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U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-KSB


x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2001
OR

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

400 North Ashley Drive, Suite 2600, Tampa, Florida 33602
(Address of principal executive offices, including zip code)

(813) 221-0024
(Registrants telephone number, including area code)

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

|                                                          |  |                                                                         
|--------------------------------------------------------- |  | ------------------------------------------------------------------------
|Title of Each ClassCommon Stock, $.01 par value per share |  | Name of Each Exchange on Which RegisteredThe Boston Stock Exchange, Inc.

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. Yeso
  No x

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.o

Issuers revenues for its most recent fiscal year: $16,685,000.

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 February
1, 2002 as reported by the Nasdaq SmallCap Market was approximately $3,502,000.
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 February 28, 2002, 7,163,936 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 2002 Annual Meeting of Stockholders, which will be filed on
or before April 30, 2002.



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TABLE OF CONTENTS



|                                                  |                                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Description of Business                                                                                        
|                                                  | Item 2. Description of Property                                                                                        
|                                                  | Item 3. Legal Proceedings                                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                                            
|PART II                                          
|                                                  | Item 5. Market for Common Equity and Related Stockholder Matters                                                       
|                                                  | Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations                          
|                                                  | Item 7. Financial Statements                                                                                           
|                                                  | Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                           
|PART III                                         
|                                                  | Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
|                                                  | Item 10. Executive Compensation                                                                                        
|                                                  | Item 11. Security Ownership Of Certain Beneficial Owners And Management                                                
|                                                  | Item 12. Certain Relationships and Related Transactions                                                                
|                                                  | Item 13. Exhibits List and Reports on Form 8-K                                                                         
|SIGNATURES                                       
|FINANCIAL STATEMENTS AND EXHIBITS                
|                                                  | REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                                                                     
|                                                  | CONSOLIDATED BALANCE SHEETS                                                                                            
|                                                  | CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                  
|                                                  | CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                                                                         
|                                                  | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                  
|                                                  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             
|December 22, 2001 Amended Aetna Service Agreement
|Nicholas R. Loglisci Termination Agreement       
|Subsidiaries of The Company                      
|BDO Seidman Consent                              
|Pender Newkirk Consent                           



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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 (the SEC), 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

We (as used herein, we, us, our, Digital Fusion, DFI and the
Company refer to Digital Fusion, Inc.) are an information technology (IT)
consulting company helping our customers use technology to access business
information and enhance the performance of their human capital. Our success is
based on a total approach, providing the people, processes, and technology
needed to translate business needs into sound IT strategies. We provide our
services to businesses, organizations and public sector institutions in the
Eastern United States.

This total approach is driven by the vision and diverse skills of our
people, talented professionals who view projects from a wider perspective than
most other IT consultants. They understand that no successful project is
developed in isolation. This big-picture approach bucks todays trend toward
the narrower focus of specialization. Vendor-specific certification programs
churn out consultants focused on only a small set of products, a
one-tool-fits-all approach, producing inefficient and expensive solutions to
business problems. We transform technology into complete solutions through our
integrated multi-disciplinary services, including Information Technology
Consulting, Business Application Development, IT Support and Integration and
Sales Force Tune-Up. Headquartered in Tampa with branch offices in Orlando,
Washington D.C., Philadelphia metro area, New York City, New Jersey, and
Alabama, DFI continues to be a leading provider of IT consulting services to
businesses, organizations, and public sector institutions across the U.S.

Our customers during the year ended December 31, 2001 included, among many
others: Aetna US Healthcare, Commerce Bank, Darden Restaurants, Deutsche Bank,
echelon, Harcourt, ING, and State of Tennessee.

We were incorporated in February 1995 as Internet Broadcasting Systems,
Inc. and changed our name to IBS Interactive, Inc., when we went public in May
1998. At the annual meeting of shareholders held October 30, 2001 in Tampa,
Florida, our shareholders approved the corporate name change to Digital Fusion,
Inc. Our stock is traded on the Nasdaq SmallCap Market under the symbol of
DIGF. Our primary Web sites are www.digitalfusion.com,
www.digitalfusionweb.com, and www.digitalfusiontraining.com.

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Company Services

We provide the following services to meet our customers needs.



| |  |  | IT Support and Integration      
| | - |  | --------------------------------
| |  |  | IT Consulting                   
| |  |  | Business application development
| |  |  | Sales Force Tune-Up             

|    |  |                           
|--- |  | --------------------------
|(a) |  | IT Support and Integration

Digital Fusions IT Support and Integration division helps organizations
define, design and deploy the optimal solution for their information technology
needs. Our solutions optimize Operational efficiency by maximizing
system availability, ensuring software license accuracy, improving end-user
productivity and significantly reducing IT operational costs.

Our IT support and integration services include:



| |  |  | Infrastructure Consulting       
| | - |  | --------------------------------
| |  |  | Desktop and help desk support   
| |  |  | Network and server management   
| |  |  | System migration/integration    
| |  |  | Leasehold replacement           
| |  |  | Hardware and Software Deployment
| |  |  | IT supplemental support         

|    |  |              
|--- |  | -------------
|(b) |  | IT Consulting

Consulting services are provided to businesses and organizations seeking
information, guidance and staffing in order to effectively build business
applications, analyze and utilize information technology prior to the time such
businesses make investments of capital, time and/or personnel. The consulting
services we provide include: (i) IT Strategy (ii) business analysis and
software design (iii) computer programming, (iv) security audits and protocol
recommendations, (v) disaster recovery plan audit and protocol recommendations,
and (vi) strategic plan development. Representative skill sets include:



| |  |  | Customer Relationship Management                   
| | - |  | ---------------------------------------------------
| |  |  | ERP (PeopleSoft, Microsoft GreatPlains)            
| |  |  | Microsoft technologies                             
| |  |  | Sybase technologies and training                   
| |  |  | Desktop and network server support                 
| |  |  | On-site business applications development          
| |  |  | Disaster recovery plans and protocol recommendation
| |  |  | Strategy and advisory services                     

|    |  |                                  
|--- |  | ---------------------------------
|(c) |  | Business Applications Development

We maintain a full range of applications programming expertise to: (i)
ensure that customers applications and networks are specifically tailored to
meet their requirements, (ii) develop and maintain customers Web sites, (iii)
provide customers with technical assistance and (iv) provide consulting
services.

Our offerings include:



| |  |  | Customized application development Digital Fusion provides
customized application development to customer specifications
including Web portals, e-commerce, intranets, customer relationship
management (CRM), distance learning, financials, online databases,
interactive communications and purchasing systems.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Web-Site Development and
Maintenance Web-site development
involves the design and development of a customers web-site
production. Working with customers and outside graphic designers and
programmers, we design, create and maintain multi-media, interactive
Web-sites for our customers, using the latest applications and
development tools.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Content management Digital Fusion provides the tools and
processes required to help move responsibility for web content to
business units within organizations.                                                                                                                                                                                   
|
| |  |  | Site Development Intranet, Extranet, and Internet site
development and maintenance requires knowledge of several different
programming languages, including Sybase, Oracle, UNIX, Windows NT,
C++, JAVA, HTML, Cold Fusion and customized database and
applications programming.                                                                  
|
| |  |  | Shrink-Wrapped Package
Selection when standard
off-the-shelf packages will meet customers requirements, we help
customers select and implement standard packaged offerings.                                                                                                                                                                      

|    |  |                    
|--- |  | -------------------
|(d) |  | Sales Force Tune-Up

Digital Fusions Sales Force Tune-Upoffering helps companies maximize
their opportunities to generate revenue and improve their sales and marketing
efficiency. We provide focused consulting services that look at organizations
overall sales & marketing business processes. We make sure we understand how
the overall sales process is structured, make suggestions for improvement, and
help the customer understand how best to apply technology to assist with
process improvement. Typical services we provide for customers include:



| |  |  | Standardizing Sales
Education We help organizations
standardize sales education across all sales organizations  making
organizations salespeople more productive takes communicating
service offerings to them, so they can communicate it to customers.
We assist by creating web-enabled versions of customized sales
training courses, so they start with the same message. We can also
assist with effective instructional design.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Business and Marketing
Analysis Many times, people do not
know the source of the bulk of their business. It is critical to
understand what is driving business into their organization, so they
can repeat that success. Capturing that knowledge takes changing
marketing & sales processes. Our analysis helps them understand
where business is coming from and where it can come from.                                              
|
| |  |  | Component Solutions Digital Fusion has a full-featured CRM
product that generally meets 80% of the typical requirements for
CRM. The license for the base product is free when a customer
purchases our customization services. Customization typically
involves integrating the CRM database with other business
applications                                                                                                          

Each service line described above has a specific target market and
customer size. Overall, we market our Business Application Development and IT
consulting services to mid-sized businesses (including mid-size departments of
larger enterprises) and public sector institutions. Our comprehensive suite of
services enables our customers to capitalize on the wide variety of critical
business and data communication opportunities made possible by the Internet and
Internet-related technologies while maximizing their investment in their legacy
systems when appropriate.

General Development of Business
 Strategic Vision

During 2001, our strategic vision was to focus on being an IT consulting
services company. To determine our service lines, we evaluated both the market
conditions, and our past successes to identify the service lines that were
likely to increase in demand. We leveraged our CRM component solution and
added business consulting to the mix to complete the offering.

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In order to further focus on the IT consulting services business, we
decided to discontinue the internet access, web hosting and network services
business units/divisions. These businesses required large capital commitments
and a certain level of critical mass to be competitive.

General Development of Business
 Acquisitions and Divestitures

Since we decided to discontinue our network services and installation
business unit, during July 2001, we sold this business unit to Spectrum
Solutions, Inc. (Spectrum Solutions) for $350,000 and Spectrum Solutions
assumed certain lease obligations of the Company related to this network
services and installation business unit. We recorded a $188,000 gain related
to this sale. This division was acquired on March 31, 1999 by purchasing
Spectrum Information Systems, Inc. (Spectrum), for approximately 145,456
shares of common stock, subject to certain adjustments, in exchange for all of
the issued and outstanding capital stock of Spectrum. The common stock was
valued by the parties at $22.00 per share. Spectrum is a Huntsville,
Alabama-based provider of network services. The combination was accounted for
as a pooling of interests.

Since we decided to discontinue our web hosting and non-dial-up internet
access business unit, we sold this business unit to Veraciti, Inc during April
2001 for $200,000 cash and $60,000 worth of services to complete certain
customer projects. In addition, Veraciti assumed certain lease obligations of
the Company related to the web hosting and non-dial-up business. We recorded a
$211,000 loss in connection with this sale.

In conjunction with our strategic vision to focus more on IT consulting
business line, on March 1, 2000 we acquired all of the outstanding stock of
digital fusion, inc. (Digital) in exchange for 975,000 shares of unregistered
common stock valued at $13.00 per share, a $500,000 three-year subordinated
note accruing 6% interest per annum and the assumption of debt totaling
approximately $4.2 million. Digital is a Tampa, Florida-based provider of
professional services. The value ascribed to the consideration of stock,
equity instruments, debt and related costs was $19.1 million resulting in
goodwill of $16.4 million. This was accounted for under the purchase
accounting method.

On June 30, 1999, we acquired Spencer Analysis, Inc. (Spencer), for
approximately 260,005 shares of common stock, subject to certain adjustments.
The common stock was valued at $23.08 per share. Spencer is a New
York City-based computer consulting firm. The combination has been accounted for as a
pooling of interests.

During 1999, we purchased several Internet access businesses. These
businesses were sold to Earthlink, Inc, a large internet service provider (ISP)
during August 2000. We received $2.8 million cash in 2000 and recorded a $3.5
million loss related to this sale.

Sales and Marketing

Our sales and marketing strategy is driven by our ability to offer
solutions specific to each customers needs, then we cross-sell additional
services to that customer when appropriate. In this way, we are able to
increase awareness of our comprehensive Business and IT consulting services,
and desktop support and integration. Our marketing efforts are primarily
focused on mid-sized businesses and organizations for our strategic services,
and large-sized organizations for our staffing, application development, and
desktop support services. We utilize a direct sales model for marketing and
selling our services. To a lesser extent, we obtain sales leads through our
partner relationships.

Our marketing efforts principally involve tradeshows, direct mailing, and
telesales in areas within the geographic scope of our network. We believe that
it is critical to increase the brand recognition of the name, Digital Fusion
which will make it easier for our sales group to convert the customer interest
to closed business.

We also generate sales leads through referrals from customers,
consultants, responses for requests for proposals, referrals from other
Business and IT consulting service businesses, our web site and associated
links and industry seminars and trade shows. We are focusing our marketing
efforts on increasing our brand awareness and on those services (e.g. IT
Consulting) that benefit from high-volume

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marketing approaches. We are also focusing on developing solution-focused
service lines such as CRM. We use this service line to proactively drive
business opportunities, then we offer our customers a wider range of solutions
as our relationship with that customer expands.

We currently employ nine full-time sales people. We have a team approach
to proposal development that leverages the best skills of our salespeople and
our technical professionals. This enables us to develop sales proposals meeting
the specific needs and budgets of our prospective customers. We are developing
internal business processes to continually refresh the sales & marketing
employees understanding of our service offerings and service lines. In many
cases, our salespeople specialize in a specific service offering instead of
selling all services. This allows our salespeople to become more knowledgeable
on the offerings they sell.

Customers

Our customer base consists primarily of businesses and organizations with
IT consulting, business application development and IT support and integration
needs. We intend to expand our customer base in all of our business lines
through internal growth to lessen our dependence on any one particular customer
or group of customers.

We are dependent on a limited number of customers for a substantial
portion of our revenues. For the years ended December 31, 2001 and 2000, our
largest customer, Aetna, accounted for approximately 18% and 20%, respectively,
of our revenues. Revenues derived from our consulting contracts are generally
non-recurring in nature; however, we have implemented a CRM system and business
processes internally to better capitalize on repeat business with customers.
Our contract with Aetna provides that we render services pursuant to purchase
orders, each of which constitutes a separate contractual commitment by Aetna.
Non-renewal or termination of our contract with Aetna or the failure by Aetna
to issue additional purchase orders to us under the existing contract would
have a material adverse effect on us. There can be no assurance that we will
obtain additional contracts for projects similar in scope to those previously
obtained, that we will be able to retain existing customers or attract new
customers or that we will not remain largely dependent on a limited customer
base which may continue to account for a substantial portion of our revenues.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Certain Factors Which May Affect the Companys Future Performance
 Dependence on Key Customers; Non-Recurring Revenue.

Competition

The markets for our services are highly competitive, but are specific to
each individual service line. With limited barriers to entry we believe the
competitive landscape will continue to grow both from new entrants to the
market as well as from existing players, such as CRM Software vendors, or ERP
vendors expanding the breadth of their services into the mid-level market that
we serve. In addition, we have been facing increased competition from
outsourced recruiting companies.

We believe that competition in the Business Application Development/IT
consulting services market is based upon the following factors:



| |  |  | Speed of response to customer request                         
| | - |  | --------------------------------------------------------------
| |  |  | Flexibility and willingness to adapt to customer needs        
| |  |  | Responsiveness to customer demands                            
| |  |  | Number and availability of qualified engineers and programmers
| |  |  | Project management capability                                 
| |  |  | Breadth of service offerings                                  
| |  |  | Technical expertise                                           
| |  |  | Size and reputation                                           
| |  |  | Brand recognition and geographic presence                     
| |  |  | Price                                                         

Traditional professional service firms (e.g. management consultants),
traditional IT service providers and advertising firms, have created divisions
within their organizations that focus on the business

-5-



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needs of their customers. Many of these service providers,
however, do not provide the breadth of services needed to offer comprehensive,
integrated business solutions and services. Management consulting firms focus
on overall business strategies and the remodeling of business processes for use
in an Internet environment. The more traditional IT service providers are
focused on systems integration and the development and implementation of
enterprise software applications. Advertising agencies and pure Web design
shops have focused on the marketing and creative development of services, but
typically lack technical capabilities depth and the ability to provide
complete, integrated solutions.

We compete with numerous large companies that have substantially greater
market presence and financial, technical, marketing and other resources than we
have, including (i) large information technology consulting and service
providers and application software firms; (ii) international, national,
regional and commercial ISPs who have consulting services divisions; (iii)
established on-line services companies; (iv) computer hardware and software and
other technology companies; (v) Application Service Providers and (vi) major
accounting firms. Many of our competitors expanded their service offerings
last year and increased their focus on e-Business and IT professional services
markets, thus increasing the number of organizations that were providing
similar services to ours. This competition increased just prior to when the
pure-play dotcom market collapsed. Companies heavily dependent on the dotcom
market for their primary source of revenue downsized extensively. The
downsizing of these entities will lessen competition for skilled technical
resources, however, it does not have a material effect on our primary market,
since our core competency is building business applications. We will remain
focused on delivering better service than our competitors who also focus their
services on business application development.

As a result of continued competition, we also expect to encounter some
pricing pressure, which in turn could result in significant reductions in the
average selling price of our services. There can be no assurance that we will
be able to offset the effects of any such price reductions through an increase
in the number of customers, higher revenue from enhanced services, cost
reductions or otherwise. In addition, we believe that continuing consolidation
in the business and IT professional services market could result in increased
price and other competition in the industry. Increased price or other
competition could make it difficult for us to gain additional customers and
could have a material adverse effect on us. There can be no assurance that we
will be able to compete successfully. See Managements Discussion and Analysis
of Financial Condition and Results of Operations  Certain Factors Which May
Affect the Companys Future Performance  Competition.

Employees

As of December 31, 2001, we had 110 full-time employees including 3
executive officers, 88 billable employees, 9 persons dedicated to sales and
marketing activities and 10 administrative personnel. None of our employees
are represented by a labor union, and we are not a party to any collective
bargaining agreements. We believe that our employee relations are good. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Certain Factors Which May Affect the Companys Future Performance
 Retaining Key Personnel.

To maximize the utilization of our resources and evaluate the skills and
knowledge of certain prospective employees, we routinely hire temporary
personnel to satisfy increased demand for personnel in connection with the
commencement of new projects, we have also implemented an internal
skills-tracking application and other support systems.

Geographic area

The majority of our customers are from the United States with less than 1%
derived elsewhere, and this is also representative of where our revenues are
derived. All long-lived assets are located in the Eastern part of the United
States.

Seasonality

Our 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.

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|        |  |                        
|------- |  | -----------------------
|Item 2. |  | Description of Property

We serve our customers through our corporate headquarters, located in
Tampa Florida, and our regional offices located in New Jersey, New York,
Florida and Alabama.

At December 31, 2001, we did not own any real property and conducted our
operations at the following leased premises:

|                                                     |  |                                                          |  |                    |       |                    |  |            |         |  |  |                  
|---------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------ | ----- | ------------------ |  | ---------- | ------- |  |  | -----------------
|                                                     |  |                                                          |  | Approximate Square |       | Approximate        |  |           
|Location                                             |  | Description of Facility                                  |  | Footage            |       | Annual Leased Cost |  | Lease Term
|                                                     |  |                                                          |  |                    |       |                    |  |           
|400 N. Ashley Drive
Suite 2600
Tampa, FL 33602       |  | Corporate headquarters,
sales, administration,
education |  |                    | 7,012 |                    |  | $          | 112,000 |  |  | 12/01/00-05/31/02
|                                                    
|1930 Route 70,
Suite K-54
Cherry Hill, NJ 08003      |  | Sales, customer
support, and
programming services        |  |                    | 1,946 |                    |  | $          | 28,000  |  |  | 9/22/01-8/31/03  
|                                                    
|3430 Sunset Ave.
Suite 21
Ocean, NJ 07712            |  | Sales, customer
support, and
programming services        |  |                    | 1,200 |                    |  | $          | 17,000  |  |  | Month-to-Month   
|                                                    
|4970 Corporate Drive
Suite 100A
Huntsville, AL 35805 |  | Sales, customer
support, and
programming services        |  |                    | 3,256 |                    |  | $          | 38,000  |  |  | 1/1/02-12/31/04  
|                                                    
|116 John Street
Suite 620
New York, NY 10038         |  | Sales, customer
support, and
programming services        |  |                    | 2,212 |                    |  | $          | 53,000  |  |  | 12/01/99-11/30/02
|                                                    
|5778 S. Semoran Blvd.
Orlando, FL 32822              |  | Sales, customer
support and
programming services         |  |                    | 4,566 |                    |  | $          | 70,000  |  |  | 3/1/98-2/28/03   

We believe that all of our leased premises are in generally good
condition, well maintained and adequate for our current operations.




|        |  |                  
|------- |  | -----------------
|Item 3. |  | Legal Proceedings

On July 25, 2000, Personnel Staffing, Inc., Gregerson Management Services,
Inc., Chynna, Inc., and Luke, Inc. (PSI) filed a complaint in the Circuit
Court of Etowah County, Alabama and a counterclaim was filed by the Company in
the Circuit Court of Etowah County, Alabama. During mediation on October 1,
2001, both the Company and PSI agreed to settle all claims asserted against the
other. The effect on the Companys financial position was the $25,000
insurance deductible, which is recorded as a liability at December 31, 2001.

On July 24, 2001, Sunrise International Leasing Corp. filed a complaint
for alleged defaults under several equipment lease agreements associated with a
business unit that was sold. The Company returned the equipment that was in its
possession and during mediation in January 2002, the Company agreed to settle
all claims asserted for $100,000, which was recorded as a liability at December
31, 2001.

On June 29, 2001, Focal Communication Corporation filed a complaint for
alleged defaults under a communication service provider agreement associated
with a business unit that was sold. During

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mediation in February 2002, the
Company agreed to settle all claims asserted for $100,000, which was recorded
as a liability at December 31, 2001.

On October 9, 2001, Brandywine Realty Partners, L.P. filed a complaint for
alleged default under a real estate lease agreement. During mediation, the
Company agreed to settle all claims asserted for $120,000 payable over the term
of the next four quarters. The Company has paid $30,000 and has recorded the
remaining $90,000 as a liability at December 31, 2001.

In addition, the Company is involved in certain legal actions arising from
the cessation of certain business operations and in the ordinary course of
business. The Company is defending these proceedings. While it is not feasible
to predict or determine the outcome of these matters, the Company does not
anticipate that any of these matters or these matters in the aggregate will
have a material adverse effect on the Companys business or its consolidated
financial position or results of operations.




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

An Annual Meeting of Stockholders of the Company was held on October 30,
2001. At the meeting, holders of 6,105,589 shares of common stock were present
in person or by proxy, which constituted a quorum thereof. The stockholders
voted on three proposals at the Meeting, all of which were approved. The vote
of the stockholders is set forth below:

| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     Election of Directors to serve until the next Annual Meeting
of Stockholders and until their respective successors have been
elected and qualified.

|                          |  |     |           |                     |  |          |         |  |  |        |   | 
|------------------------- |  | --- | --------- | ------------------- |  | -------- | ------- |  |  | ------ | - | 
|                          |  |     |           |                     |  |          |         |  |  | Broker
|                          |  | For |           | Against or withheld |  | Non-vote
|                          |  |     |           |                     |  |         
|Ahmad Al-Khaled           |  |     | 6,022,947 |                     |  |          | 82,642  |  |  |        | 0 | 
|Roy E. Crippen, III       |  |     | 5,668,920 |                     |  |          | 436,669 |  |  |        | 0 | 
|Bruce E. Fike             |  |     | 6,039,903 |                     |  |          | 65,686  |  |  |        | 0 | 
|O.G. Greene               |  |     | 5,666,492 |                     |  |          | 439,097 |  |  |        | 0 | 
|Nicholas R. Loglisci, Jr. |  |     | 6,031,447 |                     |  |          | 74,142  |  |  |        | 0 | 



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | 2.     Approve an amendment to the Restated Certificate of
Incorporation to increase the number of authorized shares of common
stock.

|          |  |         |         |         |  |          |       |  |  |        |   | 
|--------- |  | ------- | ------- | ------- |  | -------- | ----- |  |  | ------ | - | 
|          |  |         |         |         |  |          |       |  |  | Broker
|For       |  | Against |         | Abstain |  | Non-vote
|          |  |         |         |         |  |         
|5,421,974 |  |         | 676,065 |         |  |          | 7,550 |  |  |        | 0 | 



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | 3.      Approve an amendment to the Restated Certificate of
Incorporation to change the name of the Company to Digital Fusion,
Inc.

|          |  |         |         |         |  |          |       |  |  |        |   | 
|--------- |  | ------- | ------- | ------- |  | -------- | ----- |  |  | ------ | - | 
|          |  |         |         |         |  |          |       |  |  | Broker
|For       |  | Against |         | Abstain |  | Non-vote
|          |  |         |         |         |  |         
|5,670,765 |  |         | 433,184 |         |  |          | 1,640 |  |  |        | 0 | 




PART II




|        |  |                                                         
|------- |  | --------------------------------------------------------
|Item 5. |  | Market for Common Equity and Related Stockholder Matters

Our common stock is traded on the Boston Stock Exchange and Nasdaq
SmallCap Market under the symbol DIGF. The following table indicates high
and low sales quotations for the periods indicated.

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Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|2001           |  | High |      | Low
|               |  |      |      |    
|First Quarter  |  | $    | 1.81 |     |  | $ | 0.41 | 
|Second Quarter |  | $    | 1.15 |     |  | $ | 0.35 | 
|Third Quarter  |  | $    | 0.85 |     |  | $ | 0.30 | 
|Fourth Quarter |  | $    | 2.00 |     |  | $ | 0.26 | 

|               |  |      |       |     |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | - | ---- | 
|2000           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 14.44 |     |  | $ | 8.50 | 
|Second Quarter |  | $    | 10.75 |     |  | $ | 4.50 | 
|Third Quarter  |  | $    | 8.25  |     |  | $ | 2.00 | 
|Fourth Quarter |  | $    | 2.50  |     |  | $ | 0.63 | 

On June 7, 2001, we were de-listed from the Nasdaq SmallCap Market
primarily for our failure to file our 10-KSB annual report and 10-QSB in a
timely manner. We appealed the de-listing and on November 15, 2001, the Nasdaq
Listing and Hearing Review Council reversed an earlier decision by the Nasdaq
Listing Qualifications Panel and we were relisted on the Nasdaq SmallCap Market
under the symbol DIGF. Among its reasons for reversing the Panel, the Council
cited our completion of required filings and a
determination that the companys internal controls were adequate.

The number of holders of record of our common stock on January 15, 2002
was 119.

There were no dividends or other distributions made by DFI during the
fiscal year ended December 31, 2001 with respect to its common stock. DFI
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 our 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 2001) have
been previously reported on our Forms 10-KSB and 10-QSB and are incorporated
into this 10-KSB by reference.

As part of our 1999 acquisition of EZNet, Inc., on December 10, 2001 we
issued 1,475 shares of common stock that had been held in reserve for EZNet,
Inc., pursuant to the terms of the related acquisition agreement. Because this
issuance did not involve any public offering, it was exempt from registration
under the Section 4(2) of the Act.

As part of our 1999 acquisition of Jaguar Systems, Inc., on December 10,
2001 we issued an aggregate of 6,660 shares of common stock that had been held
in reserve for the former shareholders of Jaguar Systems, Inc., pursuant to the
terms of the related agreement and plan of merger. Because this
issuance did not involve any public offering, it was exempt from
registration under the Section 4(2) of the Act.

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As part of our 1999 acquisition of ADViCOM division of Multitronics, Inc.
on December 10, 2001 we issued 1,170 shares of common stock that had been held
in reserve to Multitronics, Inc., pursuant to the terms of the related
acquisition agreement. Because this issuance did not involve any public
offering, it was exempt from registration under the Section 4(2) of the Act.




|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|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

We are an information technology (IT) consulting company helping our
customers use technology to access business information and enhance the
performance of their human capital. We provide a broad range of business and
IT consulting services, including IT support and integration; information
technology consulting; business applications development and sales force
tune-up. We provide our services to businesses, organizations and public
sector institutions in the Eastern United States. Our revenues are derived
principally from fees earned in connection with the performance of services
provided to customers. We typically bill on a time and materials basis. The
majority of our costs are associated with personnel, which varies with our
revenue. Attracting and retaining billable personnel will be important for our
Company going forward.

During the past year, we have continued our strategic vision to be focused
on being an IT consulting services company and concentrate on our profitable
business units. To accomplish this, we stream-lined the costs of our
continuing business units, closed unprofitable offices and sold or shut down
business units that did not fit our strategic vision of being an IT consulting
services company.

In March 2000, we purchased Digital, an e-business professional services
company to complement our existing web development, desktop support and
integration groups. In 2001, we began developing our sales force tune-up
business line, which helps companies maximize their opportunities to improve
their sales and marketing efficiency.

We stream-lined our continuing business units by eliminating expenses that
were not essential to our IT consulting services focus, moving the headquarters
from New Jersey to Florida which resulted in reducing corporate overhead and
eliminating corporate redundancies and restructuring our Company in late 2000
and April 2001 to reduce our work force. During 2001, we also moved our two
New Jersey offices to smaller facilities and reduced the monthly fixed costs
for those offices.

We closed office locations in Minneapolis, Minnesota; Detroit, Michigan
and Sterling, Virginia due to the offices not being profitable and our limited
financial resources. We focused our efforts on those offices that were or
could quickly become profitable. We currently have an office location in
Alabama, two in Florida, two in New Jersey, one in New York City, and we intend
to lease a small office space in Washington DC. We currently do not anticipate
closing any additional office locations. As we penetrate these market
locations in order to grow in the future, we will evaluate the need to open
additional offices, but keep the same philosophy of small office size and
minimal monthly fixed costs.

During the fourth quarter of 2001, we recorded an impairment of goodwill
associated with prior years acquisitions of $6.5 million. The $4.5 million
value of remaining goodwill on our balance sheet as of December 31, 2001 was
determined by the projected discounted cash flow method. Beginning first
quarter 2002, we will adopt SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. Under these new standards,
goodwill will be subject to a periodic impairment test of fair value and will
no longer be amortized over its useful life. We do not expect to make any
goodwill adjustments during 2002.

In order to focus on our strategic vision of being an IT consulting
services business, we sold our dial-up internet access division to Earthlink,
Inc. in August 2000, our web hosting and non-dial-up internet

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access business
to Veraciti, Inc. in April 2001 and our network services and installation
business unit to Spectrum Solutions, Inc. in July 2001. During the fourth
quarter of 2001, we also closed our education division, which sold mainly
Sybase related training classes.

As a result of significant restructuring, closing of unprofitable offices
and selling certain business divisions during 2000 and the first half of fiscal
year 2001, the Company accumulated unpaid liabilities not associated with
current operations in excess of $4.5 million (Legacy
Liabilities). These creditor liabilities
include terminated equipment leases, property leases and telecommunication
contracts as well as certain professional fees. Through productive negotiations
with the majority of the creditors, $4.1 million of these liabilities have been
settled and paid or settled and reasonable payment terms agreed to through
February 2002. At December 31, 2001, $2.4 million of Legacy
Liabilities were
fully accrued for. Subsequent to December 31, 2001, approximately $1.8 million
has been settled for 250,000 warrants at an exercise price of $1.00 and
$456,000 of cash with payments throughout 2002. The remaining $0.4 million of
unsettled Legacy Liabilities are under negotiation. The total negotiated
payments owed during 2002 based upon agreed payment terms (including
the Legacy
Liabilities settled through February 2002) is $636,000.

We believe we have taken the steps necessary to become cash flow positive
from our continuing operations and have become slightly cash flow positive
during the last half of 2001. We received an unqualified audit opinion for our
year ended December 31, 2001 due to our successful efforts to restructure our
Legacy Liabilities (including the $1.8 million that has been settled subsequent to
yearend) and our efforts to streamline our monthly fixed costs.

Going forward, our ability to grow substantially may be dependent upon
obtaining cash flow from external sources. We are currently evaluating our
alternatives to receive an infusion of up to $750,000 of liquidity, which may
include raising equity, obtaining a line of credit secured by receivables or a
combination of both of which the availability cannot be predicted.

Results of Operations

Revenues.

Revenues decreased by $6,678,000, or 29%, from $23,363,000 for the year
ended December 31, 2000, to $16,685,000 for the year ended December 31, 2001.
This decrease is due to reduced revenue as a result of the sale of non-IT
business units, closing unprofitable offices and reduced revenues of $1.4
million from our desktop support group, which did not have the summer special
projects that occurred in 2000. This decrease is offset by an increase in
revenues of approximately $1.1 million during the year ended 2001 compared to
2000 due to the March 2000 acquisition of Digital. Because the Digital
acquisition took place in March 2000, the 2000 revenues did not include Digital
revenue for January and February 2000. Revenue from our largest
professional service customer was responsible for 18% of our revenue in 2001 as
compared to 20% in 2000.

Cost of Services.

Cost of services for Consulting Services consists primarily of salaries
and expenses of engineering, programming and technical personnel, expenses
relating to cost of equipment and applications sold to customers and equipment
costs for Web-site hosting and fees paid to outside consultants engaged for
customer projects. Cost of services decreased by $5,117,000, or 29%, from
$17,671,000 for 2000 to $12,554,000 for 2001. This 29% decrease in cost of
services is mainly due to the 29% decrease in revenues as discussed above.

Gross Profit.

Our gross profit was $5,692,000 or 24% of revenues in 2000 and $4,131,000
or 25% of revenues in 2001. The slight increase in gross profit as a
percentage of sales was primarily due to better utilization of our billable
personnel due to the restructuring that occurred in late 2000 and April 2001.

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Selling, General and Administrative.

Selling, general and administrative expenses consist primarily of salaries
and costs associated with marketing literature, advertising, direct mailings,
accounting, finance, administrative and sales and marketing as well as
professional fees and other costs associated with being a public company and
the administration of the Company. Selling, general and administrative
expenses decreased by $6,813,000, or 55%, from $12,445,000 in 2000 to
$5,632,000 for 2001. This decrease was primarily due to the significant
reduction in our administrative staff in conjunction with our fourth quarter
2000 restructuring, the administrative headquarters move from New Jersey to
Florida during January 2001 and the April 2001 restructuring which included
closing unprofitable offices and a reduction in workforce.

Amortization of Intangible Assets.

Amortization of intangible assets increased by $616,000, from $3,160,000
for 2000 to $3,776,000 for 2001. This increase is primarily attributable to the
Digital acquisition and the fact that the acquisition occurred on March 1,
2000, therefore the 2000 amount only has ten months of amortization related to
the Digital acquisition as compared to twelve months included in 2001. During
2002, we will not incur any amortization of intangible assets as a result of a
new pronouncement, SFAS No. 142, Goodwill and Other Intangible Assets. Under
this new standard, goodwill will no longer be amortized over its useful life.

Impairment of Goodwill.

During the fourth quarter of 2001, we recorded an impairment of goodwill
charge of $6.5 million associated with prior years acquisitions. The value of
the remaining $4.5 million of goodwill on our balance sheet as of December 31,
2001 was determined by the projected discounted cash flow method. We do not
expect to make any goodwill adjustments during fiscal year 2002.

Non-Cash Compensation Expenses.

Non-cash compensation expense decreased from $244,000 in 2000 to $-0- in
2001. This decrease was due to the release of shares of common stock related
to the 1998 acquisition of Entelechy, Inc. Since the condition of continued
employment for the release of such shares was waived, we recognized a remaining
non-cash compensation charge of $214,000 in the Quarter ended March 31, 2000.
Non-cash compensation expense is expected to be $-0- during 2002.

Severance and Restructuring.

During the first quarter of 2000, we reduced our work force by 19
employees and, as a result, recognized a charge of $567,000 related to
severance, benefits and entitlements. In addition, the Company decided to
terminate its Microsoft training business in Huntsville, Alabama and recognized
a charge of $298,000, which is comprised of the exit costs of this business and
impairment losses on the value of related assets.

During the fourth quarter 2000, we recorded a $1,895,000 expense related
to reduction in work force and closing certain non-essential offices. This
expense was comprised of $1,328,000 related to leases and various expenses
related to office closings, $230,000 related to write-downs on equipment,
$143,000 related to write-off of goodwill and customer lists and $194,000
related to severance, benefits and entitlements from downsizing and moving the
administrative headquarters to Tampa, Florida from Cedar Knolls, New Jersey.
This move was done to consolidate the administrative offices with its
operational office and eliminate corporate redundancies and reduce corporate
overhead.

During April 2001, we took additional cost reduction and restructuring
steps to become profitable. We closed our Detroit facility and reduced our
sales and general and administrative management headcount by 21 employees. As
a result, we recognized a severance and restructuring expense of $518,000 in
April 2001. This is comprised of $456,000 relating to the closing of the
office, and $62,000 relating to severance, benefits and entitlements.

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Merger Related Expenses.

During 2000 the Company incurred charges of $750,000 in connection with
the termination of the Agreement and Plan of Reorganization with Infonautics,
Inc. and First Venue Ventures, Inc., which the Company entered into on July 30,
2000. In November 2000, the Reorganization Agreement with Infonautics and
First Avenue Ventures was terminated by all parties. There was no such
expense incurred during 2001.

Interest Expense.

Interest expense consists primarily of interest payments and accruals on
indebtedness in connection with the Digital acquisition. Interest expense was
$296,000 and $87,000, respectively for the years ended 2000 and 2001. The
decrease in interest expense for 2001 compared to 2000 is largely due to the
Digital line of credit, which was paid in full during 2000.

Interest Income.

Interest income decreased from $184,000 in 2000 to $16,000 in 2001 due to
a decrease in our cash position in 2001 relative to 2000.

Loss on Disposal of Assets.

During April 2001, the Company sold its web hosting and non-dial-up
internet access business to Veraciti, Inc. for $200,000 cash and $60,000 worth
of services to complete certain customer projects. In addition, Veraciti
assumed certain lease obligations of the Company related to the web hosting and
non-dial-up internet access business and subleased 4,000 square feet of the
Cedar Knolls office space through lease termination. The Company recorded a
$211,000 loss related to this sale. Veraciti is owned by Frank Altieri, a
former member of the DFI Board of Directors.

During July 2001, the Company sold its network services and installation
business unit to Spectrum Solutions, Inc. (Spectrum) for $350,000 and Spectrum
assumed certain lease obligations of the Company related to this network
services and installation business unit. The Company recorded a $188,000 gain
related to this sale.

No such gain or loss was recorded during 2000.

Income Tax Benefit.

We recognized an income tax benefit of $365,000 for the year ended 2001
and an income tax expense of $365,000 for the year ended associated with the
extraordinary gain on forgiveness of debt (this tax expense is recorded net of
the extraordinary gain on forgiveness of debt). We have not recognized an
income tax benefit for our additional operating losses generated during the
years ended 2001 and 2000 based upon uncertainties concerning our ability to
generate taxable income in future periods. The additional tax benefit for the
years ended 2001 and 2000 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.

Discontinued Operations and Loss on Disposal of Discontinued Operations.

During 2000, the Company sold its dial-up internet access business to
Earthlink for $2.8 million. We initially received $2.9 million for the sale
during the third quarter of 2000, which was reduced by $100,000 during the
fourth quarter of 2000 based upon certain criteria of customers converted.
During 2000, we recorded a loss on disposal of discontinued operations of
$3,474,000 related primarily to the write-off of goodwill, certain equipment
leases, and severance costs related to the discontinuance of this business.
The results from this business unit were recorded in discontinued operations
until it was sold.

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During the year ended 2000, we recorded a loss from
discontinued operations related to this business unit of $798,000.

Extraordinary Gains on Forgiveness of Debt, Net of Taxes.

In conjunction with
the settlements of our Legacy Liabilities as described above
in the Overview section of Managements Discussion and Analysis of Financial
Condition and Results of Operations, we recorded gains on forgiveness of debt
of $977,000 ($612,000 net of taxes). During January and February 2002, a total
of $1.8 million of Legacy Liabilities were settled resulting in gains on
forgiveness of debt of $1,229,000 ($766,000 net of taxes).

Liquidity and Capital Resources.

The net cash used in operating activities decreased from $6,837,000 in
2000 compared to $513,000 in 2001. This decrease is mainly due to the decrease
in net loss from 2000 to 2001. During 2001, we had collections of accounts
receivable from our divisions sold (especially the network and installation
group) which we used to pay off our Legacy Liabilities. During 2002, we will continue
to focus our efforts to collect our accounts receivable quickly. As of December
31, 2001, we have $180,000 of payments required to be paid during 2002 as part
of the settlement of certain Legacy Liabilities. In January 2002, $1.8 million of
Legacy Liabilities was settled for $456,000 in cash with the payments spread
throughout 2002 and 250,000 warrants, which were issued during January 2002.
The total owed for Legacy Liabilities payments is $636,000 payable throughout 2002.

Net cash provided by investing activities was $0.5 million in 2001. This
was from the sale of two business units (non-dial up internet access and web
hosting division and network services and installation business unit). Net
cash provided by investing activities was $2.3 million in 2000 of which $2.8
million was received from the sale of our dial-up internet access businesses,
which was offset by $0.6 million of capital expenditures. We do not anticipate
having significant equipment purchases during 2002, however to support
substantial growth we will need to make certain equipment investments.

Financing activities used $216,000 of cash during 2001 to pay down the
PowerCerv Note related to the Digital acquisition (see Footnote 8 in the Notes
to Consolidated Financial Statements section). Financing activities provided
cash and cash equivalents of $3.2 million in 2000. In 2000, the net proceeds
from our 2000 Private Placement totaled $7.0 million. This was offset by $3.7
million spent to repay debt obligations. During 2002, we expect to pay
$233,000 related to the PowerCerv Note. Going forward, our ability to grow
substantially may be dependent upon obtaining cash flow from external sources.
We are currently evaluating our alternatives to receive an infusion of up to
$750,000 of liquidity, which includes raising equity, obtaining a line of
credit secured by receivables or a combination of both, the availability of
which can not be predicted.

Our working capital at December 31, 2001 is $-0-. This includes $0.4
million of Legacy Liabilities accruals that we are disputing. During the last three
quarters of 2001, we were cash flow positive from current operations. To
accomplish this, we stream-lined our continuing business units, closed
unprofitable offices and sold or shut down business units that did not fit our
new strategic vision of being an IT consulting services company. With these
actions, we believe we have taken the steps necessary to become cash flow
positive from our continuing operations. We have funded our payments
of Legacy
Liabilities through the sale of two business units, which generated $550,000 and
collections of accounts receivable related to our network and installation
group that was sold. We will continue to focus on consistent collections of
accounts receivable, restructuring our Legacy Liabilities and continued improvements
in the operational performance of our ongoing business lines. We believe that
if we meet our Company plan, we will be able to have sufficient cash and cash
flows from operations to meet our funding requirements over the next year. If
we have potential short falls in execution of our Company plan, want to expand
our
operations, and/or do not receive our customer payments in a timely
manner, we may require an infusion of working capital, the availability of
which can not be predicted.

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Fluctuations in Operating Results.

Our operating results may fluctuate significantly from period to period as
a result of the length of our sales cycle, as well as from 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. Our business is generally
subject to making expenditures and using significant resources prior to receipt
of corresponding revenues. Our operating results can also fluctuate based
upon the number of billable days in a quarter and the fourth quarter is
typically lower due to vacations taken during the holidays. Our business is
somewhat dependent upon the economy. Certain customers (including our largest
customer) have put projects on hold due to the slow down in the economy and may
potentially terminate their contracts, which could have a material impact on
our Company.

Inflation.

Inflation has not had a significant impact on our results of operations.

Recent Events.

During January 2002, the Company reached settlement agreements on certain
equipment leases. The total accrued for these leases at December 31, 2001 is
$1,752,000. The Company will pay $456,000 in cash with the payments spread
throughout 2002 and will issue 250,000 warrants with an exercise price of $1.00
during January 2002. This will result in a forgiveness of debt of $1,229,000
($766,000 net of taxes) and additional equity related to the warrants of
$67,000.

Certain Factors Which May Affect the Companys Future Performance

Limited Operating History.

We have only been in operation since 1995 and many of our services have
only been offered since 1997 or later. In addition, we have only been a
publicly reporting company since May 1998. Accordingly, we have a limited
operating history on which you may evaluate us. You should consider the risks
and difficulties frequently encountered by early stage companies in new,
rapidly evolving and technology-dependent markets. If we fail to adequately
address these risks, our business will be materially and adversely affected.

Prior Operating Losses; Lack of Profitability; Future Operating Results.

We have recently experienced significant losses in our operations. We may
continue to incur losses for the foreseeable future. For the year ended
December 31, 2001 our loss from continuing operations was $12.0 million. Our
expenses may increase as we seek to grow our business and as our business
expands. Even if we become profitable, we may be unable to sustain our
profitability. We may not generate sufficient cash flow from operations or be
able to raise capital in sufficient amounts to enable us to continue to operate
our business. An inability to sustain profitability may also result in an
impairment loss in the value of our long-lived assets, principally goodwill,
property and equipment, and other tangible and intangible assets. If we are
unable to generate sufficient cash flow from operations or raise capital in
sufficient amounts, our business will be materially and adversely affected.

Dependence on Key Customer; Non-Recurring Revenue.

For the year ended December 31, 2001, our largest customer, Aetna
accounted for approximately 18% of our revenues. In December 1998, we entered
into a contractual agreement with Aetna to provide certain IT services. This
contractual agreement expired in December 2001 and we entered into a new
contractual agreement to provide certain IT consulting services to Aetna until
December 31, 2002. Non-renewal or termination of our contract with Aetna would
have a material adverse effect on us. A large portion of our revenues derived
from our consulting is generally non-recurring in nature.
There can be no assurance that we will obtain additional contracts for
projects similar in scope to those previously obtained from Aetna or any other
customer, that we will be able to retain existing customers or attract new
customers or that we will not remain largely dependent on a limited customer
base, which may continue to account for a substantial portion of our revenues.
In addition, we generally will be subject to delays in customer funding;
lengthy customer review processes for awarding contracts; non-renewal; delay,

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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.

Our revenues are difficult to forecast. We may increase our operating
expenses to increase the number of our sales, marketing and technical personnel
to sell, provide and support our products and services. We may not be able to
adjust our spending quickly enough to offset any unexpected revenue shortfall.
In addition, at any given point in time, we may have significant accounts
receivable balances with customers that expose us to credit risks if such
customers are unable to settle such obligations. If we have an unexpected
shortfall in revenues in relation to our expenses, or significant bad debt
experience, our business will be materially and adversely affected.

Emerging and Evolving Markets.

The markets for some of our services are changing rapidly and evolving,
and therefore the ultimate level of demand for our services is subject to a
high degree of uncertainty. Any significant decline in demand for programming
and applications development and IT consulting services could materially
adversely affect our business and prospects.

Our success is dependent on our ability to continually attract and retain
new customers as well as to replace customers who have not renewed their
contracts. Achieving significant market acceptance will require substantial
efforts and expenditures on our part to create awareness of our services.

Limited Marketing, Service and Support Capabilities.

To effectively market and sell our services, we will need to expand our
customer service and support capabilities to satisfy increasingly sophisticated
customer requirements. We currently have limited marketing experience and
limited marketing, service, customer support and other resources, which may not
be adequate to meet customer needs.

Competition.

Competition for the Internet and IT consulting services that we provide is
significant, and we expect that competition will continue to intensify due to
the low barriers to entry. We may not have the financial resources, technical
expertise, sales and marketing or support capabilities to successfully meet
this competition. If we are unable to compete successfully against such
competitors, our business will be adversely affected. We compete against
numerous large companies that have substantially greater market presence,
longer operating histories, more significant customer bases, and financial,
technical, facilities, marketing, capital and other resources than we have.

Our competitors include national, regional and local IT consulting service
providers, software development firms and major accounting and consulting firms
such as Accenture, Answerthink, Keane, Kforce, MPS Group, Razorfish, Sapient,
Scient and Viant.

In addition, we also encounter competition from numerous other businesses
that provide one or more similar goods or services, including numerous
resellers of Internet-related hardware and software and Web-site development
companies.

Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. Our competitors may also
devote greater resources than we can 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 ours.
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 our existing and potential
employees and strategic partners. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties.

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New competitors, including large computer hardware, software, professional
services and other technology and telecommunications companies, may enter our
markets and rapidly acquire significant market share. As a result of increased
competition and vertical and horizontal integration in the industry, we could
encounter significant pricing pressures. These pricing pressures could result
in significantly lower average selling prices for our products and services.
We 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.

Rapid Technological Change.

The market for Internet and IT professional services has only recently
begun to develop and is rapidly evolving. Significant technological changes
could render our existing products and services obsolete. To be successful, we
must adapt to this rapidly changing market by continually improving the
responsiveness, functionality and features of our products and services to meet
customers needs. If we are unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis,
our business will be materially and adversely affected.

Systems Failure Risk.

Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain most of our computer systems in our facilities in Tampa, Florida.
While we have taken precautions against systems failure, interruptions could
result from natural disasters as well as power loss, telecommunications failure
and similar events. We also lease telecommunications lines from local and
regional carriers, whose service may be interrupted. Any damage or failure that
interrupts or delays our network operations could materially and adversely
affect our business.

Security Issues.

We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our
operations. We 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 our reputation and
expose us to a risk of loss or liability.

The security services that we offer in connection with customers use of
the networks cannot assure complete protection from computer viruses, break-ins
and other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of these problems may result in
claims against us or liability on our part. These claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business and reputation and on our ability to attract and
retain customers.

Identifying Suitable Acquisition Candidate and New Acquisition Integration.

A key element of our expansion strategy has been to grow through
acquisitions. If we do identify suitable candidates, we may not be able to make
investments or acquisitions on commercially acceptable terms. Acquisitions may
cause a disruption in our ongoing business, distract our management and other
resources and make it difficult to maintain our standards, controls and
procedures. We may not be able to successfully integrate the services, products
and personnel of any acquired business into our operations. We
may not be able to retain key employees of the acquired companies or
maintain good relations with their customers or suppliers. We may be required
to incur additional debt, and we may be required to issue equity securities,
which may be dilutive to existing stockholders, to fund acquisitions.

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Unsuccessful Acquisitions.

We may acquire and integrate complementary businesses, products, services
or technologies, but we have limited experience in these activities. If we seek
to make investments or acquisitions, it will be subject to the following risks:



| |  |  | The difficulty of assimilating the operations and personnel of acquired companies.                                                                                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | The potential disruption of our business.                                                                                                                              
| |  |  | The inability of our management to maximize our financial and
strategic position by the incorporation of an acquired technology or
business into our service offerings.
| |  |  | The difficulty of maintaining uniform standards, controls,
procedures and policies.                                                                                    
| |  |  | The potential loss of key employees of acquired businesses,
and the impairment of relationships with employees and customers as
a result of changes in management.     

We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash
could be used to consummate the acquisitions. If we were to consummate one or
more acquisitions in which the consideration consisted of stock, our
stockholders could suffer significant dilution of their interest in us. In
addition, we could incur or assume significant amounts of indebtedness in
connection with acquisitions. Acquisitions are required to be accounted for
under the purchase method, which could result in significant goodwill charges.
In addition, an inability to sustain profitability may also result in an
impairment loss in the value of our long-lived assets, principally goodwill,
property and equipment, and other tangible and intangible assets.

Retaining Key Personnel.

There is intense competition for qualified personnel in the sectors in
which we operate. The loss of existing personnel or the failure to recruit
additional qualified technical, managerial and sales personnel, as well as
expenses in connection with hiring and retaining personnel, would adversely
affect our business. We also depend on the performance of our executive
officers and key employees, some of whom have not entered into employment
agreements with us.

As of December 31, 2001, the Company had 110 full-time employees. We will
need to attract, train and retain more employees for management, engineering,
programming, sales and marketing, and customer support technician positions.
Competition for qualified employees, particularly engineers, programmers and
technicians, is intense. Consequently, we may not be successful in attracting,
training and retaining the people we need to continue to offer solutions and
services to present and future customers in a cost effective manner or at all.

Need for Capital.

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



| |  |  | The extent to which our solutions and services gain market acceptance.                      
| | - |  | --------------------------------------------------------------------------------------------
| |  |  | The level of revenues from our present and future solutions and services.                   
| |  |  | The expansion of operations.                                                                
| |  |  | The costs and timing of product and service developments and
sales and marketing activities.
| |  |  | Costs related to acquisitions of technology or businesses.                                  
| |  |  | Competitive developments; and                                                               
| |  |  | Costs related to downsizing and discontinuation or sale of business units.                  

In order to continue to increase sales and marketing efforts, continue to
expand and enhance the solutions and services we are able to offer to present
and future customers and fund potential acquisitions, we may require additional
capital that may not be available on terms acceptable to us, or at all. In
addition,
if unforeseen difficulties arise in the course of these or other aspects
of our business, we may be required to spend greater-than-anticipated funds. As
a consequence, we 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 terms acceptable to us, 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. We have financed our operations to date primarily through
private sales of equity securities, proceeds from our initial public offering
in May 1998 and loan facilities.

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We cannot assure you that additional funding will be available for us to
finance our ongoing operations when needed or that adequate funds for our
operations, whether from financial markets, collaborative or other arrangements
with corporate partners or from other sources, will be available when needed,
if at all, or on terms acceptable to us. Our inability to obtain sufficient
funds may require us to delay, scale back or eliminate some or all of our
expansion programs, to limit the marketing of our products, or to license to
third parties the rights to commercialize products or technologies that we
would otherwise seek to develop and market ourselves. This would have a
material adverse effect on our business.

Fluctuation in Quarterly Operating Results May Negatively Impact Our Stock Price.

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

Factors that could cause quarterly results to fluctuate include:



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

Changes in Government Regulations.

There are an increasing number of laws and regulations pertaining to the
Internet. These laws and regulations relate to liability for information
received from or transmitted over the Internet, online content regulation, user
privacy, taxation and quality of products and services. The government may
also seek to regulate some segments of our activities as basic
telecommunications services. Moreover, the applicability to the Internet of
existing laws governing intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment, personal
privacy and other issues is uncertain and developing. We cannot predict the
impact, if any, that future regulation or regulatory changes may have on our
business.

Limited Intellectual Property Protection.

We rely on a combination of copyright and trademark laws, trade secrets
laws and license and nondisclosure agreements to protect our proprietary
information, particularly the computer software applications that we have
developed. We currently have 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, our proprietary information
without authorization. The majority of our current contracts with our
customers contain provisions granting to the customer intellectual property
rights to certain of our work product, including the customized programming
that we create for such customer. We anticipate that contracts with future
customers will contain similar provisions. Other existing agreements to which
we are
a party are, 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, our ability to reuse
or resell such rights will or may be limited.

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Our policy is to execute confidentiality agreements with our employees and
consultants upon the commencement of an employment or consulting relationship
with us. These agreements generally require
that all confidential information
developed or made known to the individual by us during the course of the
individuals relationship with us 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 us shall be
our exclusive property. There can be no assurance that such agreements will not
be breached, that we would have adequate remedies for any breach or that our
trade secrets will not otherwise become known to or be independently developed
by competitors.

Potential Liability to Customers.

Our services involve development, implementation and maintenance of
computer systems and computer software that are critical to the operations of
our customers businesses. Our failure or inability to meet a customers
expectations in the performance of our services could harm our business
reputation or result in a claim for substantial damages against us, regardless
of our responsibility for such failure or inability. In addition, in the course
of performing services, our personnel often gain access to technologies and
content that includes confidential or proprietary customer information.
Although we have implemented policies 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.
We attempt to limit contractually our damages arising from negligent acts,
errors, mistakes or omissions in rendering services and, although we maintain
general liability insurance coverage, 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 us that are uninsured, exceed available insurance coverage or
result in changes to our insurance policies, including premium increases or the
imposition of a large deductible or co-insurance requirements, would adversely
affect us.

Liability for Material Distributed Over the Internet.

The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through their networks is currently unsettled. We may become
subject to legal claims relating to the content in the web sites we host or in
email messages that we transmit. For example, lawsuits may be brought against
us claiming that material inappropriate for viewing by young children can be
accessed from the web sites we host. Claims could also involve matters such as
defamation, invasion of privacy and copyright infringement. Providers of
Internet products and services have been sued in the past, sometimes
successfully, based on the content of material. If we have to take costly
measures to reduce our exposure to these risks, or are required to defend
ourselves against such claims, our business may be materially adversely
affected.

Future Sales of Common Stock By Existing Stockholders.

The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of common stock in the
market or the perception that these sales may occur. These sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate.

We have granted options to purchase 862,650 shares under our 1998, 1999
and 2000 Stock Option Plans. We have granted 980,000 of nonqualified stock
options. These were granted to certain management to retain key personnel
during our restructuring and refocusing of the Companys strategic vision to be
focused on being an IT consulting services firm and sell or shut down
unprofitable units. If the holders of these options were to exercise their
rights and sell the shares issued to them, it could have an adverse effect on
the market price of our common stock.

In addition, the Company has agreed to issue warrants to purchase up to
666,510 shares in connection with the consulting agreements, private placement
financings, the conversion of the 1999 Debentures and other agreements. If and
when these shares are issued by the Company and sold by the various holders,
sale of these shares could have an adverse effect on the market price of our
common stock.

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Common Stock Volatility.

The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
consulting companies have been especially volatile. Investors may be unable to
resell their shares of our common stock at or above the offering price.

Lack of Dividends.

We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Instead, we intend
to retain future earnings for reinvestment in our business.

Anti-Takeover Provisions.

Provisions of our Restated Certificate of Incorporation, our Amended and
Restated By-laws, and Delaware law, could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our 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

On September 27, 2001, we notified BDO Seidman LLP (BDO) they would no
longer be engaged as our auditors and appointed Pender Newkirk & Company, a
local Tampa firm, as our independent auditor for the remainder of 2001. Our
change of auditors was approved by our audit committee and board of directors.
BDOs report on financial statements of DFI for the past two years
contained no adverse opinion, disclaimer of opinion, nor was qualified or
modified as to audit scope or accounting principles. BDOs report on the
Companys financial statements was unqualified with an explanatory paragraph
for a going concern due to the fact that DFI incurred significant losses for
the years ended December 31, 2000 and 1999 and our ability to continue as a
going concern is contingent upon our ability to raise additional funds and
restructure our liabilities. During the past two fiscal years and the
subsequent interim period preceding the notice, there were no disagreements
between DFI and BDO on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of BDO, would have caused BDO to make a reference
to the subject matter thereof in connection with our report.

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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 our Proxy Statement for our
2002 Annual Meeting of Stockholders (the 2002 Proxy Statement) under the
captions proposal 1-Election of Directors, Executive Officers of the
Company, Promoters and Control Persons and Section 16(a) Beneficial
Ownership Reporting Compliance and is incorporated by reference.




|         |  |                       
|-------- |  | ----------------------
|Item 10. |  | Executive Compensation

The response to this item will be contained in 2002 Proxy Statement under
the caption Executive Compensation and is incorporated by reference.




|         |  |                                                               
|-------- |  | --------------------------------------------------------------
|Item 11. |  | Security Ownership Of Certain Beneficial Owners And Management

The response to this item will be contained in 2002 Proxy Statement under
the caption Executive Compensation and is incorporated by reference.




|         |  |                                               
|-------- |  | ----------------------------------------------
|Item 12. |  | Certain Relationships and Related Transactions

The response to this item will be contained in 2002 Proxy Statement under
the caption Certain Transactions And Related Transactions and is incorporated
by reference.




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

|    |  |         
|--- |  | --------
|(a) |  | Exhibits

|            |  |                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 and 3.2 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).                                                           
|*10.1       |  | Form of Registration Rights Agreement, dated as of May 6, 1997,
between the Company and the holders of certain shares of common
stock (filed as Exhibit 10.2 to our Registration Statement).      
|*10.2       |  | Form of Warrant to Purchase Shares of Stock, dated as of October
31, 1997 (filed as Exhibit 10.4 to our Registration Statement).                                                                  

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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10.3       |  | Employment Agreement, dated as of May 3, 1999, by and between DFI
and Nicholas R. Loglisci, Jr. (filed as Exhibit 10.1 to our
Quarterly Report on form 10-QSB for the quarter ended June 30,
1999). +                                                                                                                                                                                                                                    
|*10.4       |  | Employment Agreement, dated as of May 3, 1999, by and between DFI
and Frank R. Altieri, Jr. (filed as Exhibit 10.3 to our Quarterly
Report on form 10-QSB for the quarter ended June 30, 1999).+                                                                                                                                                                                                                                         
|*10.5       |  | Employment Agreement, dated as of May 3, 1999, by and between DFI
and Jeffrey E. Brenner (filed as Exhibit 10.4 to our Quarterly
Report on form 10-QSB for the quarter ended June 30, 1999).+                                                                                                                                                                                                                                            
|*10.6       |  | Employment Agreement, dated as of May 7, 1999, by and between DFI
and Howard Johnson (filed as Exhibit 10.6 to our Annual Report on
form 10-KSB for the fiscal year ended December 31, 1999).+                                                                                                                                                                                                                                           
|*10.7       |  | Stock Purchase Agreement, dated as of January 31, 1998, between
the Company and Entelechy, Inc. and the stockholders of
Entelechy, Inc. named therein (filed as Exhibit 10.12 to our
Registration Statement).                                                                                                                                                                                                                            
|*10.8       |  | Membership Interest Purchase Agreement, dated September 24, 1998,
by and among the Company and Peter Bowman, Lawrence Rafkin,
Robert Gillespie, Steven Rotella, Steven Swartz, Joseph Calabro,
Febe Dwyer, Barbara Glass-Seran, Clifford Seran, Stanley Lerner,
Annette Monti, Christina Monti, Jack Monti, Rogelio Valencia,
Linda Valencia and Phyllis Wood (filed as Exhibit 2.1 to our
Report on Form 8-K, filed on October 9, 1998).
|*10.9       |  | Membership Interest Acquisition Agreement dated December 10,
1998, by and among the Company, Carl Broadbent, Keith Lowy,
Stephen Lowy and Halo Network Management, LLC (filed as Exhibit
2.1 to our Report on Form 8-K, filed on December 22, 1998).                                                                                                                                                                                     
|*10.10      |  | Digital Fusion, Inc. 1998 Stock Option Plan (filed as Exhibit
10.14 to our Registration Statement).+                                                                                                                                                                                                                                                                                                                                     
|*10.11      |  | 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).+                                                                                                                                                                                                                                                                                         
|*10.12      |  | Second Lease Modification Agreement, dated as of March 3, 1998,
by and among the Company and EI Realty, 2 Ridgedale Avenue, Inc.
and Hanover Park for Industry, in connection with our premises in
Cedar Knolls, New Jersey (filed as Exhibit 10.17 to our
Registration Statement).                                                                                                                                                      
|*10.13      |  | Letter Agreement, dated as of October 21, 1997, between the
Company and EI Realty in connection with our premises in Cedar
Knolls, New Jersey (filed as Exhibit 10.18 to our Registration
Statement).                                                                                                                                                                                                                                    
|*10.14      |  | Lease Agreement, dated as of May 1, 1997, by and between the
Company and Iron Investment Corp. and Hanover Park for Industry,
in connection with our premises in Cedar Knolls, New Jersey
(filed as Exhibit 10.19 to our Registration Statement).                                                                                                                                                                                        
|*10.15      |  | Network Services Contract, dated as of December 27, 1996, between
the Company and the Catholic Healthcare Network (filed as Exhibit
10.20 to our Registration Statement).                                                                                                                                                                                                                                                                
|*10.16      |  | Professional Service Agreement Consulting, dated as of October
23, 1997, between Aetna Life Insurance Company and the Company
(filed as Exhibit 10.21 to our Registration Statement).                                                                                                                                                                                                                                                    
|*10.17      |  | Lease Agreement, dated as of January 31, 1998, between the
Company and R&G International, in connection with our premises in
Huntsville, Alabama (filed as Exhibit 10.22 to our Registration
Statement).                                                                                                                                                                                                                                 
|*10.18      |  | Loan Agreement, dated October 30, 1998, by and between the
Company and First Union National Bank (filed as Exhibit 10.18 to
our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998).                                                                                                                                                                                                                               
|*10.19      |  | Digital Fusion, Inc. Deferred Compensation Plan, effective May 1,
1999 (filed as Exhibit 10.5 to our Quarterly Report on Form
10-QSB for the quarter ended June 30, 1999). +                                                                                                                                                                                                                                                             
|*10.20      |  | Amendment 1 to Digital Fusion, Inc. Deferred Compensation Plan,
effective August 1, 1999 (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1999).
+                                                                                                                                                                                                                                      
|*10.21      |  | Exchange Agreement, dated as of March 31, 1999, by and among DFI,
Dan E. Spencer, Raymond Deep, Michael Bayless, Michael Ivy, Billy
Lenox and Spectrum Information Services, Inc. (filed as Exhibit
2.1 to our Report on Form 8-K filed on April 15, 1999).                                                                                                                                                                              
|*10.22      |  | Agreement and Plan of Merger dated as of June 30, 1999, among
Arnold Schron, Spencer Analysis, Inc., DFI and SAI Acquisition
Corp. (filed as Exhibit 2.1 to our Report on Form 8-K, filed on
July 15, 1999).                                                                                                                                                                                                                             

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|            |  |                                                                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                        
|*10.23      |  | Agreement and Plan of Merger dated as of February 10, 2000, among
Sean D. Mann, Roy E. Crippen III, Michael E. Mandt, Ali A.
Husain, Robert E. Siegmann, digital infusion, inc., DFI, and
Digital Fusion Acquisition Corp. (filed as Exhibit 2.1 to our
Report on 8-K, filed March 24, 2000).                                          
|*10.24      |  | Employment Agreement dated as of March 1, 2000 by and between DFI
and Roy E. Crippen, III (filed as Exhibit 10.24 to our Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1999).+                                                                                                                                   
|*10.25      |  | Employment Agreement dated as of March 1, 2000 by and between DFI
and Sean D. Mann (filed as Exhibit 10.25 to our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999).+                                                                                                                                          
|*10.26      |  | Digital Fusion, Inc. 2000 Stock Option Plan (filed as part of our
Proxy Statement for the Annual Meeting of Stockholders held June
9, 2000).                                                                                                                                                                                           
|*10.27      |  | Schedule 6 to Professional Service Agreement No. 6346, dated as
of December 15, 2000, between Aetna Life Insurance Company and
the Company which extended the term of services of the initial
Agreement dated October 23, 1997(filed as Exhibit 10.27 to our
Annual Report on Form 10-KSB for the fiscal year ended December
31, 2000).
|**10.28     |  | Amendment No. 1 to Professional Service Agreement No. 6346, dated
as of December 22, 2001, between Aetna Life Insurance Company and
the Company which amended the initial Agreement dated October 23,
1997.                                                                                                                            
|**10.29     |  | Employment Termination Agreement, dated July 1, 2001, between the
Company and Nicholas R. Loglisci, Jr.                                                                                                                                                                                                                                
|*16.1       |  | Letter from BDO Seidman, LLP, our prior auditor, dated as of
October 5, 2001 responding to the Companys 8-K filed on
September 28, 2001 regarding the change of the Companys auditors
(filed as Exhibit 16.1 to our Report on Form 8-K, filed on
October 22, 2001).                                                                  
|**21.1      |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                           
|**23.1      |  | Consent of BDO Seidman, LLP                                                                                                                                                                                                                                                                                                            
|**23.2      |  | Consent of Pender Newkirk and Company                                                                                                                                                                                                                                                                                                  
|**24.1      |  | Power of Attorney (appears on signature page)                                                                                                                                                                                                                                                                                          



---

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

|    |  |                    
|--- |  | -------------------
|(b) |  | Reports on Form 8-K

On October 22, 2001, the Company filed an 8-K/A which included BDO
Seidman, LLPs (BDO) response to the Companys 8-K filed on September 28, 2001
regarding the change of the Companys auditors to Pender Newkirk & Company from
BDO.

On November 8, 2001, the Company filed a Form 8-K regarding actions
approved by the vote of the shareholders at the Companys annual shareholder
meeting. The following actions were approved; A) Election of Nicholas R.
Loglisci, Jr., Roy E. Crippen, III, Bruce E. Fike, Ahmad Al-Khaled and O.G.
Greene as directors of the Company, B) Approval of a resolution to amend the
Companys Restated Certificate of Incorporation to increase the number of
authorized shares of common stock and C) approval of a resolution to amend the
Companys Restated Certificate of Incorporation to change the name of the
Company to Digital Fusion, Inc.

-24-



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##### Table of Contents






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: February 28, 2002 |  | By:                  |  | /s/ Roy E. Crippen, III      
|                        
|                         |  |                      |  | Roy E. Crippen, III          
|                        
|                         |  |                      |  | Chief Executive Officer      
|                        
|                         |  |                      |  | (Principal Executive Officer)

KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints both Roy E. Crippen, III and Karen L.
Surplus 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.

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##### Table of Contents



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 28th day of February 2002.

|                                                       |  |                                                                      | 
|------------------------------------------------------ |  | -------------------------------------------------------------------- | 
|Signature                                              |  | Title(s)                                                            
|                                                       |  |                                                                     
|                                                      
|/s/Roy E. Crippen IIIRoy E. Crippen III                |  | Chief Executive Officer, President and Director                     
|                                                      
|                                                      
|/s/ Karen L. SurplusKaren L. Surplus                   |  | Chief Financial Officer
(Principal Financial and Accounting Officer)
|                                                      
|                                                      
|/s/ Nicholas R. Loglisci, Jr.Nicholas R. Loglisci, Jr. |  | Chairman of the Board of Directors                                  
|                                                      
|                                                      
|/s/ Ahmad Al-KhaledAhmad Al-Khaled                     |  | Director                                                            
|                                                      
|                                                      
|/s/ Bruce E. FikeBruce E. Fike                         |  | Director                                                            
|                                                      
|                                                      
|/s/ O.G. GreeneO.G. Greene                             |  | Director                                                            

-26-



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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.

|                                                                                              |  |      |     | 
|--------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                              |  | Page
|                                                                                              |  |     
|Report of Independent Certified Public Accountants                                            |  |      | F-2 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                  |  |      | F-4 | 
|Consolidated Statements of Operations for the years ended
December 31, 2001 and 2000          |  |      | F-5 | 
|Consolidated Statement of Stockholders Equity for the years
ended December 31, 2000 and 2001 |  |      | F-6 | 
|Consolidated Statements of Cash Flows for the years
ended December 31, 2001 and 2000          |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                    |  |      | F-8 | 

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##### Table of Contents



Independent Auditors Report

Board of Directors
Digital Fusion, Inc. and Subsidiaries
Tampa, Florida

We have audited the accompanying consolidated balance sheet of Digital Fusion,
Inc. and Subsidiaries (formerly IBS Interactive, Inc.) as of December 31, 2001
and related consolidated statements of operations, changes in stockholders
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the management of Digital Fusion, Inc. and
Subsidiaries. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Fusion,
Inc. and Subsidiaries as of December 31, 2001 and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
January 25, 2002, except for the third paragraph of Note 12(c)
and Note 19 for which the date is February 28, 2002

-F2-



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##### Table of Contents






REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board Of Directors and Stockholders
Digital Fusion, Inc.
Tampa, Florida

We have audited the
accompanying consolidated balance sheet of Digital Fusion, Inc.
(formerly IBS Interactive Inc.) and Subsidiaries as of December 31,
2000 and the related consolidated statements of operations,
stockholders equity and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital
Fusion, Inc. and Subsidiaries and the results of their operations and their
cash flows for the year then ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred significant losses
for the year ended December 31, 2000 and its ability to continue as a going
concern is contingent upon its ability to raise additional funds and
restructure its liabilities. These factors raise substantial doubt about the
Companys ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

BDO Seidman, LLP
Woodbridge, New Jersey
May 30, 2001, except for Note 10(e) for which the date is June 15, 2001

-F3-



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##### Table of Contents






DIGITAL FUSION, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |             |   |            |  | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------ | ----------- | - | --------- | ---------- | ----------- | - | ---------- |  | 
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   | 2001      |            | 2000       
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|ASSETS                                                           |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|Current Assets:                                                  |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 | Cash and cash equivalents                                                                                                        |                                                    | $                                          | 1,350,000   |   |           | $          | 1,557,000   |  
|                                                                 | Accounts receivable (net of allowance for doubtful
accounts of $340,000 in 2001 and $1,000,000 in 2000)                          |                                                    |                                            | 1,963,000   |   |           |            | 3,802,000   |  
|                                                                 | Prepaid income taxes                                                                                                             |                                                    |                                            |            |   |           |            | 86,000      |  
|                                                                 | Prepaid expenses and other current assets                                                                                        |                                                    |                                            | 20,000      |   |           |            | 185,000     |  
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 |                                                                                                                                  |                                                    | Total current assets                       |             |   | 3,333,000 |            |             |   | 5,630,000  | 
|Property and equipment, net                                      |                                                                                                                                  |                                                    | 495,000                                    |             |   |           | 1,424,000  |            
|Intangible assets, net                                           |                                                                                                                                  |                                                    | 4,547,000                                  |             |   |           | 14,819,000 |            
|Other assets                                                     |                                                                                                                                  |                                                    | 74,000                                     |             |   |           | 136,000    |            
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 |                                                                                                                                  |                                                    | Total Assets                               |             | $ | 8,449,000 |            |             | $ | 22,009,000 | 
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|LIABILITIES AND STOCKHOLDERS EQUITY                             |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|Current Liabilities:                                             |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 | Current maturities of long-term debt                                                                                             |                                                    | $                                          | 233,000     |   |           | $          | 210,000     |  
|                                                                 | Accounts payable                                                                                                                 |                                                    |                                            | 264,000     |   |           |            | 622,000     |  
|                                                                 | Deferred revenue                                                                                                                 |                                                    |                                            | 132,000     |   |           |            | 213,000     |  
|                                                                 | Accrued salaries and related expenses                                                                                            |                                                    |                                            | 500,000     |   |           |            | 420,000     |  
|                                                                 | Accrued professional fees                                                                                                        |                                                    |                                            | 287,000     |   |           |            | 857,000     |  
|                                                                 | Accrued liabilities on sale of discontinued operations                                                                           |                                                    |                                            | 437,000     |   |           |            | 1,769,000   |  
|                                                                 | Accrued severance and restructuring expenses                                                                                     |                                                    |                                            | 883,000     |   |           |            | 1,375,000   |  
|                                                                 | Customer deposits                                                                                                                |                                                    |                                            |            |   |           |            | 333,000     |  
|                                                                 | Other current liabilities                                                                                                        |                                                    |                                            | 630,000     |   |           |            | 608,000     |  
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 |                                                                                                                                  |                                                    | Total current liabilities                  |             |   | 3,366,000 |            |             |   | 6,407,000  | 
|Acquisition liabilities                                          |                                                                                                                                  |                                                    | 71,000                                     |             |   |           | 945,000    |            
|Accrued liabilities on sale of discontinued operations-long term |                                                                                                                                  |                                                    | 1,103,000                                  |             |   |           |           |            
|Accrued severance and restructuring expenses-long term           |                                                                                                                                  |                                                    | 187,000                                    |             |   |           |           |            
|Long-term debt, less current maturities                          |                                                                                                                                  |                                                    | 709,000                                    |             |   |           | 1,083,000  |            
|Pension obligation                                               |                                                                                                                                  |                                                    | 124,000                                    |             |   |           | 148,000    |            
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 |                                                                                                                                  |                                                    | Total liabilities                          |             |   | 5,560,000 |            |             |   | 8,583,000  | 
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|Commitments and contingencies                                    |                                                                                                                                  |                                                    |                                           |             |   |           |           |            
|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, issued and outstanding
7,163,936 - 2001 and 6,787,129 shares - 2000 |                                                    |                                            | 72,000      |   |           |            | 68,000      |  
|                                                                 | Additional paid in capital                                                                                                       |                                                    |                                            | 39,754,000  |   |           |            | 38,883,000  |  
|                                                                 | Accumulated deficit                                                                                                              |                                                    |                                            | (36,937,000 | ) |           |            | (25,525,000 | )
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 |                                                                                                                                  |                                                    | Total Stockholders Equity                 |             |   | 2,889,000 |            |             |   | 13,426,000 | 
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            
|                                                                 |                                                                                                                                  |                                                    | Total Liabilities and Stockholders Equity |             | $ | 8,449,000 |            |             | $ | 22,009,000 | 
|                                                                 |                                                                                                                                  |                                                    |                                            |             |   |           |            |            

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

-F4-



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##### Table of Contents






DIGITAL FUSION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

|                                                                      |                                             |                                                               |            |           |             |      |            |            |             |  
|--------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------------- | ---------- | --------- | ----------- | ---- | ---------- | ---------- | ----------- | -
|                                                                      |                                             |                                                               |            | 2001      |             | 2000
|                                                                      |                                             |                                                               |            |           |             |     
|Revenues                                                              |                                             | $                                                             | 16,685,000 |           |             | $    | 23,363,000 |           
|Cost of services                                                      |                                             |                                                               | 12,554,000 |           |             |      | 17,671,000 |           
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Gross profit                                                  |            |           | 4,131,000   |      |            |            | 5,692,000   |  
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|Operating expenses:                                                   |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Selling, general and administrative         |                                                               |            | 5,632,000 |             |      |            | 12,445,000 |            
|                                                                      | Amortization of intangible assets           |                                                               |            | 3,776,000 |             |      |            | 3,160,000  |            
|                                                                      | Impairment of goodwill                      |                                                               |            | 6,500,000 |             |      |            |           |            
|                                                                      | Non-cash compensation expenses              |                                                               |            |          |             |      |            | 244,000    |            
|                                                                      | Severance and restructuring                 |                                                               |            | 518,000   |             |      |            | 2,760,000  |            
|                                                                      | Merger related expenses                     |                                                               |            |          |             |      |            | 750,000    |            
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Total operating expenses                                      |            |           | 16,426.000  |      |            |            | 19,359,000  |  
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Operating loss                                                |            |           | (12,295,000 | )    |            |            | (13,667,000 | )
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|Other income (expense):                                               |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Interest expense                            |                                                               |            | (87,000   | )           |      |            | (296,000   | )          
|                                                                      | Interest income                             |                                                               |            | 16,000    |             |      |            | 184,000    |            
|                                                                      | Loss on disposal of assets, net             |                                                               |            | (23,000   | )           |      |            |           |            
|                                                                      | Other income (expense), net                 |                                                               |            |          |             |      |            | (11,000    | )          
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Total other income (expense)                                  |            |           | (94,000     | )    |            |            | (123,000    | )
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Loss before income taxes                                      |            |           | (12,389,000 | )    |            |            | (13,790,000 | )
|Income tax benefit                                                    |                                             |                                                               | 365,000    |           |             |      |           |           
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Loss from continuing operations and before extraordinary item |            |           | (12,024,000 | )    |            |            | (13,790,000 | )
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|Discontinued operations:                                              |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Loss from discontinued operations           |                                                               |            |          |             |      |            | (798,000   | )          
|                                                                      | Loss on disposal of discontinued operations |                                                               |            |          |             |      |            | (3,474,000 | )          
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Loss before extraordinary item                                |            |           | (12,024,000 | )    |            |            | (18,062,000 | )
|Extraordinary gain on forgiveness of debt, net of taxes               |                                             |                                                               | 612,000    |           |             |      |           |           
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|                                                                      |                                             | Net loss                                                      |            | $         | (11,412,000 | )    |            | $          | (18,062,000 | )
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|Loss per share from continuing operations:                            |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Basic and diluted                           |                                                               | $          | (1.73     | )           |      | $          | (2.16      | )          
|Loss per share from discontinued operations:                          |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Basic and diluted                           |                                                               |            |          |             |      |            | (0.67      | )          
|Income per share from extraordinary gain on forgiveness of debt, net: |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Basic and diluted                           |                                                               |            | 0.09      |             |      |            |           |            
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|Loss per share:                                                       |                                             |                                                               |            |           |             |      |            |           
|                                                                      | Basic and diluted                           |                                                               | $          | (1.64     | )           |      | $          | (2.83      | )          
|                                                                      |                                             |                                                               |            |           |             |      |            |           
|Weighted average common stock outstanding
basic and diluted           |                                             |                                                               | 6,965,000  |           |             |      | 6,375,000  |           
|                                                                      |                                             |                                                               |            |           |             |      |            |           

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

-F5-



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##### Table of Contents






DIGITAL FUSION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001

|                                                         |  |               |           |                  |  |             |        |               |  |        |            |   |  |   |             |   |  |   |             |  
|-------------------------------------------------------- |  | ------------- | --------- | ---------------- |  | ----------- | ------ | ------------- |  | ------ | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                         |  | Common stock  |           |                  |  |             |        |               |  |        |            |   |  |  
|                                                         |  |               |           | Additional Paid- |  | Accumulated |        | Stockholders'
|                                                         |  | No. of shares |           | Amount           |  | in Capital  |        | Deficit       |  | Equity
|                                                         |  |               |           |                  |  |             |        |               |  |       
|Balance, January 1, 2000                                 |  |               | 5,020,532 |                  |  | $           | 50,000 |               |  | $      | 18,185,000 |   |  | $ | (7,463,000  | ) |  | $ | 10,772,000  |  
|Shares issued in connection with
acquisition             |  |               | 925,000   |                  |  |             | 9,000  |               |  |        | 12,749,000 |   |  |   |            |   |  |   | 12,758,000  |  
|Shares issued in connection with
private placement       |  |               | 684,545   |                  |  |             | 7,000  |               |  |        | 6,944,000  |   |  |   |            |   |  |   | 6,951,000   |  
|Additional shares issued in
connection with acquisitions |  |               | 124,352   |                  |  |             | 2,000  |               |  |        | 531,000    |   |  |   |            |   |  |   | 533,000     |  
|Shares issued in connection with
options exercised       |  |               | 200       |                  |  |             |       |               |  |        |           |   |  |   |            |   |  |   |            |  
|Shares issued to a former officer                        |  |               | 32,500    |                  |  |             |       |               |  |        | 309,000    |   |  |   |            |   |  |   | 309,000     |  
|Warrants issued in connection
with professional services |  |               |          |                  |  |             |       |               |  |        | 165,000    |   |  |   |            |   |  |   | 165,000     |  
|Net loss                                                 |  |               |          |                  |  |             |       |               |  |        |           |   |  |   | (18,062,000 | ) |  |   | (18,062,000 | )
|                                                         |  |               |           |                  |  |             |        |               |  |        |            |   |  |   |             |   |  |   |             |  
|Balance, December 31, 2000                               |  |               | 6,787,129 |                  |  |             | 68,000 |               |  |        | 38,883,000 |   |  |   | (25,525,000 | ) |  |   | 13,426,000  |  
|Additional shares issued in
connection with acquisitions |  |               | 59,305    |                  |  |             | 1,000  |               |  |        | 874,000    |   |  |   |            |   |  |   | 875,000     |  
|Shares rescinded from a former
officer                   |  |               | (32,500   | )                |  |             |       |               |  |        |           |   |  |   |            |   |  |   |            |  
|Shares issued in connection with
settlement              |  |               | 350,002   |                  |  |             | 3,000  |               |  |        | (3,000     | ) |  |   |            |   |  |   |            |  
|Net loss                                                 |  |               |          |                  |  |             |       |               |  |        |           |   |  |   | (11,412,000 | ) |  |   | (11,412,000 | )
|                                                         |  |               |           |                  |  |             |        |               |  |        |            |   |  |   |             |   |  |   |             |  
|BALANCE, DECEMBER 31, 2001                               |  |               | 7,163,936 |                  |  | $           | 72,000 |               |  | $      | 39,754,000 |   |  | $ | (36,937,000 | ) |  | $ | 2,889,000   |  
|                                                         |  |               |           |                  |  |             |        |               |  |        |            |   |  |   |             |   |  |   |             |  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

-F6-



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##### Table of Contents






DIGITAL FUSION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |             |           |           |            |  
|----------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | --------- | ---------- | ---------- | ----------- | --------- | --------- | ---------- | -
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           | 2001       |            | 2000       
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|Cash flows from operating activities:           |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|                                                | Net loss                                                                    |                                                                                                         | $                                     | (11,412,000                                         | )         |            | $          | (18,062,000 | )        
|                                                | Adjustments to reconcile net loss to net cash
used in operating activities: |                                                                                                         |                                       |                                                     |           |            |            |             |          
|                                                |                                                                             | Depreciation and amortization                                                                           |                                       |                                                     | 4,604,000 |            |            |             | 3,945,000 |          
|                                                |                                                                             | Provision for uncollectible accounts                                                                    |                                       |                                                     | 11,000    |            |            |             | 539,000   |          
|                                                |                                                                             | Non-cash interest expense                                                                               |                                       |                                                     |          |            |            |             | 12,000    |          
|                                                |                                                                             | Non-cash restructuring                                                                                  |                                       |                                                     | 459,000   |            |            |             | 2,041,000 |          
|                                                |                                                                             | Warrant expense                                                                                         |                                       |                                                     |          |            |            |             | 165,000   |          
|                                                |                                                                             | Impairment of goodwill                                                                                  |                                       |                                                     | 6,500,000 |            |            |             |          |          
|                                                |                                                                             | Forgiveness of debt                                                                                     |                                       |                                                     | (612,000  | )          |            |             |          |          
|                                                |                                                                             | Non-cash compensation                                                                                   |                                       |                                                     |          |            |            |             | 244,000   |          
|                                                |                                                                             | Deferred income tax benefit                                                                             |                                       |                                                     | (365,000  | )          |            |             |          |          
|                                                |                                                                             | Loss on disposal of assets, net                                                                         |                                       |                                                     | 23,000    |            |            |             | 3,474,000 |          
|                                                |                                                                             | Changes in operating assets and liabilities (net
of effects of purchase acquisitions and divestitures): |                                       |                                                     |           |            |            |             |           |          
|                                                |                                                                             |                                                                                                         | Accounts receivable                   |                                                     |           | 1,729,000  |            |             |           | 1,039,000 |           
|                                                |                                                                             |                                                                                                         | Prepaid expenses and other assets     |                                                     |           | 113,000    |            |             |           | 248,000   |           
|                                                |                                                                             |                                                                                                         | Accounts payable and accrued expenses |                                                     |           | (1,143,000 | )          |             |           | (209,000  | )         
|                                                |                                                                             |                                                                                                         | Deferred revenue                      |                                                     |           | (171,000   | )          |             |           | (27,000   | )         
|                                                |                                                                             |                                                                                                         | Income taxes                          |                                                     |           | 86,000     |            |             |           | 78,000    |           
|                                                |                                                                             |                                                                                                         | Deposits and other                    |                                                     |           | (311,000   | )          |             |           | (205,000  | )         
|                                                |                                                                             |                                                                                                         | Pension obligation                    |                                                     |           | (24,000    | )          |             |           | (119,000  | )         
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|                                                |                                                                             |                                                                                                         |                                       | Net cash used in operating activities               |           |            | (513,000   | )           |           |           | (6,837,000 | )
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|Cash flows from investing activities:           |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|                                                | Capital expenditures  property and equipment                               |                                                                                                         |                                       | (28,000                                             | )         |            |            | (570,000    | )        
|                                                | Asset acquisitions and related costs                                        |                                                                                                         |                                       |                                                    |           |            |            | 30,000      |          
|                                                | Proceeds from assets sold                                                   |                                                                                                         |                                       | 550,000                                             |           |            |            | 2,800,000   |          
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|                                                |                                                                             |                                                                                                         |                                       | Net cash provided by investing activities           |           |            | 522,000    |             |           |           | 2,260,000  |  
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|Cash flows from financing activities:           |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|                                                | Net proceeds from private placements of common stock                        |                                                                                                         |                                       |                                                    |           |            |            | 6,951,000   |          
|                                                | Repayments of notes payable                                                 |                                                                                                         |                                       | (216,000                                            | )         |            |            | (251,000    | )        
|                                                | Payments of line of credit, net                                             |                                                                                                         |                                       |                                                    |           |            |            | (3,437,000  | )        
|                                                | Payments of capital lease obligations                                       |                                                                                                         |                                       |                                                    |           |            |            | (21,000     | )        
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|                                                |                                                                             |                                                                                                         |                                       | Net cash provided by (used in) financing activities |           |            | (216,000   | )           |           |           | 3,242,000  |  
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|Net decrease in cash and cash equivalents       |                                                                             |                                                                                                         | (207,000                              | )                                                   |           |            | (1,335,000 | )          
|Cash and cash equivalents, at beginning of year |                                                                             |                                                                                                         | 1,557,000                             |                                                     |           |            | 2,892,000  |            
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            
|Cash and cash equivalents, at end of year       |                                                                             | $                                                                                                       | 1,350,000                             |                                                     |           | $          | 1,557,000  |            
|                                                |                                                                             |                                                                                                         |                                       |                                                     |           |            |            |            

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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DIGITAL FUSION, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | ORGANIZATION, BACKGROUND AND BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | Digital Fusion, Inc. (the Company or DFI) and its subsidiaries are an
information technology (IT) consulting company helping its customers use
technology to access business information and enhance the performance of
their human capital. The services DFI provides are IT Support and
integration; IT consulting; business application
development and sales force tune-up. DFI provides its services to
businesses, 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 the annual 2001 shareholders
meeting, the shareholders approved a name change to Digital Fusion, Inc.
(DFI). DFI, a Delaware corporation, has its main administrative office
in Tampa, Florida, along with regional offices in New Jersey, New York,
Florida and Alabama.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | The Company has incurred losses of $11,412,000 and $18,062,000 in 2001 and
2000, respectively and cash flow deficiencies from operations of $513,000
and $6,837,000 in 2001 and 2000, respectively. The losses and cash flow
deficiencies in 2000 and prior years caused the Company to receive an
unqualified opinion with an explanatory paragraph for a going concern in
its December 31, 2000 consolidated financial statements. During late 2000
and early 2001, the Company restructured its operations. This included
selling or shutting down unprofitable business units/division, streamlining
its continuing business units and settling its debts associated with
business units/division that were shut down or sold (Legacy
Liabilities). The
Company has been cash flow positive from operations for the last three
quarters of 2001. At December 31, 2001, the cash and cash equivalents
totaled $1,350,000. Management settled an additional $1.8 million of
Legacy Liabilities subsequent to December 31, 2001 for $456,000 in scheduled
payments during 2002 and 250,000 of common stock warrants. Management is
continuing to negotiate with certain of its vendors to restructure the
remaining Legacy Liabilities. DFIs current business units are not capital
intensive (the business divisions that were capital intensive were sold).
The majority of the Companys costs are employee related which will vary
based upon the revenue of the Company. The Company believes that, as a
result of the actions it has taken during 2001 to restructure and
streamline the Company, it currently has sufficient cash to meet its
funding requirements over the next year; however, the Company has
experienced negative cash flows from operations and incurred large net
losses in the past.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | The Companys current growth has been funded through internally generated
funds. In order for the Company to support substantial growth, the Company
may need to fund this growth through externally generated funds. The
Company is reviewing its options, which include a line of credit secured by
receivables, raise equity or a combination of both. There can be no
assurance as to the availability or terms upon which such financing and
capital might be available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  | In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. DFI did not have a business combination
during 2001. The Companys previous business combinations were accounted
for using both the pooling-of-interests and purchase methods. 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. SFAS 142 is required to be applied for
fiscal years beginning after December 15, 2001. Since the adoption of SFAS
142 requires no future amortization of goodwill, this will increase the
Companys results of operations in future years as compared to 2001 and
2000, which had amortization expense of $3.8 million and $3.2 million,
respectively. During 2001, the Company recorded $6.5 million of goodwill
impairment. No impairment of goodwill is expected to be recorded upon the
initial adoption of SFAS 142 in 2002. As of December 31, 2001, the net
carrying amount of goodwill is $4.5 million.                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | In October 2001, the Financial Accounting Standards Board issued 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. SFAS 144 is required to be
applied for fiscal years beginning after December 15, 2001. The Company
does not expect the adoption of SFAS 144 to have an impact on its financial
position or results of operations.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(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 intercompany 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.                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | For the year ended December 31, 2000, the Company recognized unbilled
revenues of $209,000 on projects in process. Such unbilled amounts
are included in accounts receivable on the balance sheet. There were
no such amounts at December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(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 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
10) 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 are established against deferred tax assets when
management concludes that the realization of such deferred tax assets
cannot be considered more likely than not.                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | 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. During 2001, the
Company recognized an income tax benefit of $365,000 and an income tax
expense of $365,000 associated with the extraordinary gain on
forgiveness of debt (this tax expense is recorded net of the
extraordinary gain on forgiveness of debt). The Company has not
recognized an income tax benefit for its additional operating losses
generated during 2001 and 2000 based on uncertainties concerning its
ability to generate taxable income in future periods. The additional
$365,000 tax benefit recorded during 2001 is offset by a reduction in
the valuation allowance which was 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.
The Companys income tax receivable at December 31, 2000 represents
net operating loss carrybacks to previous periods. There was no
income tax receivable at December 31, 2001.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(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 a major financial
institution in the United States. Deposits with this bank 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | Financial instruments, which potentially subject the Company to credit
risk, consist primarily of a concentration of unsecured trade accounts
receivables. At December 31, 2001, one customer accounted for 25% of
total net accounts receivable. No customers were greater than 10% of
total net accounts receivable at December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The
Company monitors the allowance for potential credit losses and adjusts
the allowance accordingly. During the years ended December 31, 2001
and 2000 the Companys allowance for doubtful accounts was increased
by $221,000 and $1,054,000, respectively and was decreased by $881,000
and $315,000, respectively, for balances written off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | Cash equivalents at December 31, 2001 and 2000 of $1,203,000 and
$1,442,000 respectively are comprised of money market fund investments
and overnight deposits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(h) |  | PROPERTY AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | Property and equipment are stated at cost. Depreciation and
amortization are computed primarily under the straight-line method
over the assets estimated useful lives, generally three years for
computer equipment, five years for office equipment and seven years
for furniture and fixtures. Leasehold improvements are amortized over
the term of the related lease, generally three to five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(i) |  | LONG-LIVED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | The Company follows SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed of. In
accordance with SFAS 121, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | See Note 5 below for a discussion of goodwill impairment. There was no impairment loss recorded in the year ended December
31, 2000. See Notes 3, 4, and 17 for assets written-off and
sold related to the sale of the web hosting and non-dial-up internet
access business unit, the sale of the network services and
installation business unit, the sale of the dial-up internet access
division, closing certain offices and work force reductions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(j) |  | INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  | Intangible assets are comprised primarily of goodwill, customer lists
and other intangibles arising from various acquisitions and deferred
compensation arrangements. Such asset values are amortized over periods of five to ten years, and for deferred compensation
arrangements over the period that such services are rendered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(k) |  | PENSION ACCOUNTING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |  | The Company follows SFAS No. 132, Employers Disclosures about
Pensions and Other Post-retirement Benefits as it relates to a 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(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 antidilutive. The
assumed exercise of stock options and warrants, as well as the
issuance of common stock under compensation and acquisition agreements
(aggregating 2,512,395 and 2,103,409 shares at December 31, 2001 and
2000, 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 and fixed assets.                                                                                                                                                          

|    |  |                                
|--- |  | -------------------------------
|(3) |  | BUSINESS COMBINATIONS AND SALES

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | PURCHASES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  | DIGITAL FUSION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  | On March 1, 2000 the Company acquired all of the outstanding stock of
digital fusion, inc. (Digital) in exchange for 975,000 shares of
unregistered common stock (50,000 shares were reserved pending
settlement of certain matters and were issued during 2001), a $500,000
three-year subordinated note accruing 6% interest per annum and the
assumption of debt totaling approximately $4.2 million. Digital is a
Tampa, Florida-based provider of professional services. Of the
assumed $4.2 million of debt, at December 31, 2001, $3.7 million has
been repaid.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  | The following summarized, unaudited pro forma information for the year
ended December 31, 2000 assumes that the acquisition of Digital had
occurred on January 1, 2000:                                                                                                                                                                                                                                                                                                                                                                                                 

|                                           |                   |   |             |       |  
|------------------------------------------ | ----------------- | - | ----------- | ----- | -
|                                           |                   |   | 2000       
|                                           |                   |   |            
|Net revenues                               |                   | $ | 25,033,000  |      
|Operating loss                             |                   |   | (15,532,000 | )    
|Loss from continuing operations            |                   |   | (16,255,000 | )    
|Loss per share from continuing operations: |                   |   |             |      
|                                           | Basic and diluted |   | $           | (2.55 | )

| |  | 
| |  | 

-F11-



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##### Table of Contents



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | The pro forma operating results reflect estimated pro forma
adjustments for the amortization of intangibles arising from the
acquisition ($281,000) and reduced interest expense from the
conversion of Digital debt prior to closing ($60,000). Pro forma
results of operations information is not necessarily indicative of the
results of operations that would have occurred had the acquisition
been consummated at the beginning of 2000 or of future results of the
combined operations.                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  | The value ascribed to the consideration of stock, equity instruments,
debt and related costs ($19.1 million) less the fair market value of
net assets acquired ($2.7 million) resulted in goodwill of $16.4
million. Goodwill is amortized over a five-year life. During 2002,
after the Company implements SFAS 142 there will not be any additional
goodwill amortization. See Footnote 1 for further discussion regarding
SFAS 142 and future goodwill amortization and Footnote 5 regarding
recording an impairment of goodwill charge during 2001.                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  | As part of this acquisition, the Company granted non-qualified options
to purchase 480,000 shares of common stock to certain of the former
employees of Digital; 25% of such options vested immediately, and as
such, have been treated as consideration in determining the purchase
price of DFI and the remaining options will vest over a period of 3
years of continued employment. These options vest immediately upon
change of control and have an exercise price of $10.49 per share.                                                                                                  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  | Roy E. Crippen, III is the Companys current Chief Executive Officer
and President and a member of the Companys Board of Directors. For
his ownership interests in Digital, Mr. Crippen received 399,396
shares of common stock and a note of $215,891 bearing a 6% interest
rate, which matures as a balloon payment on March 1, 2003.                                                                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(b) |  | SALES OF BUSINESS UNITS IN CONTINUING OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  | During April 2001, the Company sold its web hosting and non-dial-up
internet access business unit to Veraciti, Inc. for $200,000 cash and
$60,000 worth of services to complete certain customer projects. In
addition, Veraciti assumed certain lease obligations of the Company
related to the web hosting and non-dial-up internet access business
and subleased 4,000 square feet of the Cedar Knolls office space
through lease termination. The Company recorded a $211,000 loss
related to this sale. Veraciti is owned by Frank Altieri, a former
member of the DFI Board of Directors.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  | During July 2001, the Company sold its network services and
installation business unit to Spectrum Solutions, Inc. (Spectrum)
for $350,000 and Spectrum assumed certain lease obligations of the
Company related to this network services and installation business
unit. The Company recorded a $188,000 gain related to this sale.                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(c) |  | SALE OF DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  | On August 8, 2000, the Company sold its dial-up internet access
division to Earthlink, Inc. (Earthlink). Pursuant to the terms of
the agreement with Earthlink, the Company received $2.8 million. A
loss on disposal of $3.5 million was recorded during 2000 related
primarily to the write-off of goodwill, certain equipment leases, and
severance costs related to the sale of this business. Also, during
2000, the Company recorded a $798,000 loss from discontinued operations
related to this unit.                                                                                

|    |  |                       
|--- |  | ----------------------
|(4) |  | PROPERTY AND EQUIPMENT

| |                                                                                                       | 
| | ----------------------------------------------------------------------------------------------------- | 
| | Major classes of property and equipment, net, consist of the following at
December 31, 2001 and 2000:

-F12-



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##### Table of Contents



|                                        |  |      |           |      |  |   |            |  
|--------------------------------------- |  | ---- | --------- | ---- |  | - | ---------- | -
|                                        |  | 2001 |           | 2000
|                                        |  |      |           |      |  |   |            |  
|Computer equipment                      |  | $    | 1,231,000 |      |  | $ | 3,195,000  |  
|Office equipment, fixtures and vehicles |  |      | 88,000    |      |  |   | 325,000    |  
|Leasehold improvements                  |  |      |          |      |  |   | 81,000     |  
|                                        |  |      |           |      |  |   |            |  
|                                        |  |      | 1,319,000 |      |  |   | 3,601,000  |  
|Less: accumulated depreciation          |  |      | (824,000  | )    |  |   | (2,177,000 | )
|                                        |  |      |           |      |  |   |            |  
|                                        |  | $    | 495,000   |      |  | $ | 1,424,000  |  
|                                        |  |      |           |      |  |   |            |  

|    |                                                                                                                                                                                                                                                                                             | 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    | Depreciation expense for the years ended December 31, 2001 and 2000
amounted to $828,000 and $785,000, respectively. Included in the 2001
depreciation is a write-off of $184,000 of fixed assets related to certain
computer and software assets that are no longer in use by the Company.
|    |                                                                                                                                                                                                                                                                                             | 
|(5) | INTANGIBLE ASSETS                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                             | 
|    | Intangible assets, net, are comprised of the following at December 31, 2001
and 2000:                                                                                                                                                                                                      

|                               |  |      |            |      |  |   |            |  
|------------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | -
|                               |  | 2001 |            | 2000
|                               |  |      |            |     
|Goodwill                       |  | $    | 10,767,000 |      |  | $ | 18,016,000 |  
|Trademarks                     |  |      |           |      |  |   | 75,000     |  
|                               |  |      |            |      |  |   |            |  
|                               |  |      | 10,767,000 |      |  |   | 18,091,000 |  
|Less: accumulated amortization |  |      | (6,220,000 | )    |  |   | (3,272,000 | )
|                               |  |      |            |      |  |   |            |  
|                               |  | $    | 4,547,000  |      |  | $ | 14,819,000 |  
|                               |  |      |            |      |  |   |            |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    | Amortization expense was $3,776,000 and $3,160,000 for the years ended
December 31, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | During the fourth quarter of 2001, the Company recorded $6.5 million
impairment of goodwill expense. The United States is currently in a
recession and most companies are reducing their expenses including reducing
technology projects, this has resulted in companies reducing its hiring of
outside consultants and putting special projects on hold. This has had an
impact on the Companys business and forecasts, which in turn impacted the
value of the Companys goodwill recorded. The fair value of the remaining
goodwill was determined using the discounted cash flow method. The Company
will adopt SFAS 142 during 2002 and does not expect to have any additional
impairment of goodwill associated with the adoption of SFAS 142.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|    | During 2000, $3,559,000 was written off as a result of the sale of the
Companys dial-up internet access division and the discontinuation of its
Microsoft training unit. See Notes 3 and 17.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|(6) | CURRENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|    | The following is a recap of the other current liabilities outstanding
at December 31 2001 and 2000:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                 |  |      |         |      |  |   |         | 
|---------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                 |  | 2001 |         | 2000
|                 |  |      |         |     
|Interest payable |  | $    | 177,000 |      |  | $ | 141,000 | 
|Other            |  |      | 453,000 |      |  |   | 467,000 | 
|                 |  |      |         |      |  |   |         | 
|                 |  | $    | 630,000 |      |  | $ | 608,000 | 
|                 |  |      |         |      |  |   |         | 

| |  | 
| |  | 

-F13-



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(7) | LEGACY LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|    | As a result of significant restructuring, closing of unprofitable offices
and selling certain business divisions during 2000 and the first half of
fiscal year 2001, the Company accumulated unpaid liabilities not associated with current operations. These creditor liabilities included terminated
equipment leases, property leases and telecommunication contracts as well
as certain professional fees. Through productive negotiations with these
creditors, $2.3 million of these liabilities have been settled and paid or
settled and reasonable payment terms agreed to as of December 31, 2001.
This resulted in a forgiveness of debt gains during 2001 of $977,000
($612,000 net of taxes) and remaining payments of $0.2 million owed during
2002 based upon agreed payment terms. See Footnote 19 for a discussion of
Legacy Liabilities settled subsequent to December 31, 2001.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|(8) | BORROWINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|    | At December 31, 2001 and 2000, the Companys outstanding borrowings were
comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                           |  |      |          |      |  |   |           |  
|-------------------------- |  | ---- | -------- | ---- |  | - | --------- | -
|                           |  | 2001 |          | 2000
|                           |  |      |          |     
|PowerCerv Note             |  | $    | 462,000  |      |  | $ | 828,000   |  
|Digital Shareholders Note |  |      | 480,000  |      |  |   | 465,000   |  
|                           |  |      |          |      |  |   |           |  
|                           |  |      | 942,000  |      |  |   | 1,293,000 |  
|Less: current portion      |  |      | (233,000 | )    |  |   | (210,000  | )
|                           |  |      |          |      |  |   |           |  
|Total-long term borrowings |  | $    | 709,000  |      |  | $ | 1,083,000 |  
|                           |  |      |          |      |  |   |           |  

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | POWERCERV NOTE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  | In connection with the Digital acquisition described in Note 3, the
Company assumed Digitals $827,500 secured note to PowerCerv
Corporation. The assets of Digital secure this note. The note bears
interest at a 4.56% annual rate with quarterly principal and interest
payments due through 2003. Interest expense on this note totaled
$29,000 and $68,000 during 2001 and 2000, respectively. See Note 13
(b) and (c) for related party discussion.                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(b) |  | DIGITAL SHAREHOLDERS NOTE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  | In conjunction with the Digital acquisition, the Company entered into
unsecured promissory notes with the former Digital shareholders
totaling $500,000. These notes bear interest at 6% and the interest
and principal are due in 2003. 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 $47,000 and $36,000 during 2001 and 2000, respectively.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(c) |  | DIGITAL LINE OF CREDIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  | Digital had a line of credit from a bank at the time DFI acquired
Digital. This line of credit was secured by all of Digitals assets
and guaranteed by certain Digital shareholders. On February 29, 2000,
the terms of the line of credit were amended and the borrower was
changed to DFI with no personal guarantees. This facility was then
secured by DFIs assets and had a rate of prime plus 2%. The $3.4
million of debt was paid in full during 2000 and the line of credit
terminated.                                           
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(d) |  | DEBT MATURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  | At December 31, 2001, aggregate required principal payments of
long-term debt are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                

|             |       |        |         |         | 
|------------ | ----- | ------ | ------- | ------- | 
|Year Ending  |       |        |         |        
|December 31, |       | Amount
|             |       |       
|2002         |       | $      | 233,000 |        
|2003         |       |        | 709,000 |        
|             |       |        |         |        
|             | Total |        | $       | 942,000 | 
|             |       |        |         |        

| |  | 
| |  | 

-F14-



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##### Table of Contents



|    |  |              
|--- |  | -------------
|(9) |  | BENEFIT PLANS

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | DEFINED BENEFIT PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  | Substantially all Spencer employees who met certain requirements of
age and length of service are covered by the Spencer sponsored
non-qualified, non-contributory defined benefit pension plan. The
benefits become fully vested upon the employees retirement. Benefits
paid to retirees are based upon age at retirement, compensation levels
and years of credited service. Subsequent to the acquisition of
Spencer in 1999, 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, 2001 and 2000 for this plan includes the
following components:

|                                         |                                      |   |         |         |      |   |         |         |  
|---------------------------------------- | ------------------------------------ | - | ------- | ------- | ---- | - | ------- | ------- | -
|                                         |                                      |   | 2001    |         | 2000
|                                         |                                      |   |         |         |     
|Components of net periodic pension cost: |                                      |   |         |         |      |   |         |        
|                                         | Service cost                         |   | $       |        |      |   | $       |        |  
|                                         | Interest cost                        |   |         | 60,000  |      |   |         | 31,000  |  
|                                         | Actual return on plan assets         |   |         | 18,000  |      |   |         | (47,000 | )
|                                         | Recognized net actuarial (gain) loss |   |         | (97,000 | )    |   |         | (6,000  | )
|                                         |                                      |   |         |         |      |   |         |        
|Net periodic pension cost (income)       |                                      | $ | (19,000 | )       |      | $ | (22,000 | )      
|                                         |                                      |   |         |         |      |   |         |        



| |  |                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The following provides a reconciliation of benefit obligations, plan
assets, the funded status of the plan and the amounts recorded in the
December 31, 2001 and 2000 Companys balance sheets:

|                                |                                              |  |         |          |      |  |         |          |  
|------------------------------- | -------------------------------------------- |  | ------- | -------- | ---- |  | ------- | -------- | -
|                                |                                              |  | 2001    |          | 2000
|                                |                                              |  |         |          |     
|Changes in benefit obligation:  |                                              |  |         |          |      |  |         |         
|                                | Benefit obligation, beginning of year        |  | $       | 555,000  |      |  | $       | 524,000  |  
|                                | Service cost                                 |  |         |         |      |  |         |         |  
|                                | Interest cost                                |  |         | 60,000   |      |  |         | 31,000   |  
|                                | Actuarial loss                               |  |         | 102,000  |      |  |         |         |  
|                                |                                              |  |         |          |      |  |         |         
|Benefit obligation, end of year |                                              |  | 717,000 |          |      |  | 555,000 |         
|                                |                                              |  |         |          |      |  |         |         
|Changes in plan assets:         |                                              |  |         |          |      |  |         |         
|                                | Fair value of plan assets, beginning of year |  |         | 575,000  |      |  |         | 428,000  |  
|                                | Actual return on plan assets                 |  |         | 18,000   |      |  |         | 47,000   |  
|                                | Employer contribution                        |  |         |         |      |  |         | 100,000  |  
|                                |                                              |  |         |          |      |  |         |         
|                                | Fair value of plan assets, end of year       |  |         | 593,000  |      |  |         | 575,000  |  
|                                |                                              |  |         |          |      |  |         |         
|                                | Unfunded status                              |  |         | (124,000 | )    |  |         | 20,000   |  
|                                | Unrecognized prior service cost              |  |         | (198,000 | )    |  |         | (214,000 | )
|                                | Unrecognized net actuarial loss              |  |         | 198,000  |      |  |         | 46,000   |  
|                                |                                              |  |         |          |      |  |         |         
|                                | Accrued benefit cost                         |  | $       | (124,000 | )    |  | $       | (148,000 | )
|                                |                                              |  |         |          |      |  |         |         



| |  |                                                                                   
| |  | ----------------------------------------------------------------------------------
| |  | Assumptions used in these actuarial valuations at December 31, 2001
and 2000 were:

|                                  |  |      |      |      |  |  |      |  
|--------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                  |  | 2001 |      | 2000
|                                  |  |      |      |     
|Discount rate                     |  |      | 5.50 | %    |  |  | 6.00 | %
|Expected long-term rate of return |  |      | 8.00 | %    |  |  | 7.50 | %

-F15-



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##### Table of Contents



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | 401(K) PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The Company sponsored a defined contribution benefit plan covering the
DFI employees and a second plan that covered the Digital employees.
Eligible employees are allowed to contribute up to 12% (Digital
employees) to 15% (DFI employees) of their compensation. In the DFI
plan, Company contributions are at the sole discretion of management.
There were no contributions for the years ended December 31, 2001 and
2000. Effective August 2001, the DFI Plan was merged with the
digital fusion, inc. 401(k) Plan (the Companys subsidiary plan) into
the restated Digital Fusion 401(k) Plan (Restated Plan). In the
Digital plan and the Restated Plan, the Company matched 30% of
participant contributions to a maximum matching amount of 6% of
participant base compensation which totaled $56,000 and $43,000 for
the years ended December 31, 2001 and 2000, respectively.

|     |  |                     
|---- |  | --------------------
|(10) |  | 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.
|   
|(b) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | PRIVATE PLACEMENTS
|   
|    | In February 2000, the Board of Directors of the Company approved a
private placement of up to $9.9 million of defined units which
consisted of 900,000 shares of common stock and 225,000 warrants to
purchase common stock. The Company raised approximately $7.0 million.
In connection with this private placement DFI issued 684,545 shares
of its common stock at a price of $11 per share                                                                                                                                                                                             
|   
|(c) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | WARRANTS          
|   
|    | At December 31, 2001, 666,510 shares of common stock were reserved for
the exercise of stock warrants comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                   |       |  |         |         | 
|---------------------------------- | ----- |  | ------- | ------- | 
|Initial IPO Underwriters Warrants |       |  | 31,760  |        
|1999 Private Placement             |       |  | 166,680 |        
|2000 Private Placement             |       |  | 183,070 |        
|Investment advisory firms          |       |  | 285,000 |        
|                                   |       |  |         |        
|                                   | Total |  |         | 666,510 | 
|                                   |       |  |         |        

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In connection with the Companys initial public offering, we
registered 120,000 shares of common stock underlying warrants, which
were sold to the underwriter (Underwriter Warrants) of which 31,760
remain unexercised. These warrants are exercisable for a four-year
period commencing on May 14, 1999 at a price of $8.10 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | In October 1999, the Company entered into a consulting agreement with
an investment advisory firm in which the Company agreed to issue: (a)
four-year warrants to purchase 50,000 shares of Common Stock at an
exercise price of $10.25 per share and (b) four-year warrants to
purchase 50,000 shares of Common Stock at an exercise price of $11.25
per share upon the closing of certain mergers or acquisitions to be
identified. The exercise prices were at least the fair market value of
the Companys common stock at the date of the agreement. In the event
that the requisite services are rendered and the warrants are issued,
the Company will realize a non-cash charge to operations for the fair
value of these warrants. The period(s) that such charge will be
recognized over will be determined based upon the nature of the merger
or acquisition involved. The fair value of these warrants was
recorded as purchase price of the related acquisitions. On January
12, 2000, the Company entered into an additional consulting agreement
with this same firm in which the Company agreed to issue four-year
warrants to purchase 50,000 shares of Common Stock at an exercise
price of $12.50 per share upon the closing of certain mergers or acquisitions to be identified. The fair value of these warrants was
charged to expense as consulting fees in 2000.

-F16-



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##### Table of Contents



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | In connection with the 1999 private placement, the Company issued
five-year redeemable warrants to purchase 166,680 shares of its common
stock at an exercise price of $12.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | In connection with the 2000 private placement, the Company issued
three-year redeemable warrants to purchase 171,125 shares of its
common stock at an exercise price of $13.75 per share. In addition,
on May 11, 2000 the Company issued a three-year warrant to purchase
11,945 shares of its common stock at an exercise price of $13.75 per
share to LaSalle St. Securities, LLC in consideration for their
services as placement agent for the private placement, the fair value
of which was reflected as a reduction to the proceeds of the private
placement.                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | The Chief Operating Officer of Tekbanc Limited joined The Companys
Board of Directors during April 2000 and, in that capacity, received
three-year warrants to purchase 60,000 shares of common stock at
$13.75 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | On June 15, 2000, the Company entered into a consulting agreement with
Tekbanc in which we agreed to issue Tekbanc three-year warrants to
purchase 75,000 shares of its common stock at an exercise price of
$7.00 in exchange for mergers and acquisitions, marketing, business
development and financial advisory services. These warrants vested
ratably over a six-month period ending December 15, 2000. The fair
value of these warrants was charged to expense during 2000.                                                                                                                                                                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(d) |  | SHARES ISSUED FOR ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | See Note 3 for a discussion of shares issued for Digital during 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | The Company issued 59,305 and 124,352 shares of reserved common stock
during 2001 and 2000, respectively in connection with the resolution
of contingencies in prior acquisitions. During 2001, the 50,000
reserve shares related to the Digital acquisition were issued as there
was no remaining unresolved issues related to that acquisition.
During 2000, 87,000 of the total 124,352 shares issued during 2000
were in conjunction with the 1998 acquisition of Entelechy, Inc. These
shares were issued to former Entelechy stockholders based upon
remaining in the continuous employ of the Company. Since the
condition of continued employment for the release of such shares was
waived, the Company recognized a non-cash compensation charge of
$214,000 in the first quarter of 2000.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | During 2000, the acquisition liability account was increased by
$650,000 related to the 50,000 reserve shares from the Digital
acquisition. The acquisition liability account was reduced by
$874,000 and $251,000 during 2001 and 2000, respectively, for the
issuance of certain reserve shares related to acquisitions the Company
made in prior years including issuing during 2001 the 50,000 reserve
shares from the Digital acquisition. The December 31, 2001 acquisition
liability balance of $71,000 relates to 3,235 of acquisition reserve
shares remaining, which are expected to be issued during 2002.                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(e) |  | SETTLEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | On June 15, 2001, the Company reached a settlement agreement with
certain shareholders resolving a contractual dispute with such
shareholders. During June 2001, the Company issued 350,002 shares of
common stock to these shareholders to effect that resolution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(f) |  | STOCK AWARDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | The Company issued 32,500 shares of restricted stock to an officer
during 2000. These shares were fully vested in conjunction with the
termination agreement of the former officer. The $309,000 value
ascribed to the stock awards was based on the fair market values of
the Companys common stock on the award dates. Compensation expense
for these agreements for the year ended December 31, 2000 totaled
$30,000. The remaining $178,000 of non-cash compensation was included
in the first quarter 2000 severance and restructuring charge. During
2001, the termination agreement was amended and these 32,500 shares
were rescinded.                                                                                                                                                     

-F17-



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##### Table of Contents



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) |  | STOCK OPTION PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  | The Company maintains three qualified stock option plans. Under the
terms of these plans, the Company has reserved 1,380,000 shares of
common stock for future grants. The Company also granted 380,000 and
660,000 (of which 60,000 were cancelled) of nonqualified stock
options during 2001 and 2000, respectively. These were granted to
certain management to retain key personnel during this restructuring
and refocusing the Companys strategic vision on being an IT
consulting services firm, stream-line on-going operations and sell or
shut down unprofitable units.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  | 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. At December 31, 2001, the
Company could grant an aggregate of 507,150 shares under these plans.                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  | The following table summarizes information about qualified and
non-qualified stock options outstanding at December 31, 2001:                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                 |  |             |           |              |             |       |           |             |          |       |          |  |  |  |          |  |  |   |       |  | 
|---------------- |  | ----------- | --------- | ------------ | ----------- | ----- | --------- | ----------- | -------- | ----- | -------- |  |  |  | -------- |  |  | - | ----- |  | 
|                 |  |             |           |              |             |       | Weighted  |             |          |       |          |  |  |  |          |  |  |   |      
|                 |  |             |           |              |             |       | Average   |             | Weighted |       |          |  |  |  | Weighted
|                 |  |             |           |              |             |       | Remaining |             | average  |       |          |  |  |  | Average 
|                 |  |             | Number    |              | contractual |       | exercise  |             | Number   |       | Exercise
|Exercise Price   |  | Outstanding |           | life (years) |             | price |           | exercisable |          | Price
|                 |  |             |           |              |             |       |           |             |          |      
|$0.29 to $0.45   |  |             | 888,500   |              |             |       | 9.76      |             |          | $     | 0.36     |  |  |  | 138,083  |  |  | $ | 0.31  | 
|$0.94 to $1.19   |  |             | 244,200   |              |             |       | 7.37      |             |          |       | 0.96     |  |  |  | 132,680  |  |  |   | 0.95  | 
|$4.31 to $5.78   |  |             | 83,050    |              |             |       | 7.10      |             |          |       | 5.74     |  |  |  | 47,069   |  |  |   | 5.74  | 
|$6.00 to $8.13   |  |             | 136,650   |              |             |       | 5.16      |             |          |       | 6.21     |  |  |  | 122,220  |  |  |   | 6.23  | 
|$9.97 to $10.49  |  |             | 466,750   |              |             |       | 8.03      |             |          |       | 10.46    |  |  |  | 348,083  |  |  |   | 10.44 | 
|$17.19 to $22.00 |  |             | 23,500    |              |             |       | 6.66      |             |          |       | 20.79    |  |  |  | 23,500   |  |  |   | 20.79 | 
|                 |  |             |           |              |             |       |           |             |          |       |          |  |  |  |          |  |  |   |       | 
|                 |  |             | 1,842,650 |              |             |       | 8.50      |             |          | $     | 3.93     |  |  |  | 811,635  |  |  | $ | 6.56  | 
|                 |  |             |           |              |             |       |           |             |          |       |          |  |  |  |          |  |  |   |       | 



| |  |                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------
| |  | Transactions under various qualified and non-qualified option plans
for 2000 and 2001 are summarized as follows:

|                                                 |  |         |           |       |  |          |       | 
|------------------------------------------------ |  | ------- | --------- | ----- |  | -------- | ----- | 
|                                                 |  |         |           |       |  | Weighted
|                                                 |  |         |           |       |  | Average 
|                                                 |  |         |           |       |  | Exercise
|                                                 |  | Options |           | price
|                                                 |  |         |           |      
|Outstanding at January 1, 2000                   |  |         | 509,550   |       |  | $        | 14.62 | 
|Granted                                          |  |         | 1,140,825 |       |  |          | 7.98  | 
|Exercised                                        |  |         | (200      | )     |  |          | 6.00  | 
|Canceled                                         |  |         | (278,895  | )     |  |          | 9.27  | 
|                                                 |  |         |           |       |  |          |       | 
|Outstanding at December 31, 2000                 |  |         | 1,371,280 |       |  |          | 10.47 | 
|Granted                                          |  |         | 1,092,858 |       |  |          | 0.58  | 
|Exercised                                        |  |         |          |       |  |          |      | 
|Canceled                                         |  |         | (621,488  | )     |  |          | 11.41 | 
|                                                 |  |         |           |       |  |          |       | 
|Outstanding at December 31, 2001                 |  |         | 1,842,650 |       |  | $        | 3.93  | 
|                                                 |  |         |           |       |  |          |       | 
|Options exercisable at December 31, 2001         |  |         | 811,635   |       |  | $        | 6.56  | 
|                                                 |  |         |           |       |  |          |       | 
|Options available for grant at December 31, 2001 |  |         | 507,150   |       |  |          |       | 
|                                                 |  |         |           |       |  |          |       | 

-F18-



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##### Table of Contents





| |  |                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | Under the accounting provisions of SFAS 123, the Companys 2001 and
2000 pro forma net loss and loss per share would have been:

|                                      |  |      |             |      |  |   |             |  
|------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                      |  | 2001 |             | 2000
|                                      |  |      |             |     
|Net loss                              |  | $    | (12,520,000 | )    |  | $ | (20,285,000 | )
|Net loss per share; basic and diluted |  | $    | (1.80       | )    |  | $ | (3.18       | )



| |  |                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 assumptions:

|                                               |  |      |      |      |  |   |      |  
|---------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                               |  | 2001 |      | 2000
|                                               |  |      |      |     
|Dividend yield                                 |  |      | 0    | %    |  |   | 0    | %
|Expected volatility                            |  |      | 63.0 | %    |  |   | 70.5 | %
|Risk-free interest rate                        |  |      | 5.05 | %    |  |   | 6.31 | %
|Expected life  years                          |  |      | 10   |      |  |   | 10   |  
|Weighted average fair value of options granted |  | $    | 0.35 |      |  | $ | 7.98 |  

|     |  |                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------
|(11) |  | TAXES                                                                                                 
|     |  |                                                                                                       
|     |  | Benefits for federal and state income taxes consist of the following as of
December 31, 2001 and 2000:

|                         |  |      |         |      |  |   |   | 
|------------------------ |  | ---- | ------- | ---- |  | - | - | 
|                         |  | 2001 |         | 2000
|                         |  |      |         |     
|Current:                 |  |      |         |      |  |   |   | 
|Federal                  |  | $    |        |      |  | $ |  | 
|State                    |  |      |        |      |  |   |  | 
|                         |  |      |         |      |  |   |   | 
|                         |  |      |        |      |  |   |  | 
|Deferred:                |  |      |         |      |  |   |   | 
|Federal                  |  |      | 332,000 |      |  |   |  | 
|State                    |  |      | 33,000  |      |  |   |  | 
|                         |  |      |         |      |  |   |   | 
|                         |  |      | 365,000 |      |  |   |  | 
|                         |  |      |         |      |  |   |   | 
|Total income tax benefit |  | $    | 365,000 |      |  | $ |  | 
|                         |  |      |         |      |  |   |   | 



| |  |                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deferred tax assets (liabilities) arise from the following temporary
differences and are classified as follows as of December 31, 2001 and 2000:

|                                                                    |  |   |            |   |  |   |            |  
|------------------------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                    |  |   | 2001       |   |  |   | 2000       |  
|                                                                    |  |   |            |   |  |   |            |  
|Deferred Tax Asset, Current:                                        |  |   |            |   |  |   |            |  
|Accounts receivables                                                |  | $ | 136,000    |   |  | $ | 400,000    |  
|Other, net                                                          |  |   |           |   |  |   | (81,000    | )
|Valuation allowance                                                 |  |   | (136,000   | ) |  |   | (319,000   | )
|                                                                    |  |   |            |   |  |   |            |  
|                                                                    |  | $ |           |   |  | $ |           |  
|                                                                    |  |   |            |   |  |   |            |  
|Deferred Tax Asset (Liabilities), Non-Current:                      |  |   |            |   |  |   |            |  
|Intangible assets                                                   |  | $ | 35,000     |   |  | $ |           |  
|Property and equipment                                              |  |   | (101,000   | ) |  |   | 219,000    |  
|Tax benefit of state income tax net
operating loss carryforwards    |  |   | 1,485,000  |   |  |   | 1,344,000  |  
|Tax benefit of federal income tax, net
operating loss carryforwards |  |   | 7,729,000  |   |  |   | 6,953,000  |  
|Change in tax status of Spencer                                     |  |   |           |   |  |   |           |  
|Valuation allowance                                                 |  |   | (9,148,000 | ) |  |   | (8,516,000 | )
|                                                                    |  |   |            |   |  |   |            |  
|                                                                    |  | $ |           |   |  | $ |           |  
|                                                                    |  |   |            |   |  |   |            |  

-F19-



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##### Table of Contents



| |  |                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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,
2001 and 2000:

|                                                    |  |      |            |      |  |   |            |  
|--------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                    |  | 2001 |            | 2000
|                                                    |  |      |            |     
|Statutory benefit                                   |  | $    | (3,880,000 | )    |  | $ | (6,141,000 | )
|State tax benefit, net of federal effect            |  |      | (678,000   | )    |  |   | (1,082,000 | )
|Amortization of non-deductible goodwill             |  |      | 1,470,000  |      |  |   | 878,000    |  
|Write-off of non-deductible goodwill                |  |      | 2,596,000  |      |  |   | 791,000    |  
|Non-deductible expenses                             |  |      | 43,000     |      |  |   | 29,000     |  
|Increase in deferred income tax valuation allowance |  |      | 449,000    |      |  |   | 5,525,000  |  
|                                                    |  |      |            |      |  |   |            |  
|                                                    |  | $    |           |      |  | $ |           |  
|                                                    |  |      |            |      |  |   |            |  

|     |  |                                                                                                                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | Based on an assessment of all available evidence, including 2000 and 2001
operating results, management does not consider realization of the deferred
tax assets generated from operations to be more likely than not, and has
established a valuation allowance against the gross deferred tax asset.
|     |  |                                                                                                                                                                                                                                                                                                       
|     |  | As of December 31, 2001, the Company had available federal and state net
operating loss carryforwards of approximately $22,285,000 and $23,615,000,
respectively, which begin expiring in 2019 and 2006, respectively.                                                                                
|     |  |                                                                                                                                                                                                                                                                                                       
|(12) |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                         

|    |  |                                                                                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | OPERATING LEASES                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                               
|    |  | The Company leases facilities and equipment under operating leases and
subleases expiring through December 2005. Some of the leases have
renewal options and most contain provisions for passing through
certain incremental costs. At December 31, 2001 future net minimum
annual rental payments under non-cancelable leases are as follows:

|             |  |        |  |   |         |   |         | 
|------------ |  | ------ |  | - | ------- | - | ------- | 
|Year Ending  |  |        |  |  
|December 31, |  | Amount
|             |  |       
|2002         |  |        |  |   |         | $ | 305,000 | 
|2003         |  |        |  |   |         |   | 60,000  | 
|2004         |  |        |  |   |         |   | 45,000  | 
|2005         |  |        |  |   |         |   | 4,000   | 
|2006         |  |        |  |   |         |   |        | 
|             |  |        |  |   |         |   |         | 
|             |  | Total  |  | $ | 414,000 |  
|             |  |        |  |   |         |   |         | 

| |  |                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Total rental and lease expense for the years ended December 31, 2001
and 2000 was approximately $697,000 and $2,227,000, respectively.

-F20-



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##### Table of Contents



|    |  |                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | In conjunction with the sale of the Companys web hosting and
non-dial-up internet access division, Veraciti, Inc. assumed certain
leases. At December 31, 2001, these leases had total payments
remaining of $46,000. The remaining lease payments for these leases
are included in the totals above.
|    |  |                                                                                                                                                                                                                                                                                                       
|(b) |  | EMPLOYMENT AGREEMENTS                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                       
|    |  | The Company has entered into employment and consulting contracts with
certain officers and employees, which provide for minimum annual
salaries to be paid over specified terms. Future commitments for such
payments are as follows:                                                                 

|             |  |        |  |   |         |   |         | 
|------------ |  | ------ |  | - | ------- | - | ------- | 
|Year Ending  |  |        |  |  
|December 31, |  | Amount
|             |  |       
|2002         |  |        |  |   |         | $ | 248,000 | 
|2003         |  |        |  |   |         |   | 29,000  | 
|             |  |        |  |   |         |   |         | 
|             |  | Total  |  | $ | 277,000 |  
|             |  |        |  |   |         |   |         | 

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) |  | LITIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | On July 25, 2000, Personnel Staffing, Inc., Gregerson Management
Services, Inc., Chynna, Inc., and Luke, Inc. (PSI) filed a complaint
in the Circuit Court of Etowah County, Alabama and a counterclaim was
filed by the Company in the Circuit Court of Etowah County, Alabama.
During mediation on October 1, 2001, both the Company and PSI agreed
to settle all claims asserted against the other. The effect on the
Companys financial position was the $25,000 insurance deductible,
which is recorded as a liability at December 31, 2001.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | On July 24, 2001, Sunrise International Leasing Corp. filed a
complaint for alleged defaults under several equipment lease
agreements associated with a business unit that was sold. The Company
returned the equipment that was in its possession and during mediation
in January 2002, the Company agreed to settle all claims asserted for
$100,000, which was recorded as a liability at December 31, 2001.                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | On June 29, 2001, Focal Communication Corporation filed a complaint
for alleged defaults under a communication service provider agreement
associated with a business unit that was sold. During mediation in
February 2002, the Company agreed to settle all claims asserted for
$100,000, which was recorded as a liability at December 31, 2001.                                                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | On October 9, 2001, Brandywine Realty Partners, L.P. filed a complaint
for alleged default under a real estate lease agreement. During
mediation, the Company agreed to settle all claims asserted for
$120,000 payable over the term of the next four quarters. The Company
has paid $30,000 and has recorded the remaining $90,000 as a liability
at December 31, 2001.                                                                                                                                                                           
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  | In addition, the Company is involved in certain legal actions arising
from the cessation of certain business operations and in the ordinary
course of business. The Company is defending these proceedings. While
it is not feasible to predict or determine the outcome of these
matters, the Company does not anticipate that any of these matters or
these matters in the aggregate will have a material adverse effect on
the Companys business or its consolidated financial position or
results of operations.                               

|     |  |                           
|---- |  | --------------------------
|(13) |  | RELATED PARTY TRANSACTIONS

|    |  |                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | OTHER TRANSACTIONS                                                                                                                                                
|    |  |                                                                                                                                                                   
|    |  | See Note 10 for a discussion of warrants given to Tekbanc and to the
Chief Operating Officer of Tekbanc Limited who joined DFIs Board of
Directors in April 2000.

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | See Note 3 for a discussion of the sale of the web hosting business to
Veraciti, Inc. Veraciti, Inc is owned by Frank Altieri who was a
former DFI board of director.                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  | See Note 3 for a discussion of the purchase of Digital by the Company.
Roy E. Crippen, III had an ownership interest in Digital and is also
a current board of directors as well as the Companys current Chief
Executive Officer and President.                                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(b) |  | PURCHASE OF ORIGINAL EQUIPMENT RIGHTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  | In September 2000, the Company purchased the original equipment
manufacturing rights to a financial accounting software package
developed by PowerCerv Technologies Corporation (PowerCerv). The
purchase price was $350,000, which approximates fair market value, of
which $140,000 was paid in the third quarter of 2000, $105,000 was
paid on December 31, 2000 and $105,000 was paid during 2001. Roy
Crippen, III, the Companys Chief Executive Officer and President, is
a member of the Board of Directors of PowerCerv.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(c) |  | CONSULTING AGREEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  | On October 9, 2001, the Company entered into a consulting services
agreement with PowerCerv to provide PowerCerv with the right to
license the derivative works created from its web-based iCRM product
for $27,500. This was paid to the Company during 2001.                                                                                                                                                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  | On October 13, 2000, the Company entered into a consulting services
agreement with PowerCerv. The Company provided consulting services to
PowerCerv at $130 per hour for a total of $350,000. PowerCerv paid
DFI a $150,000 deposit, the next $50,000 was paid by PowerCerv and the
remaining $150,000 of services was paid by reducing the PowerCerv Note
discussed in Note 6(a). At December 31, 2001, the unused paid
services totaled $63,000.                                                                                 



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

|     |  |                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) |  | CASH FLOW INFORMATION                                                                                                                                   
|     |  |                                                                                                                                                         
|     |  | As disclosed in Note 3, the Company consummated an asset acquisition in
2000. In conjunction with such acquisition, liabilities were assumed as
follows:

|                                  |  |      |            | 
|--------------------------------- |  | ---- | ---------- | 
|                                  |  | 2000
|                                  |  |     
|Fair value of assets acquired     |  | $    | 19,119,000 | 
|Fair value of issued common stock |  |      | 12,758,000 | 
|                                  |  |      |            | 
|Liabilities assumed               |  | $    | 6,361,000  | 
|                                  |  |      |            | 



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|             |  |      |        |      |  |   |         | 
|------------ |  | ---- | ------ | ---- |  | - | ------- | 
|             |  | 2001 |        | 2000
|             |  |      |        |     
|Interest     |  | $    | 30,000 |      |  | $ | 211,000 | 
|Income Taxes |  |      |       |      |  |   |        | 

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