              quarter. During the years ended December 31, 2004 and 2003 the
              Company's allowance for doubtful accounts was decreased by $32,000
              for reduced bad debt provision and $50,000 for balances recovered,
              respectively and was decreased by $185,000 during the year ended
              December 31, 2003 for accounts written off. The Company does not
              accrue interest on past due accounts receivable.

       (h)    PROPERTY AND EQUIPMENT

              Property and equipment are recorded at the lower of cost or fair
              value. Major additions are capitalized, while minor additions and
              maintenance and repairs, which do not extend the useful life of an
              asset, are charged to operations when incurred. When property and
              equipment are sold or otherwise disposed of, the asset account and
              related accumulated depreciation account are relieved, and any
              gain or loss is included in operations. Depreciation is provided
              primarily using the straight-line method over the assets'
              estimated useful lives of three to seven years. Estimated useful
              lives are periodically reviewed and, where appropriate, changes
              are made prospectively.

       (i)    LONG-LIVED ASSETS

              The Company applies SFAS No. 144, Accounting for the Impairment or
              Disposal of Long-Lived Assets. SFAS 144 addresses the financial
              accounting and reporting for the impairment of long-lived assets,
              excluding goodwill and intangible assets, to be held and used or
              disposed of. In accordance with SFAS 144, the carrying values of
              long-lived assets are periodically reviewed by the Company and
              impairments would be recognized if the expected future operating
              non-discounted cash flows derived from an asset were less than its
              carrying value.

       (j)    INTANGIBLE ASSETS

              Intangible assets are comprised of goodwill arising from various
              acquisitions. The Company applies the Statement of Financial
              Accounting Standards ("SFAS") No. 142, Goodwill and Other
              Intangible Assets. SFAS 142 addresses financial accounting and
              reporting for acquired goodwill and other intangible assets. SFAS
              142 requires, among other things, that companies no longer
              amortize goodwill, but instead test goodwill for impairment at
              least annually. The Company tested goodwill for impairment as of
              December 31, 2004 and December 31, 2003. The Company will continue
              to test goodwill for impairment at least annually.

       (k)    PENSION ACCOUNTING

              The Company follows SFAS No. 132, Employers' Disclosures about
              Pensions and Other Post-retirement Benefits as revised in 2003 as
              it relates to the Spencer Analysis, Inc. ("Spencer") Defined
              Benefit plan that is inactive. Subsequent to the acquisition of
              Spencer in 1999, the plan was amended to no longer require the
              Company to accrue future service benefits.

       (l)    ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

              The carrying amounts reported in the consolidated balance sheets
              for cash and cash equivalents, accounts receivable, accounts
              payable, accrued liabilities and notes payable approximate the
              instruments' fair values due to the immediate or short-term
              maturity of these financial instruments.



                                      F-9
<PAGE>

       (m)    LOSS PER SHARE

              Basic loss per share has been computed using the weighted average
              number of shares of common stock outstanding for the period. The
              Company's diluted loss per share includes the effect, if any, of
              unissued shares under options, warrants and stock awards computed
              using the treasury stock method. In all periods presented, there
              were no differences between basic and diluted loss per common
              share because the assumed exercise of common share equivalents was
              anti-dilutive. The assumed exercise of stock options and warrants,
              as well as the issuance of common stock under compensation and
              acquisition agreements (aggregating 3,524,637 and 2,505,774 shares
              at December 31, 2004 and 2003 respectively), could potentially
              dilute basic earnings per share.

       (n)    USE OF ESTIMATES

              The preparation of financial statements in conformity with
              generally accepted accounting principles requires management to
              make estimates and assumptions that affect the reported amounts of
              assets and liabilities and disclosure of contingent assets and
              liabilities at the date of the financial statements and the
              reported amounts of revenues and expenses during the reporting
              period. The actual results could differ from those estimates.
              Significant estimates include management's estimates with respect
              to the values of accounts receivable allowance, intangibles,
              liabilities (including accruals) and fixed assets.

       (o)    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

              In January 2003, the Financial Accounting Standards Board ("FASB")
              issued Interpretation No. 46, "Consolidation of Variable Interest
              Entities, an Interpretation of Accounting Research Bulletin
              ("ARB") No. 51" (the "Interpretation"). The Interpretation
              requires the consolidation of variable interest entities in which
              an enterprise absorbs a majority of the entity's expected losses,
              receives a majority of the entity's expected residual returns, or
              both, as a result of ownership, contractual, or other financial
              interests in the entity. Currently, entities are generally
              consolidated by an enterprise that has controlling financial
              interest through ownership of a majority voting interest in the
              entity. The Interpretation was originally immediately effective
              for variable interest entities created after January 31, 2003, and
              effective in the fourth quarter of our fiscal 2003 for those
              created prior to February 1, 2003. However, in October 2003, the
              FASB deferred the effective date for those variable interest
              entities created prior to February 1, 2003, until the Company's
              first quarter of fiscal 2004. The Company adopted this
              interpretation on January 1, 2004 and it did not have a material
              impact on its consolidated financial statements.

              In November 2004, the Financial Accounting Standards Board
              ("FASB") issued Statement of Financial Accounting Standard
              ("SFAS") No. 151, "Inventory Costs." The new statement amends
              Accounting Research Bulletin ("APB") No. 43, Chapter 4, "Inventory
              Pricing," to clarify the accounting for abnormal amounts of idle
              facility expense, freight, handling costs, and wasted material.
              This statement requires that those items be recognized as
              current-period charges and requires that allocation of fixed
              production overheads to the cost of conversion be based on the
              normal capacity of the production facilities. This statement is
              effective for fiscal years beginning after June 15, 2005. The
              Company does not expect adoption of this statement to have a
              material impact on its financial condition or results of
              operations.

              In December 2004, the FASB issued SFAS No. 123 (revised 2004)
              ("SFAS 123(R)"), "Share-Based Payment." This statement replaces
              SFAS No. 123 "Accounting for Stock-Based Compensation," and
              supersedes APB Opinion No. 25, "Accounting for Stock Issued to
              Employees." SFAS 123(R) will require the fair value of all stock
              option awards issued to employees to be recorded as an expense
              over the related vesting period. The statement also requires the
              recognition of compensation expense for the fair value of any
              unvested stock option awards outstanding at the date of adoption.
              The adoption of SFAS 123(R) will impact the Company by requiring
              it to use the fair-value based method of accounting for future and
              unvested employee stock transactions rather than the intrinsic
              method the Company currently uses. The Company will adopt this
              SFAS as of January 1, 2006. The Company is evaluating the impact
              of the adoption of this SFAS 123(R) relating to its outstanding
              options/warrants.



                                      F-10
<PAGE>

              In December 2004, the FASB issued SFAS No. 153 ("SFAS 153"),
              "Exchanges of Nonmonetary Assets-an amendment of APB Opinion No.
              29". This statement amends APB 29 which is based on the principle
              that exchanges of nonmonetary assets should be measured based on
              the fair value of the assets exchanged. SFAS 153 eliminates the
              exception for nonmonetary exchanges of similar productive assets
              and replaces it with a general exception for exchanges of
              nonmonetary assets that do not have commercial substance. The
              Company adopted this FASB on January 1, 2005 and it did not have a
              material impact on its financial statements.

 (3)   PROPERTY AND EQUIPMENT

     Major classes of property and equipment,  net,  consist of the following at
December 31, 2004:


                     Computer equipment                        $    1,140,000
                     Office equipment, fixtures and vehicles          229,000
                                                                 --------------
                                                                    1,369,000

                     Less: accumulated depreciation                  (952,000)
                                                                 --------------
                                                               $      417,000
                                                                 ==============

     Depreciation  expense  for the years ended  December  31, 2004 and 2003 was
$48,000 and $160,000, respectively.

(4)    INTANGIBLE ASSETS

     Intangible  assets,  net, are  comprised  of the  following at December 31,
2004:


                   Goodwill                                     $   10,767,000
                   Less: accumulated amortization, including
                          impairment charge                         (7,420,000)
                                                                  --------------
                                                                $    3,347,000
                                                                  ==============

         The value of the remaining $3.3 million of goodwill on the balance
         sheet as of December 31, 2004 was determined not to be impaired by
         comparing the quoted market value of Digital Fusion stock at year-end
         to the total stockholders' equity at year-end and by analyzing other
         factors that could decrease the value of goodwill.

(5)    CURRENT LIABILITIES

     The following is a recap of the other current  liabilities  outstanding  at
December 31, 2004:


         Interest payable                            $  95,000
         Other                                         171,000
                                                     ---------
                                                     $ 266,000
                                                     =========
(6)    BORROWINGS

     At December 31, 2004, the Company's  outstanding  borrowings were comprised
of the following:



                                      F-11
<PAGE>

           Note with related party                            $    130,000
           Note with shareholders' of former acquisition           598,000
                                                                -------------
                                                                   728,000
           Less: current portion                                  (647,000)
                                                                -------------
           Total-long term borrowings                         $     81,000
                                                                =============

       (a)    POWERCERV NOTE AND NOTE WITH RELATED PARTY

              On January 15, 2004, the note to PowerCerv was paid by Digital
              Fusion's President and CEO, Roy E. Crippen, III, tendering to
              PowerCerv $110,000 in cash and 25,000 shares of PowerCerv
              preferred stock. In consideration therefore, Digital Fusion issued
              a note to Mr. Crippen in the amount of $136,580 (representing the
              amount of principal and interest on the PowerCerv note at the time
              of its retirement). The note bears an interest rate of prime plus
              6% and is payable at $600 per month plus interest for the first
              twelve months, $4,400 per month plus interest for the next eleven
              months, and a balloon payment of approximately $81,000 plus
              interest on January 15, 2006. Subject to a subordination agreement
              with Digital Fusion's primary lender, the note is secured by a
              security interest in property currently owned or later acquired by
              the Debtor (Digital Fusion) to secure the prompt payment and
              performance of all liabilities, obligations, and indebtedness of
              the Debtor under the note.

              Interest expense on these notes totaled approximately $12,800 and
              $5,000 during 2004 and 2003, respectively.

       (b)    DIGITAL SHAREHOLDERS' NOTE

              The Company entered into unsecured promissory notes with
              shareholders of a company DFI purchased during 2000 totaling
              $500,000. These notes bear interest at 6% and are payable at
              maturity. The interest rate was below the market rate and a
              discount of $46,000 was recorded to be amortized to interest
              expense over the period of the notes and results in an effective
              interest rate of 9%. Interest expense on these notes totaled
              approximately $53,000 and $47,000 during 2004 and 2003,
              respectively.

              Effective March 2, 2003, the interest rate increased from 6% to
              8%, and the accrued interest was converted into principal in the
              amended notes. The maturity date was extended from March 1, 2003
              to March 1, 2005. During March 2005, the Company made payments of
              approximately $188,000 for $157,000 of principal and the remaining
              accrued interest on these notes. Two note holders with a principal
              amount of $441,069 have agreed to extend their debt. The final
              terms of this extension have not been completed, but may include
              an option to convert the debt to common stock.

       (c)    LAURUS NOTE

                  On April 29, 2003, the Company closed on a $266,667 10%
              convertible note with its primary lender, collateralized by the
              Company's accounts receivable. The Company pays interest
              immediately at each monthly anniversary and the principal payments
              are paid over 22 months beginning July 30, 2003. This note matures
              on April 30, 2005. At the note holder's election, this note can be
              converted into DFI common stock at $0.35 a share after the DFI
              common stock price is at or above $0.4375 a share for ten
              consecutive days. Additionally, a seven-year warrant to purchase
              25,000 shares of DFI common stock at $0.4375 per share was issued.
              The Company paid a management fee of $16,000, which was amortized
              to interest expense over the 24-month life of the note. The
              initial note dated July 26, 2002, which had $533,333 remaining at
              April 30, 2003, was renegotiated and the remaining principal is
              due equally over 22 months beginning July 30, 2003 and ending
              April 30, 2005. The conversion feature of this July 26, 2002 note
              was repriced to $0.4375 a share for ten consecutive days. The
              five-year warrant issued on July 26, 2002, was also repriced to
              $0.4375.

              On April 7, 2004, the Company restructured its outstanding note
              with its primary lender to suspend monthly payments until February
              2005. The note bore an interest rate of 10% with monthly payments



                                      F-12
<PAGE>

              due on the first day of each month of $50,000 plus interest
              commencing on February 1, 2005 until the maturity date of January
              1, 2006. In addition, the Company paid an amendment fee of $25,000
              to the note-holder that will be amortized to interest expense over
              the life of the loan. In relation to the first note, the
              note-holder was given the right to convert the principal portion
              of the note and/or interest due and payable into fully paid and
              non-assessable shares of common stock of the Company at the fixed
              conversion price of $0.922. In relation to the second note, the
              note-holder was given the right to convert the principal and/or
              interest due and payable into fully paid and non-assessable shares
              of common stock of the Company at the fixed conversion price of
              $0.35.

              On April 22, 2004 and on May 11, 2004, the Company's primary
              lender exercised its right to convert principal and/or interest
              into fully paid and non-assessable shares of common stock of
              Digital Fusion, Inc. at the fixed conversion price of $0.35. With
              both the transactions, the primary lender converted $35,000
              ($70,000 total) of the principal, of which no interest is owed, to
              100,000 (200,000 total) shares of common stock. The conversion was
              deemed to constitute a conversion of outstanding principal amount
              to be applied against subsequent amounts to be paid. In addition,
              the lender issued a "rebate credit" for every dollar in principal
              amount converted equal to the amount of time in years and
              fractions thereof from the closing date, as defined in the
              Securities Purchase Agreement, to the conversion date times four
              percent (4%) that was applied as a reduction in the monthly amount
              due.

              On July 1, 2004, Digital Fusion fully redeemed this secured
              convertible debt for $531,855 of principal and $32,920 of
              interest.

       (d)    DEBT MATURITIES

              At December 31, 2004, aggregate required principal payments of
              long-term debt are as follows:

                           Year Ending
                           December 31,                         Amount

                               2005                        $        647,000
                               2006                                  81,000
                                                            ----------------
                                     Total                 $        728,000
                                                            ================

       (e)    LINE OF CREDIT

              On July 1, 2004, Digital Fusion entered into a secured revolving
              line of credit with a local bank. The line of credit has an
              interest rate of prime plus one percent, is secured by the
              Company's receivables and certain guarantees, and is not to exceed
              $800,000 which was increased to the lower of 80% of accounts
              receivable or $2,500,000 on December 22, 2004. On March 10, 2005,
              DFI amended this loan agreement. The Amendment (i) extended the
              maturity date to April 10, 2006, (ii) stated the rate of interest
              at prime, payable monthly and (iii) secured the line of credit by
              the Company's receivables and certain guarantees.

(7)    BENEFIT PLANS

       (a)    DEFINED BENEFIT PLAN

              Certain employees from a company that Digital Fusion acquired who
              met certain requirements of age and length of service at the time
              of acquisition are covered by the Company's sponsored
              non-qualified, non-contributory defined benefit pension plan. The
              benefits become fully vested upon the employees' retirements.
              Benefits paid to retirees are based upon age at retirement,
              compensation levels and years of credited service. The plan was
              amended to no longer require the Company to accrue future service
              benefits. Plan assets are stated at fair value and are comprised
              of stocks and bonds. Net periodic pension cost at December 31,
              2004 and 2003 for this plan includes the following components:



                                      F-13
<PAGE>

<TABLE>
<CAPTION>

                   Change in benefit obligation                                         2004                  2003
                                                                                   ----------------      ---------------
<S>                                                                            <C>                   <C>
                   Benefit obligation at beginning of year                     $         776,000     $         757,000
                   Service cost                                                                -                     -
                   Interest cost                                                          41,000                39,000
                   Amendments                                                                  -                     -
                   Benefit transactions                                                  (40,000)              (31,000)
                   Actuarial loss/(gain)                                                       -                52,000
                   Effect of settlement                                                        -               (41,000)
                                                                                   ----------------      ---------------
                   Benefit obligation at end of year                           $         777,000    $          776,000
                                                                                   ----------------      ---------------
                   Change in plan assets
                   Fair value of plan assets at beginning of year              $         481,000    $          478,000
                   Actual return on plan assets                                           34,000                90,000
                   Employer contributions                                                      -                     -
                   Benefit transactions                                                  (40,000)              (87,000)
                                                                                   ----------------      ---------------
                   Fair value of plan assets at end of year                    $         475,000    $          481,000

                   Funded status
                   Fair value of plan assets                                   $         475,000    $          481,000
                   Benefit obligation                                                    777,000               776,000
                                                                                   ----------------      ---------------
                   Funded status at end of year                                         (302,000)             (295,000)
                   Unrecognized net actuarial loss (gain)                                148,000               165,000
                   Unrecognized prior service cost (benefit)                            (148,000)             (165,000)
                                                                                   ----------------      ---------------
                   Accrued liability at end of year                            $        (302,000)   $         (295,000)
                                                                                   ================      ===============

                   Amounts recognized in the statement of financial position
                   Prepaid benefit cost                                        $        (103,000)   $          (98,000)
                   Accrued benefit cost                                                 (199,000)             (182,000)
                   Intangible assets
                   Accumulated other comprehensive income                                      -               (15,000)
                                                                                   ----------------      ---------------
                   Net amount recognized at end of year                        $        (302,000)   $         (295,000)
                                                                                   ================      ===============

                   Components of net periodic benefit cost
                   Service cost                                                $               -    $                -
                   Interest cost                                                          41,000                39,000
                   Expected return on plan assets                                        (34,000)              (34,000)
                   Amortization of:
                          Prior service cost                                             (16,000)              (17,000)
                          Actuarial loss                                                  17,000                25,000
                   Settlement loss                                                        (3,000)               27,000
                                                                                   ----------------      ---------------
                   Net periodic pension cost                                   $           5,000    $           40,000
                                                                                   ================      ===============

                   Assumptions used in determining actuarial valuations
                   Discount rate to determine projected benefit                           5.5%                  5.5%
                   Rate of increase in compensation levels                                0.0%                  0.0%
                   Expected rate of return on plan assets                                 8.0%                  8.0%
</TABLE>


        (b)   401(K) PLAN

              The Company sponsors a defined contribution benefit plan covering
              its employees. Currently, eligible employees are allowed to
              contribute annually up to the maximum annual contribution allowed
              for 401(k) plans. Effective August 1, 2002, the Board of Directors
              of DFI suspended the matching contribution due to the Company
              being cash flow negative. Company contributions are at the sole
              discretion of the Company.



                                      F-14
<PAGE>

(8)    STOCKHOLDERS' EQUITY

       (a)    CAPITAL STOCK

              During the 2001 Annual Shareholders meeting, the shareholders
              approved increasing the number of authorized shares to 17,000,000.
              The Company's Board of Directors designated 1,000,000 of the
              authorized shares as "blank check" preferred stock and 16,000,000
              shares as common stock. During March 2001, the Company's Board of
              Directors designated 60,000 of the preferred shares as Series A
              Convertible Preferred Stock par value $.01 per share and 45,000 of
              the preferred shares as Series B Preferred Stock, par value of
              $.01. No shares of the preferred stock have been issued.

              On May 11, 2004, Digital Fusion and Madison Run, LLC completed an
              equity sale whereby Madison Run bought 608,108 shares of Digital
              Fusion common stock at $0.74 per share, was issued a five-year
              warrant to purchase 304,054 shares of Digital Fusion common stock
              at $0.89 per share, and was issued a five-year warrant to purchase
              212,839 shares of Digital Fusion common stock at $0.94 per share.
              Digital Fusion President, Mr. Gary Ryan, is a member of the
              Madison Run investment group

              On October 21, 2004, the Company sold 1,650,000 shares of its
              common stock to Madison Run at a $1.00 per share for total
              proceeds of $1,650,000. The Company issued a five-year warrant to
              purchase 50,000 shares of its common stock at an exercise price of
              $1.25 per share to this investor.

         (b)      WARRANTS

              At December 31, 2004, 841,893 shares of common stock were reserved
              for the exercise of stock warrants comprised of the following:

                            Legacy Liability Settlement               250,000
                            Consulting                                 25,000
                            Madison Run private placement             566,893
                                                                  ------------
                                Total                                 841,893
                                                                  ============

              During January 2002, the Company entered into a settlement
              agreement on a certain equipment lease. As part of this
              settlement, the Company issued a five-year warrant to purchase
              250,000 shares of the Company's common stock at $1.00 per share.
              The Company recorded these warrants at fair market value,
              recording additional equity of $67,000.

              On April 17, 2003, the Company entered into a consulting agreement
              with an independent consultant in which the Company agreed to
              issue five-year warrant to purchase 10,000 shares of the its
              common stock at $0.33 per share. During May 2004, the Company
              granted a five-year warrant to purchase 15,000 shares of its
              common stock at an exercise price of $1.01 per share.

              See Note 8 (a) above for a discussion of the Madison Run private
              placement warrants.

       (c)    DELISTING NOTICE FROM NASDAQ

              On May 6, 2003, Digital Fusion announced that is had been delisted
              from the NASDAQ Small Cap Market effective at the opening of
              business May 9, 2003. The Company's common stock is currently
              traded on the Over-the-Counter (OTC) Bulletin Board.

       (d)    STOCK OPTION PLAN

              The Company maintains three qualified stock option plans. Under
              the terms of these plans, the Company has reserved 1,357,700
              shares of its common stock under these plans. The Company granted
              1,011,000 and 38,000 of stock options outside of its qualified
              stock option plans during 2004 and 2003 respectively. These were



                                      F-15
<PAGE>

              granted to Board of Directors as part of their compensation for
              being on the Company's BOD's, and certain management to retain key
              personnel.

              Under the Company's Stock Option Plans, the Company may grant
              incentive stock options to certain officers, employees and
              directors. The options expire five or ten years from the date of
              grant. Accelerated vesting occurs following a change in control of
              the Company and under certain other conditions.

              The following table summarizes information about qualified and
              non-qualified stock options outstanding at December 31, 2004:

<TABLE>
<CAPTION>

                                                    Options outstanding                    Options exercisable
                                        ------------------------------------------- -----------------------------------
                                                          Weighted
                                                           Average       Weighted                          Weighted
                                                          Remaining        average                         Average
                                           Number        contractual      exercise      Number             Exercise
                    Exercise Price       Outstanding    life (years)        price     exercisable           Price
                    --------------       -----------    ------------        -----     -----------           -----
<S>                 <C>      <C>              <C>             <C>      <C>                  <C>       <C>
                    $0.29 to $0.37            767,250         8        $    0.31            456,750   $      0.30
                    $0.40 to $0.55            399,594         7             0.41            390,417          0.41
                    $0.65 to $0.87            804,000         9             0.82            213,667          0.79
                    $0.89 to $1.19            452,000         9             0.92            252,667          0.94
                    $1.35 to $2.60             63,000        10             1.66             27,000          2.06
                    $5.78 to $7.50             80,900         5             5.97             80,900          5.97
                    $8.13 to $10.49            95,000         5            10.18             95,000         10.18
                    $17.19 to $22.00           21,000         4            20.38             21,000         20.38
                                        --------------                              ----------------

                                            2,682,744         8        $    1.29          1,537,401   $      1.72
                                        ==============                              ================
</TABLE>

              As of December 31, 2003, there were approximately 1,671,000
              exercisable with a weighted average exercise price of $3.96.

              Transactions under various qualified and non-qualified option
              plans for 2003 and 2004 are summarized as follows:

<TABLE>
<CAPTION>

                                                                                                        Weighted
                                                                                                         Average
                                                                                                        Exercise
                                                                                   Options                price
                                                                                   -------                -----
<S>                                                 <C>                            <C>               <C>
                             Outstanding at January 1, 2003                        1,827,350         $    3.85
                             Granted                                                 149,500              0.31
                             Exercised                                               -                    -
                             Canceled                                               (122,756)             2.29
                                                                                 -------------

                             Outstanding at December 31, 2003                      1,854,094         $    3.61
                             Granted                                               1,457,500              0.77
                             Exercised                                               (11,975)             0.38
                             Canceled                                               (616,875)             6.92
                                                                                 -------------

                             Outstanding at December 31, 2004                      2,682,744         $    1.29
                                                                                 =============

                             Options exercisable at December 31, 2004              1,537,401         $    1.72
                                                                                 =============

                             Options available for grant at December 31, 2004        298,956
                                                                                 =============
</TABLE>



                                      F-16
<PAGE>

(9)      TAXES

        Benefits for federal and state income taxes consist of the following as
        of December 31, 2004 and 2003:

                                                2004              2003
                                                ----              ----
         Current:
         Federal                         $       -          $      -
         State                                   -                 -
                                           ---------------    -------------
                                                 -                 -
         Deferred:
         Federal                                 -                 -
         State                                   -                 -
                                           ---------------    -------------
                                                 -                 -
                                           ---------------    -------------
         Total income tax benefit        $       -          $      -
                                           ===============    =============


       Deferred tax assets (liabilities) arise from the following temporary
       differences and are classified as follows as of December 31, 2004:

                                                                       2004
                                                                       ----
        Deferred Tax Asset, Current:
        Accounts receivable allowance                         $        22,000
        Vacation payable                                               30,000
        Other, net                                                      2,000
        Valuation allowance                                           (54,000)
                                                                ----------------
                                                              $             -
                                                                ================

        Deferred Tax Asset (Liabilities), Non-Current:
        Intangible assets                                     $    (1,244,000)
        Property and equipment                                       (161,000)
        Net operating loss carryforward                            11,123,000
        Accrued pension                                               121,000
        Valuation allowance                                        (9,839,000)
                                                                ----------------
                                                              $        -
                                                                ================

       Differences between the federal benefit computed at a statutory rate and
       the Company's effective tax rate and provision are as follows as of
       December 31, 2004 and 2003:

<TABLE>
<CAPTION>

                                                              2004                2003
                                                              ----                ----
<S>                                                    <C>                  <C>
Statutory benefit                                      $       (355,000)    $    (134,000)
State tax benefit, net of federal effect                        (63,000)          (24,000)
Non-deductible expenses                                           2,000             3,000
Increase in deferred income tax valuation allowance             416,000           155,000
                                                         ----------------     -------------
                                                       $        -           $      -
                                                         ================     =============

</TABLE>

       The Company has not recognized an income tax benefit for its operating
       losses generated during 2003 and 2004 based on uncertainties concerning
       its ability to generate taxable income in future periods. The tax benefit



                                      F-17
<PAGE>

       for 2003 and 2004 is offset by a valuation allowance established against
       deferred tax assets arising from operating losses and other temporary
       differences, the realization of which could not be considered more likely
       than not. In future periods, tax benefits and related deferred tax assets
       will be recognized when management considers realization of such amounts
       to be more likely than not.

       As of December 31, 2004, the Company had available net operating loss
       carry forwards of approximately $28 million that expire in various years
       through the year ended December 31, 2024.

(10)   COMMITMENTS AND CONTINGENCIES

       (a)    OPERATING LEASES

              The Company leases facilities and equipment under operating leases
              and subleases expiring through August 2007. Some of the leases
              have renewal options and most contain provisions for passing
              through certain incremental costs. At December 31, 2004 future net
              minimum annual rental payments under non-cancelable leases are as
              follows:

      Year Ending
      December 31,                  Amount
   -------------------              ------

       2005                          239,000
       2006                          194,000
       2007                          123,000
                             ----------------
      Total                 $        556,000
                             ================

              Total rental and lease expenses for the years ended December 31,
              2004 and 2003 were approximately $143,000 and $152,000,
              respectively.

       (b)    EMPLOYMENT AGREEMENTS

              The Company has several employment agreements which require
              payments of approximately $1,099,000 during 2005, $991,000 during
              2006 and $368,000 during 2007.

       (c)    LITIGATION

              The Company is involved in certain legal actions arising from the
              ordinary course of business. There are currently no legal items in
              which the Company is defending itself, however the Company is
              pursuing certain proceedings. While it is not feasible to predict
              or determine the outcome of these matters, any outcome would have
              a favorable impact on the Company, the amount which currently
              cannot be determined.

 (11) RELATED PARTY TRANSACTIONS

         (a)              POWERCERV NOTE AND NOTE WITH RELATED PARTY

              The Company's note to PowerCerv was paid by Digital Fusion's
              President and CEO, Roy E. Crippen, III, tendering to PowerCerv
              $110,000 in cash and 25,000 shares of PowerCerv preferred stock.
              In consideration therefore, Digital Fusion issued a note to Mr.
              Crippen in the amount of $136,580 (representing the amount of
              principal and interest on the PowerCerv note at the time of its
              retirement). The note bears an interest rate of prime plus 6% and
              is payable at $600 per month plus interest for the first twelve
              months, $4,400 per month plus interest for the next eleven months,
              and a balloon payment of approximately $81,000 plus interest on
              January 15, 2006. Subject to a subordination agreement with
              Digital Fusion's primary lender, the note is secured by a security
              interest in property currently owned or later acquired by the
              Debtor (Digital Fusion) to secure the prompt payment and
              performance of all liabilities, obligations, and indebtedness of
              the Debtor under the note.



                                      F-18
<PAGE>

              The above amounts are not necessarily indicative of the amounts
              that would have been incurred had comparable transactions been
              entered into with independent parties.

         (b)              INVESTMENT BY PRESIDENT

              During 2004, Madison Run, LLC purchased DFI's common stock through
              private placement transactions. DFI's President, Mr. Gary Ryan, is
              a member of the Madison Run investment group and personally
              invested in one of the offerings. See footnote 8.

(12)    CASH FLOW INFORMATION

       During 2003, the Company closed on a $266,667 convertible note. In
       conjunction with this financing, the Company issued a seven-year warrant
       to purchase 25,000 shares of the Company's common stock at $0.4375 per
       share. The Company recorded these warrants at fair market value,
       recording additional equity of $13,000. The Company also recorded $11,000
       additional deferred financing costs related to legal fees and other fees
       that were netted against the debt proceeds given to the Company in
       conjunction with this convertible note.

       Effective March 2, 2003, the Company converted $101,000 of interest
       payable to the digital shareholders' notes to additional principal
       payable in March 2005.

       During 2004, warrants were exercised for 200,000 shares of the Company's
       common stock and the exercise was paid for by a reduction of notes
       payable of $70,000.

       During 2004, a note payable was refinanced and the deferred financing
       fees of $25,000 were added to the notes payable balance.

       During 2004 and 2003, the Company paid $185,000 and $186,000 respectively
       for interest. No income taxes were paid during 2004 or 2003.

(13)   MAJOR CUSTOMERS OF THE COMPANY

       One customer accounted for 28% of the Company's revenues during 2003. No
       customer accounted for over 10% of the Company's revenues during 2004.

(14)     ACQUISITION

       On October 28, 2004, Digital Fusion, Inc. (the "Company") entered into a
       Stock Purchase Agreement (the "Agreement") with Michael W. Wicks
       ("Wicks") pursuant to which Wicks agreed to sell all of his outstanding
       capital stock of Summit Research Corporation ("Summit").

       Under the terms of the Agreement, the Company will pay to Wicks (a)
       $1,600,000 in cash at the closing of the transaction (the "Closing"), (b)
       575,000 shares of the Company's common stock as of the Closing, (c) on
       the six month anniversary of the Closing, $600,000 cash plus an
       additional amount equal to the excess of Summit's tangible net worth as
       of the Closing in excess of $900,000 (the "Second Payment") and (d) a
       convertible promissory note (the "Note") in the cumulative amount of
       $2,700,000. To the extent that Summit's tangible net worth as of the
       Closing is less than $900,000, the Note shall be reduced by that same
       amount.

       The principal portion of the Note may be converted at any time by Wicks
       into a number of shares determined by dividing the converted principal
       amount of the Note by the Conversion Price of $2.25 per share. In the
       event the entire Note is converted, Wicks will receive a total of
       1,200,000 shares of the Company's common stock. No interest shall accrue
       on the Note during any calendar month in which the Company's common stock
       is publicly traded and the average closing price of the Company's common
       stock is greater than $2.80 per share.

       This transaction closed on January 3, 2005. In conjunction with this
       acquisition, on January 3, 2005, the Company entered into employment
       agreements with two individuals with Summit. The annual salaries for
       these two individuals total $310,000 per year for two years or when the
       convertible note is paid off whichever is later.



                                      F-19
<PAGE>

       The following pro forma condensed balance sheet gives effect to the above
       event as if the transaction had occurred on December 31, 2004. These pro
       forma statements are based upon the unaudited January 3, 2005 balance
       sheet of Summit.

<TABLE>
<CAPTION>

                                               Digital Fusion, Inc.
                                         Pro Forma Condensed Balance Sheet
                                                 December 31, 2004

                                                           As Reported in          Pro Forma
                                                            Accompanying        Adjustments for
                                                             Financial               Summit             Pro Forma
                                                             Statements           Acquisition        Balance Sheet
                                                         -------------------    -----------------    ---------------
<S>                                                  <C>                                <C>
Assets
Cash                                                 $             252,000              (252,000)              -
Accounts receivable and unbilled receivables, net                1,050,000             2,354,000       3,404,000
Other current assets                                                27,000                40,000          67,000
Fixed assets, net of accumulated depreciation                      417,000                57,000         474,000
Goodwill and intangible assets                                   3,347,000             4,478,000       7,825,000
Other assets                                                       298,000              (281,000)         17,000
                                                         -------------------    -----------------    ---------------
                                                     $           5,391,000             6,396,000      11,787,000
                                                         ===================    =================    ===============

Liabilities and Stockholders' Equity

Accounts payable and accrued expenses                              993,000             1,225,000       2,218,000
Pension obligation                                                 302,000                     -         302,000
Notes payable, convertible debt, lines of credit
and lease payments                                                 728,000             3,925,000       4,653,000
Stockholders' equity                                             3,368,000             1,246,000       4,614,000
                                                         -------------------    -----------------    ---------------
                                                     $           5,391,000             6,396,000      11,787,000
                                                         ===================    =================    ===============
</TABLE>


(15)     SUBSEQUENT EVENTS

       On January 3, 2005, the Company closed on its acquisition with Summit.
       See footnote 14.

       On March 10, 2005, the Company amended its line of credit. See footnote
       6(e).

       On February 25, 2005, the Company amended the Chief Executive Officer's
       employment agreement to increase his annual salary to $175,000 per year
       and the employment agreement expires on February 25, 2007.

       On February 25, 2005, the Company amended the Chief Operating
       Officer/President's employment agreement to increase his annual salary to
       $175,000 per year and the employment agreement expires on February 25,
       2007.

       During March 2005, note holders with $441,069 of principal agreed to
       extend their debt. The Company is finalizing the terms of the debt
       extensions. Note holders with $157,000 of principal were paid. See
       footnote 6 (b).

       Effective March 17, 2005, Madison Run, LLC exercised warrants to purchase
       354,054 shares of the Company's common stock. The Company received
       $333,108 from the exercise of these warrants.



                                      F-20