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

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

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 2003
                                       OR

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

          For the transition period from _____________ to _____________

                           Commission File No. 0-24073

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

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

                4940-A Corporate Drive, Huntsville, Alabama 35807
          (Address of principal executive offices, including zip code)

                                 (256) 837-2620

              (Registrant's telephone number, including area code)

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

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

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

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

         Issuer's revenues for its most recent fiscal year: $6,420,000.

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

         As of March 15, 2004, 7,167,671 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 2004 Annual Meeting of Stockholders, which is due within 120
days after year-end.



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

<PAGE>

            Cautionary Statement Regarding Forward-Looking Statements


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

                                     PART I

Item 1.       Description of Business

(a)  Business Development

         Digital Fusion, Inc. (used herein, "Digital Fusion", "DFI", and the
"Company", refer to Digital Fusion, Inc.) is an information technology (IT)
consulting firm that helps its customers maximize the use of modern technology
to access business information, enhance the performance of their human
resources, and meet various business needs. The Company's success is based on a
total approach that provides the people, processes, and technology needed to
translate business needs into sound IT strategies. Services are provided to
business organizations and public sector institutions primarily in the Eastern
United States.

         The Company is incorporated in Delaware with its main administrative
office located in Huntsville, Alabama and regional offices in Florida, New
Jersey, and Virginia. Digital Fusion's website address is www.digitalfusion.com.

                        Form and History of Organization

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

                          Acquisitions and Divestitures

         In July 2001, Digital Fusion discontinued its network services and
installation business unit and sold it to Spectrum Solutions, Inc. ("Spectrum
Solutions") for $350,000. Spectrum Solutions assumed certain lease obligations
of Digital Fusion related to this network services and installation business
unit. Digital Fusion recorded an $188,000 gain related to this sale.

         In April 2001 Digital Fusion discontinued its Web hosting and
non-dial-up Internet access business unit, and sold this 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 Digital
Fusion related to the Web hosting and non-dial-up business. The Company recorded
a $211,000 loss in connection with this sale.

         On March 1, 2000, in conjunction with its strategic vision to focus
primarily on its IT consulting business line, the Company acquired all of the
outstanding stock of digital fusion, inc. 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. 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.


                                      -1-
<PAGE>


(b) Business of Issuer
                             Description of Services

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

|X|      Application Development and Data Management - Following its proven
         System Development Life Cycle Methodology, Digital Fusion builds
         customized software solutions including database design and
         maintenance, business practice automation, Web-enabled client/server
         applications, and complete project out sourcing. With SPI Dynamics'
         WebInspect, the Company performs application security audits and the
         remediation of issues identified.
|X|      System Integration - Specializing in Microsoft solutions and Intuit
         Track-It!, Digital Fusion installs and configures a variety of software
         packages, including complete system integration with custom front-ends,
         third-party packages, or other external databases and legacy system
         migrations.
|X|      IT Support and Integration, helping organizations define, develop, and
         deploy the optimal solution for IT operations, including infrastructure
         consulting, desktop and help-desk support, network and server
         management, system migration and integration, and leasehold
         replacement.

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


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

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

IT Infrastructure Support and Integration - Digital Fusion's IT Support
expertise includes hardware/software installation and ongoing maintenance,
onsite end-user support and training, infrastructure design/analysis and
configuration management, and systems and network administration. Its experience
includes large-scale projects such as operating system rollouts of more than
100,000 PCs across 30 states and leasehold replacement projects of more than
125,000 computers and peripherals. Digital Fusion maintains multi-year staffing
with several companies and manages more than 11 consultants onsite with
companies in 5 states across the U.S., including Hawaii. Digital Fusion
effectively and efficiently provides and manages consultants across
geographically diverse customer sites. It provides dedicated technical managers
who work with local offices and corporate headquarters to provide individuals
who match the specific technical needs of the unit and the organization's
particular corporate culture.

Web Design and Development - Digital Fusion designs, develops, and maintains
engaging, interactive, multimedia websites and builds high-performance
internet/intranet applications. The Company is a Macromedia Alliance Partner
with thorough knowledge and experience in Web technologies such as JavaScript,
Java, ASP, DHTML, XML, ColdFusion, Dreamweaver, Flash, and others. Company
solutions also include complete content

                                      -2-

<PAGE>

management  features for managing  information and  streamlining  communications
company wide,  along with  easy-to-use  tools to give  non-technical  staff full
control of website or intranet/extranet content.

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

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


                                 Strategic Plan

         During 2003, Digital Fusion devoted substantial resources to further
develop U.S. federal government business in order to accelerate its growth and
take advantage of the competencies gained in the commercial and government
sectors. As a result of this strategy, Digital Fusion is increasing its
penetration of the government sector and diversifying its business.

         Additionally, Digital Fusion's strategic plan for business development
continued to provide IT consulting services that focused on providing the best
technical solutions to business problems. In a tight economic climate in which
IT spending was dramatically restricted, its strategic position was to place
special emphasis on helping customers maximize their current IT systems to
create the most cost-effective solutions to immediate business problems and make
their technology investments perform more efficiently.

                          Federal GSA IT Schedule Award

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

                               Sales and Marketing

         Each service line described above has a specific target market and
customer size. Overall, the Company markets its Application Development, Data
Management, and System Integration to mid-sized businesses (including mid-size
departments of larger enterprises) and public sector institutions. Its suite of
services enables its 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.

         Our sales and marketing strategy is driven by its ability to offer
solutions specific to each customer's needs, and then to provide additional
services to that customer when appropriate. In this way, the Company is able to
increase awareness of its comprehensive business and IT consulting services and
desktop support and integration. Its marketing efforts are primarily focused on
mid-sized businesses and organizations for strategic services, and large-sized
organizations for staffing, application development, and desktop support
services. A direct sales model is used for marketing and selling services.


                                       -3-
<PAGE>


         Marketing efforts principally involve tradeshows, direct mailings,
telesales, involvement in appropriate industry professional organizations, and
informal networking in areas within the geographic scope of the network. These
efforts are critical to increasing the brand recognition of the name "Digital
Fusion," which will make it easier for its sales group to convert the customer
interest to closed business.

         Digital Fusion also generates sales leads through referrals from
customers, consultants, requests for proposals, referrals from other business
and IT consulting service businesses, its website and associated links, and
industry seminars and trade shows.

         In 2003, the Company continued a concentrated effort into strengthening
its relationships with existing partners and establishing new strategic
partnerships for developing new business. Currently it is a Microsoft Certified
Solution Provider, Microsoft Great Plains Certified Business Solutions Provider,
and a Macromedia Associate Partner and a SPI Dynamics Value Added Reseller and
Remediation Partner. It also has an arrangement with Intuit, that allows their
federal government customers to use Digital Fusion's GSA IT schedule to procure
Intuit's Track-It! products.

              Sales Management and Services Distribution Structure

         Digital Fusion's organizational structure adheres to a regional sales
management and services distribution model that allows the company to be
flexible and responsive to client needs. Management and sales for its
Application Development and Data Management, and System Integration service
lines operate regionally with directors for Florida, Mid-south, and Northeast,
each managing service delivery, consultant resources, and sales for his
respective region. This structure gives the Company control at the regional
level to manage resources and develop sales strategies tailored to regional
market demands. The IT Support and Integration service line has a national
client base with programs, consultant resources, and sales managed by the
Mid-Atlantic director.

                                    Customers

         Digital Fusion's customer base consists primarily of businesses and
organizations with system integration, business application development and IT
support and integration needs. It intends to expand its customer base in all of
its business lines through internal growth to lessen dependence on any one
particular customer or group of customers. The GSA award, mentioned above, is an
important part of this effort.


Customers during the year ended December 31, 2003 included:
<TABLE>
<CAPTION>

<S>                             <C>                             <C>
ABN AMRO                        Alabama A & M University         Amana
Bank of America                 Bentley Systems                  Bridgestone/Firestone
College of Health Sciences      Commerce Bancorp                 Darden Restaurants
Deutsche Bank                   Echelon/Florida Hospital         State of Florida
General Dynamics                Hillsborough County, FL          Intergraph Corporation
Intuit                          Jacobs Sverdrup                  Kingsway America
Lucent Technologies             M & R Marketing Systems          Managing Foods
Marriott Vacation Club Int'l    National Computer Print          New York University
Nielsen Media Research          Orange County, FL                Progress Energy
Protective Life                 Scandinavian Tourist Board       Solutia
State of Tennessee              TIAA/CREF                        Time Warner Communications
U.S. Army                       Vital Works                      Watkins Motor Lines

</TABLE>


                       Dependence on a Few Major Customers

         The Company is dependent on a limited number of customers for a
substantial portion of its revenues. For the years ended December 31, 2003 and
2002, its largest customer accounted for approximately 28% and 24% respectively,
of revenues. The contract with the Company's major customer provides that DFI
render services pursuant to purchase orders, each of which constitutes a
separate contractual commitment by the customer. Non-renewal or termination of
DFI contract with its major customer or the failure by the customer to issue
additional purchase orders under the existing contract would have a materially
adverse effect on Digital Fusion. There can be no assurance that the Company
will obtain additional contracts for projects similar in scope to those
previously obtained, that it will be able to retain existing customers and

                                       -4-
<PAGE>


attract new customers, or that it will not remain largely dependent on a limited
customer base accounting for a substantial portion of revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Which May Affect the Company's Future Performance
- A loss of a Significant Customer could Substantially Decrease Revenues."

                                   Competition

         The markets for Digital Fusion's services are highly competitive, but
are specific to each individual service line. With limited barriers to entry the
Company believes the competitive landscape will continue to increase both from
new entrants to the market as well as from existing players. It continues to
face increasing competition from outsourced recruiting companies. In addition,
the growing trend in 2003 for companies to ship part of their software
programming work overseas, especially to India, has increased competition in the
IT services industry.

         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 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.

         Digital Fusion competes with numerous large companies that have
substantially greater market presence and financial, technical, marketing and
other resources than it has, including

     o    Large  information  technology  consulting  and service  providers and
          application software firms

     o    International,  national,  regional,  and  commercial  ISPs  that have
          consulting services divisions

     o    Computer  hardware and software and other  technology  companies  also
          providing services

     o    Application service providers

     o    Staffing companies

         Many of the Company's competitors have expanded their service offerings
and increased their focus on e-Business and IT professional services markets,
thus increasing the number of organizations that are providing services similar
to ours. The Company remains focused on delivering better service than its
competitors who also deliver business application development services.

                               Pricing Competition

         In 2003, the Company continued to encounter extensive pricing pressure,
which in turn resulted in reductions to the average selling price of its
services. There can be no assurance that the Company 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 other
efforts. In addition, the Company believes that consolidation in the business
and IT professional services market will continue to result in increased price
competition, partly due to a market surplus of software developers, which drives
down the consultant bill rate, and the trend toward outsourcing programming work
overseas. This may make it difficult for Digital Fusion to gain additional
customers and could have a material adverse effect on revenues. There can be no
assurance that it 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 - The Company
May Not Have The Resources To Compete Effectively With Larger Competitors, Which
Could Result In Lost Market Share and Decreased Pricing."

                                    Employees

         At December 31, 2003, Digital Fusion had 53 full-time employees
including four executive officers, 40 billable employees, six people dedicated
to sales and marketing activities and three administrative personnel. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Which May Affect the Company's Future Performance


                                       -5-
<PAGE>

- If Digital Fusion is Unable To Retain The Services Of Key Personnel, Business
Operations May Be Disrupted."

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

                                 Geographic area

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

                                   Seasonality

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


Item 2.       Description of Property

         Digital Fusion serves its customers through its corporate headquarters,
located in Huntsville, Alabama, and regional offices located in Florida, New
Jersey, and Virginia. In April 2003, the Company moved its corporate
headquarters to Huntsville, Alabama and closed its Tampa, Florida office
location.

         At December 31, 2003, the Company did not own any real property and
conducted its operations at the following leased premises:
<TABLE>
<CAPTION>

                                                                                    Approximate
                                                                   Approximate     Annual Leased
Location                            Description of Facility       Square Footage        Cost       Lease Term
<C>                                                                  <C>                <C>        <C>      <C>
4940-A Corporate Drive              Corporate                        3,256              $37,000    1/1/02 - 12/31/04
Huntsville, AL 35805                headquarters,
                                    administration, sales,
                                    customer support, and
                                    programming services

3 South Broad Street                Sales, customer                  1,390               $7,550    9/1/03 - 8/31/06
Suite 2D                            support, and
Woodbury, NJ  08096                 programming services

3430 Sunset Ave.                    Sales, customer                   300                $3,780    Month-to-Month
Suite 20                            support, and
Ocean, NJ  07712                    programming services

5824 South Semoran Blvd.            Sales, customer support          1,800              $28,700    2/29/04 - 2/28/06
Orlando, FL  32822                  and programming services


8965 Center Street                  Sales, customer support           800                $8,900    4/1/02 - 3/31/05
Manassas, VA  20110                 and programming services

</TABLE>

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


                                      -6-
<PAGE>

Item 3.       Legal Proceedings

         The Company is involved in certain legal actions arising 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


         No matters were submitted to a vote of security holders during the
quarter ended December 31, 2003.



                                     PART II


Item 5.       Market for Common Equity and Related Stockholder Matters

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

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


                              2003                       High                      Low

<S>                                                      <C>                      <C>
                    First Quarter                        $0.46                    $0.19

                    Second Quarter                       $0.45                    $0.15

                    Third Quarter                        $0.44                    $0.30

                    Fourth Quarter                       $0.45                    $0.22




                              2002                       High                      Low

                    First Quarter                        $1.19                    $0.40

                    Second Quarter                       $1.40                    $1.00

                    Third Quarter                        $1.09                    $0.68

                    Fourth Quarter                       $0.80                    $0.37


</TABLE>

    The number of holders of record of common stock on March 15, 2004 was 118.

         There were no dividends or other distributions made by the Company
during the fiscal year ended December 31, 2003 with respect to its common stock.
The Company currently intends to retain any earnings to provide for the
operation and expansion of its business and does not anticipate paying any cash
dividends to the holders of its common stock in the foreseeable future.


                                       -7-
<PAGE>


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 2003)
have been previously reported on Forms 10-KSB and 10-QSB and are incorporated
into this 10-KSB by reference.

         As part of its 1999 acquisition of Florence Business Net, on December
27, 2002 the Company issued 3,235 shares of common stock that had been held in
reserve for Florence Business Net, pursuant to the terms of the related
acquisition agreement. Because this issuance did not involve any public
offering, it was exempt from registration under Section 4(2) of the Securities
Act of 1933.

         On January 8, 2003, its registration statement on From S-3, as amended
(file number 333-100052), relating to the Company's convertible note issued to
its primary lender was declared effective by the SEC. The Company registered
951,153 shares of common stock for issuance upon conversion of a convertible
note. At the note holder's election, this note is convertible into shares of
common stock at $0.922 a share after the Company common stock price is at or
above $1.15 a share for ten consecutive days. The Company registered 75,000
shares for issuance upon exercise of a common stock purchase warrant. The
warrant is exercisable for a five-year period commencing on July 26, 2002 at a
price of $1.15 per share.


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


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

                                    OVERVIEW

         Digital Fusion, Inc. is an information technology (IT) consulting firm
that helps its customers maximize the use of modern technology to access
business information, enhance the performance of their human resources, and meet
various business needs. The Company's success is based on a total approach that
provides the people, processes, and technology needed to translate business
needs into sound IT strategies. Services are provided to business organizations
and public sector institutions primarily in the Eastern United States. The
Company is incorporated in Delaware with its main administrative office located
in Huntsville, Alabama and regional offices in Florida, New Jersey, and
Virginia.

         Revenues are derived primarily from fees earned in connection with the
performance of services provided to customers. The Company typically invoices on
a time and materials basis. The majority of costs are associated with personnel.
Attracting and retaining billable employees is vital for the Company to move
forward. Quarterly operating results are affected by the number of billable days
in the quarter, holiday seasons, and vacations. During the second quarter of
2003, the Company began reselling the Intuit product Track-It!. All 2003
Track-It! product sales were to governmental entities where margins are lower.

         During the past year, the Company has continued its strategic vision to
focus on being an IT consulting services company, to concentrate on its
profitable business units, and to further develop its public-sector customer
base. In furtherance of this goal, the Company continued to stream-line the
costs of its ongoing business units, closed unprofitable offices, and sold or
shut down business units that did not fit its strategic vision of being an IT
consulting services company.

         The Company moved its corporate headquarters from Tampa, Florida to
Huntsville, Alabama in April, 2003 and the Tampa office was closed at that time.
The Huntsville location controls the Company's largest federal customer base and
this move has helped increase the Company's penetration of the federal market.
Due to the relocation of corporate headquarters, the Company's Chief Financial
Officer resigned effective June 30, 2003, and remained available for assistance
during the subsequent transition period.

         During the fourth quarter of 2002, the Company recorded an impairment
of goodwill of $1.2 million that was associated with prior years' acquisitions.
No impairment was recorded for 2003. The value of the remaining $3.3 million of
goodwill on the balance sheet as of December 31, 2002 and 2003 was determined by
the quoted market price of Digital Fusion stock at year-end. During the first
quarter 2002, the Company adopted SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets". Under these new standards,
goodwill is subject to a periodic impairment test of fair value and is no longer
amortized over its useful life.

                                       -8-
<PAGE>

         As a result of significant restructuring in 2001 and 2002, the Company
accumulated unpaid liabilities not associated with current operations in excess
of $3.9 million ("Legacy Liabilities"). These creditor liabilities included
terminated equipment leases, property leases and telecommunication contracts as
well as certain professional fees. Through productive negotiations with the
creditors, these liabilities were settled and paid.

         The Company has incurred losses of $395,000 and $403,000 in 2003 and
2002, respectively, and cash flow deficiencies from operations of $107,000 and
$1,026,000 in 2003 and 2002, respectively. During the last quarter and latter
half of 2003 the Company became cash flow positive from operating activities by
$243,000 and $230,000 respectively compared to a cash flow negative of $339,000
for the first half of 2003. To accomplish this, the company focused on growing
sales while reducing costs. The Tampa office was closed in April 2003 and the
corporate headquarters was moved from Tampa, Florida to Huntsville, Alabama to
take advantage of federal market prospects.

       On April 7, 2004, the Company restructured its outstanding note with its
primary lender to suspend monthly payments until February 2005. The note bears
an interest rate of 10% with monthly payments due on the first day of each month
of $50,000 plus interest commencing on February 1, 2005 until the maturity date
of January 1, 2006. In addition, the Company will pay an amendment fee of
$25,000 to the note-holder which will be amortized to interest expense over the
life of the loan. In relation to the first note, the note-holder will have the
right to convert the principal portion of the note and/or interest due and
payable into fully paid and non-assessable shares of common stock of the Company
at the fixed conversion price of $0.922. In relation to the second note, the
note-holder will have the right to convert the principal and/or interest due and
payable into fully paid and non-assessable shares of common stock of the Company
at the fixed conversion price of $0.35.

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


                              RESULTS OF OPERATIONS

Revenues.

          Consulting revenues decreased $3.4 million or 36%, from $9.5 million
for the year ended December 31, 2002, to $6.1 million for the year ended
December 31, 2003. The decrease is due to the sluggishness of the IT consulting
market over the past year. Revenue from the Company's largest consulting
customer was responsible for 28% of revenue in 2003 as compared to 24% in 2002.

         During the second quarter of 2003, the Company began reselling the
Track-It! software from Intuit. Total sales for the year-ending December 31,
2003 were $345,000.

Cost of Services.

         Cost of services and goods sold consists primarily of salaries and
expenses of programming and technical personnel, expenses related to
applications sold to customers, and fees paid to outside consultants engaged for
customer projects. Consulting cost of services decreased by $2.7 million or 37%
from $7.3 million for 2002 to $4.6 million for 2003. The decrease is mainly due
to the reduction of consulting services personnel as revenues decreased.

         The product cost of goods sold of $325,000 is related to the reselling
of the Intuit product Track-It! that began during the second quarter of 2003. It
represents the cost to Digital Fusion to buy the product from Intuit.


                                      -9-
<PAGE>

Gross Profit.

         Services gross profit is $1.5 million or 24.6% of revenues in 2003
compared to $2.2 million or 23% of service revenues in 2002. The increase in
services gross profit as a percent of revenues is due to the improved
utilization rates of billable consultants during the third and fourth quarters
of 2003.

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

Selling, General and Administrative.

         Selling, general and administrative (SG&A) expenses consist primarily
of salaries of accounting, finance, sales, and administrative personnel,
expenses associated with marketing literature, advertising, and direct mailings,
and professional fees and costs associated with the administration of the
Company. SG&A expenses decreased by $1.4 million, or 45% from $3.1 million in
2002 to $1.7 million in 2003. The decrease is primarily due to the reduction in
payroll and facilities costs related to business units that were closed, the
final depreciation of certain fixed assets, and the adjustment of certain
liabilities relating to bad debt expense, payroll, and former liability issues.

Amortization of Intangible Assets.

         The Company implemented SFAS 142 on January 1, 2002 and in accordance
with SFAS 142, discontinued the amortization of goodwill as of January 1, 2002.

Impairment of Goodwill.

         During the fourth quarter of 2002, the Company recorded an impairment
of goodwill of $1.2 million that was associated with prior years' acquisitions.
No impairment was recorded for 2003. The value of the remaining $3.3 million of
goodwill on the balance sheets as of December 31, 2002 and 2003 was determined
by the quoted market price of Digital Fusion stock at year-end. The Company will
continue to review the goodwill balance during 2004 to determine if any further
adjustments are needed.

Severance and Restructuring.

         During 2002, the Company reduced its severance and restructuring
liability by $271,000 based upon its current estimates of remaining liabilities
associated with the 2001 restructuring.

         No adjustments were made during 2003 to the severance and restructuring
accrual.

Gain on Forgiveness of Debt.

         During 2002, the Company reached settlement agreements on certain debts
associated with offices that were closed, business units that were sold, and
services not used, which resulted in forgiveness of debt of $1.6 million.

         No forgiveness of debt occurred in 2003.

Interest Expense.

         Interest expense consists primarily of interest payments and accruals
on indebtedness in connection with the acquisition of digital fusion, inc (a
Florida corporation). On July 26, 2002, the Company completed an $800,000
secured convertible debt financing which was refinanced in April 2003. Interest
expense was $197,000 and $154,000, respectively for the years ended 2003 and
2002.

Interest Income.

          Interest income decreased from $12,000 in 2002 to $2,000 in 2003 due
to a decrease in the Company's cash position in 2003 relative to 2002.


                                      -10-
<PAGE>


Other Income (expense), Net.

         During 2002, at the request of PowerCerv Corporation, Inc. (PowerCerv),
the Company remitted early debt payments of $188,000 owed on the promissory note
issued to PowerCerv. In return, the Company received a discount of $42,000. The
remaining debt outstanding at year-end 2002 was $135,000.

         During 2003, only interest payments were remitted to PowerCerv and the
final interest was added to the principal at year-end. The remaining debt
outstanding at year-end 2003 was $135,000.

         On January 15, 2004, the note to PowerCerv was paid by Digital Fusion's
President and CEO, Roy E. Crippen, III, tendering to PowerCerv $110,000 in cash
and 25,000 shares of PowerCerv preferred stock. In consideration therefore,
Digital Fusion issued a note to Mr. Crippen in the amount of $136,580.32
(representing the amount of principal and interest on the PowerCerv note at the
time of its retirement). The note bears an interest rate of prime plus 6% and is
payable at $600 per month plus interest for the first twelve months, $4,400 per
month plus interest for the next eleven months, and a balloon payment of
approximately $81,000 plus interest on January 15, 2006. Subject to a
subordination agreement with Digital Fusion's primary lender, the note is
secured by a security interest in property currently owned or later acquired by
the Debtor (Digital Fusion) to secure the prompt payment and performance of all
liabilities, obligations, and indebtedness of the Debtor under the note.

Income Tax Provision.

         The Company has not recognized an income tax benefit for its operating
losses generated during 2002 and 2003 based on uncertainties concerning its
ability to generate taxable income in future periods. The tax benefit for 2003
and 2002 is offset by a valuation allowance established against deferred tax
assets arising from operating losses and other temporary differences, the
realization of which could not be considered more likely than not. In future
periods, tax benefits and related deferred tax assets will be recognized when
management considers realization of such amounts to be more likely than not.

Net loss.

         The Company has incurred net losses of $395,000 for 2003 and $403,000
for 2002. The Company adopted FASB 142 effective January 1, 2002, which requires
the Company to discontinue amortizing its goodwill. Thus, no goodwill
amortization was recorded during 2003 or 2002. The reduction of net loss from
2002 to 2003 includes recording in 2002 an impairment of goodwill charge of $1.2
million, a gain on forgiveness of debt of $1.6 million, and a gain on the
reduction of severance and restructuring accrual of $271,000. Excluding these
items, the net loss for 2002 would have been $1.1 million.

Liquidity and Capital Resources.

         Net cash used in operating activities decreased from $1,026,000 in 2002
to $107,000 in 2003. This decrease in cash used in operations is mainly due to
the non-cash gains of approximately $650,000 that reduced the net loss for 2002
and better collections of accounts receivable in 2003 compared to 2002.

         Net cash used in investing activities was $23,000 in 2002 and $4,000 in
2003. This was primarily for the purchase of telephone, computer, and office
equipment for the Huntsville location. The Company does not anticipate having
significant equipment purchases during 2003. However, to support substantial
growth going forward, investments in certain equipment will be required.

       In April 2003, financing activities provided $256,000 of cash to the
Company through a secured note from its primary lender. This was offset by note
repayments of $379,000. During 2002, financing activities provided $717,000 of
cash through a secured note from the Company's primary lender. This was offset
by note repayments of $365,000.

        On April 7, 2004, the Company restructured its outstanding note with its
primary lender to suspend payments until February 2005 with the total principal
to be repaid by January 2006. Going forward, Digital Fusion's ability to grow
substantially may be dependent upon obtaining cash flow from this or other
external sources.


                                      -11-
<PAGE>

         Working capital at December 31, 2003 is $470,000. During the last
quarter and latter half of 2003 the Company was cash flow positive from
operating activities by $243,000 and $230,000 respectively compared to a cash
flow negative of $339,000 for the first half of 2003. To accomplish this, the
company focused on growing sales while reducing costs and consistent collection
of accounts receivable. Total accounts receivable decreased $370,000 during the
latter half of 2003 with $72,000 due to fewer billable days because of holidays
and vacations, and the remainder of $298,000 due to improved collections. Trade
accounts payable increased $124,000 due to longer payment terms for a specific
vendor.

         Also, the Tampa office was closed in April 2003 and the corporate
headquarters was moved from Tampa, Florida to Huntsville, Alabama to take
advantage of federal market prospects and to eliminate costs associated with
that facility. With these actions, the Company believes it has taken the
necessary steps to remain cash flow positive from continuing operations. It will
continue to focus on consistent collections of accounts receivable and continued
improvements in the operational performance of ongoing business lines.

         Digital Fusion's management believes if the Company meets its plan it
will have sufficient cash flow to meet its funding requirements over the next
year. If the Company fails to meet its goals, seeks to expand operations, or
does not collect accounts receivable in a timely manner, it may require an
infusion of working capital of which availability and terms can not be
predicted.

Fluctuations in Operating Results.

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

         The IT industry is somewhat dependent upon the economy. Certain
customers (including the Company's largest customer) have put projects on hold
due to economic downturns and may terminate their contracts, which could have a
material impact on Digital Fusion.

Inflation.

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

Certain Factors Which May Affect the Company's Future Performance

Critical Accounting Policies

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


Allowance for doubtful accounts.


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


                                      -12-
<PAGE>

Valuation of Goodwill.

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

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

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

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

         Digital Fusion has experienced significant losses in its operations. It
may continue to incur losses for the foreseeable future. For the year ended
December 31, 2002 and 2003 losses from continuing operations were $403,000, and
$395,000 respectively. Its expenses may increase as it seeks to grow its
business and as business grows. Even if the Company becomes profitable, it may
be unable to sustain profitability. It may not generate sufficient cash flow
from operations or be able to raise capital in sufficient amounts to enable it
to continue to operate. An inability to sustain profitability may also result in
an impairment loss in the value of long-lived assets, such as goodwill, property
and equipment, and other tangible and intangible assets. If it is unable to
generate sufficient cash flow from operations or raise capital in sufficient
amounts, the Company may be unable to continue as a going concern.

A LOSS OF A SIGNIFICANT CUSTOMER COULD SUBSTANTIALLY DECREASE REVENUES.

         The Company's largest customer accounted for 28% of its revenue at
December 31, 2003. The contract with this customer was renewed on December 31,
2003 to extend for three years through December 31, 2006. Expected revenue from
this account is $1.1 million over the life of the contract which is consistent
with prior contracts with this customer. However, a termination by a major
customer could substantially decrease revenues.

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

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

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


                                      -13-
<PAGE>

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

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

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

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

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

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

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

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

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

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

         Although measures have been taken to protect the integrity of the
Company's infrastructure and the privacy of confidential information, it is
potentially vulnerable to physical or electronic intrusions, computer viruses,
or similar issues. If the security measures are circumvented the security of
confidential information stored on the system could be jeopardized, proprietary
information misappropriated, or operations interrupted. The Company may be


                                       -14-
<PAGE>

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


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

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

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

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

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

         In order to continue to increase sales and marketing efforts and
continue to expand and enhance the solutions and services offered to present and
future customers, the Company may require additional capital that may not be
available on acceptable terms, or at all. In addition, if unforeseen
difficulties arise in the course of these or other aspects of business, it may
be required to spend funds that are greater than originally anticipated.
Therefore, it will be required to raise additional capital through public or
private equity or debt financings, collaborative relationships, bank facilities
or other arrangements. There can be no assurances that such additional capital
will be available on acceptable terms, or at all. Any additional equity
financing is expected to be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants and increased interest costs.
Operations have been financed to date primarily through private sales of equity
securities, proceeds from the initial public offering in May 1998, and debt
facilities.

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

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


                                       -15-
<PAGE>

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

         Factors that could cause quarterly results to fluctuate include:

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

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

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

         The Company's policy is to execute confidentiality agreements with its
employees and consultants upon the commencement of an employment or consulting
relationship. These agreements generally require that all confidential
information developed or made known to the individual by it during the course of
the individual's relationship with the Company be kept confidential and not
disclosed to third parties. These agreements also generally provide that
inventions conceived by the individual in the course of rendering services to
Digital Fusion shall be the Company's exclusive property. There can be no
assurance that such agreements will not be breached, that there would be
adequate remedies for any breach or that trade secrets will not otherwise become
known to or be independently developed by competitors which may result in lost
sales and lost competitive advantage.

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

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

                                       -16-
<PAGE>

cover one or more large claims. The successful assertion of one or more large
claims against the Company that are uninsured, exceed available insurance
coverage, or result in changes to corporate insurance policies, including
premium increases or the imposition of a large deductible or co-insurance
requirements, would reduce earnings.

DIGITAL FUSION MAY BECOME SUBJECT TO LEGAL CLAIMS RELATING TO THE CONTENT IN THE
WEB SITES IT BUILDS OR HOSTS, WHICH COULD ADVERSELY AFFECT ITS FINANCIAL
POSITION.

         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. 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. The Company cannot predict the impact, if any, that future
regulation or regulatory changes may have on its business. Laws relating to the
liability of online service providers, private network operators, and Internet
service providers for information carried on or disseminated through their
networks are currently unsettled. Digital Fusion may become subject to legal
claims relating to the content in the web sites it hosts or in email messages
that it transmits. If it has to take costly measures to reduce its exposure to
these risks, or is required to defend itself against such claims, its financial
position may be materially adversely affected.

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

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

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

ANTI-TAKEOVER PROVISIONS.

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


Item 7. Financial Statements

     Financial Statements are attached hereto at page F-1.

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

     There were no changes in or disagreements with the Company's
accountants on accounting and financial disclosures during 2002 or 2003.


Item 8A.      Controls and Procedures

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


                                      -17-
<PAGE>

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

Code of Ethics

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


                                    PART III



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

         The response to this item will be contained in the Proxy Statement for
the 2004 Annual Meeting of Stockholders (the "2004 Proxy Statement") and is
incorporated by reference.


Item 10. Executive Compensation

         The response to this item will be contained in the 2004 Proxy Statement
and is incorporated by reference.


Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The response to this item will be contained in the 2004 Proxy
Statement and is incorporated by reference


Item 12.  Certain Relationships and Related Transactions

         The response to this item will be contained in the 2004 Proxy Statement
and is incorporated by reference.


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

(a)      Exhibits


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

Exhibit No.                         Description

*2.1 Securities Purchase Agreement, dated July 26, 2002, between the Company and
     Laurus Master Fund,  Ltd.,  filed as exhibit  10.30 to the  Company's  Form
     10-QSB  for the period  ended June 30,  2002,  and  incorporated  herein by
     reference.
*3.1 Restated  Certificate of Incorporation of the Company (filed as Exhibit 3.1
     to our Registration  Statement on Form SB-2, File No.  333-47741,  filed on
     April 23, 1998 (the "Registration Statement")).
*3.2 Amended and  Restated  By-Laws of the Company  (filed as Exhibit 3.2 to our
     Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999).
*3.3 Amendment to Restated Certificate of Incorporation (filed as Exhibit 3.1 to
     our Report on 8-K,  filed November 8, 2001).
4.1  See  Exhibit  numbers  3.1,  3.2  and 3.3 for  provisions  of the  Restated
     Certificate  of  Incorporation  and  Restated  By-Laws of the  Company,  as
     amended, defining the rights of the holders of common stock.


                                       -18-
<PAGE>


*4.2 Specimen form of  certificate  evidencing the shares of common stock of the
     Company (filed as Exhibit 4.1 to our Registration Statement).
*4.3 (10.1) Securities  Purchase  Agreement,  dated April 29, 2003,  between the
     Company and Laurus Master Fund, Ltd.
*4.4 (10.2)  Convertible  note,  dated April 29,  2003,  between the Company and
     Laurus Master Fund, Ltd.
*4.5 (10.3) Common Stock  purchase  Warrant,  dated April 29, 2003,  between the
     Company and Laurus  Master Fund,  Ltd.
*4.6 (10.4)Allonge   dated  April  29,  2003  to  Convertible  Note,  which  was
     originally  dated July 26, 2002 between the Company and Laurus Master Fund,
     Ltd.
*4.7 (10.5)Second  Allonge dated April 30, 2003 to Convertible  Note,  which was
     originally  dated July 26, 2002 between the Company and Laurus Master Fund,
     Ltd.
*4.8 (10.6)Allonge  dated April 29, 2003 to Warrant which was  originally  dated
     July 26, 2002 between the Company and Laurus Master Fund, Ltd.
**4.9 Promissory  Note dated January 15, 2004 between the Company and Roy E.
      Crippen, III.
**4.10 Security  Agreement dated January 15, 2004 between the Company and Roy E.
       Crippen, III.
**4.11  Subordination  Agreement  dated January 15, 2004 between the Company and
        Roy E. Crippen, III.
**4.12 Release  dated  January  15,  2004  between  the  Company  and  PowerCerv
      Corporation.
**4.13 Composite  Amendment  No. 1 dated  April 7, 2004  between the Company and
       Laurus Master Fund, Ltd.
*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).
*10.3 Digital Fusion, Inc. 1998 Stock Option Plan
      (filed as Exhibit 10.14 to our Registration Statement).+
*10.4 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).+
*10.7 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).
*10.8 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).
*10.9 Digital  Fusion,  Inc. 2000 Stock Option Plan (filed as part of our Proxy
      Statement for the Annual Meeting of Stockholders held June 9, 2000).
*10.10  Amendment  No. 2 to Master  Agreement,  dated as of January 06, 2003,
        between Aetna Life  Insurance  Company and the
        Company which amended the initial Agreement dated October 23, 1997.
**14.1  Digital Fusion, Inc. Code of Ethics for Principal Executive and
        Financial Officers.
**21.1  Subsidiaries of the Company.
**23.1  Consent of Pender Newkirk and Company
**24.1  Power of Attorney (appears on signature page).
**31.1  Written Statement of Chief Executive Officer pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002.
**32.1  Certification  of Principal  Executive  Officer  pursuant to Rule
        13a-14(a)  under the  Securities  Exchange Act of 1934, an amended.

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

(b) Reports on Form 8-K

1.   Report on Form 8-K filed  March 6,  2003  with  respect  to the move of the
     Company's Headquarters to Huntsville, Alabama.

2.   Report on Form 8-K filed  November 10, 2003 with  respect to third  quarter
     financial operating results.

Item 14.      Principal Accountant Fees and Services

Audit Fees


                                      -19-
<PAGE>

During 2002, Digital Fusion was billed by its accountants, Pender Newkirk &
Company, approximately $57,000 for audit and review fees. During 2003, Digital
Fusion was billed by Pender Newkirk & Company, approximately $50,000 for audit
and review fees associated with its 10-QSB, 10-KSB filings and Employee Benefit
Plan.
Audit related fees

None

Tax Fees

None

All Other Fees

None


                                 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:  April 14, 2004                        by:   /s/ Roy E. Crippen, III
                                                --------------------------------

                                                  Roy E. Crippen, III
                                                  Chief Executive Officer
                                                  (Principal Executive Officer)




                                      -20-
<PAGE>


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


         In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated on the 14th day of April 2004.


         Signature                                            Title(s)

/s/Roy E. Crippen III                   Chief   Executive   Officer,   President
------------------------------------    and   Director
                                       (Principal Executive Officer)
Roy E. Crippen III



/s/ Nicholas R. Loglisci, Jr.           Chairman of the Board of Directors
------------------------------------

Nicholas R. Loglisci, Jr.


/s/ O.G. Greene                          Director
------------------------------------
O.G. Greene




                                      -21-
<PAGE>




FINANCIAL STATEMENTS AND EXHIBITS


The following are the consolidated financial statements and exhibits of Digital
Fusion, Inc. and Subsidiaries, which are filed as part of this report.
                                                                      Page
Report of Independent Certified Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002.......... F-3
Consolidated Statements of Operations for the years ended
      December 31, 2003 and 2002...................................... F-4
Consolidated Statement of Stockholders' Equity for the years
      ended December 31, 2002 and 2003................................ F-5
Consolidated Statements of Cash Flows for the years
      ended December 31, 2003 and 2002................................ F-6
Notes to Consolidated Financial Statements............................ F-7



                                      -F1-



<PAGE>


                          Independent Auditors' Report



Board of Directors
Digital Fusion, Inc.
Huntsville, Alabama


We have audited the accompanying consolidated balance sheets of Digital Fusion,
Inc. as of December 31, 2003 and 2002 and related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the management of
Digital Fusion, Inc. and Subsidiaries. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Fusion, Inc. as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.



Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
January 27, 2004
(except for the last paragraph of Note 7(c), as to which the date is
April 7, 2004)


                                      -F2-

<PAGE>
<TABLE>
<CAPTION>


                              DIGITAL FUSION, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002

                                                              2003              2002
                                                              ----              ----
                        ASSETS
Current Assets:
<S>                                                     <C>               <C>
    Cash and cash equivalents                           $      419,000    $      653,000
    Accounts receivable (net of allowance for doubtful
    accounts of $90,000 in 2003 and $325,000 in 2002)          737,000           978,000
    Prepaid expenses and other current assets                   39,000            87,000
                                                          --------------    --------------
         Total current assets                                1,195,000         1,718,000

Property and equipment, net                                     29,000           185,000
Intangible assets, net                                       3,347,000         3,347,000
Other assets                                                    13,000            28,000
                                                          --------------    --------------
         Total Assets                                   $    4,584,000    $    5,278,000
                                                          ==============    ==============

         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Current maturities of long-term debt                $       46,000    $      808,000
    Accounts payable                                           213,000            89,000
    Deferred revenue                                            21,000            21,000
    Accrued salaries and related expenses                       94,000           250,000
    Accrued professional fees                                   74,000           110,000
    Accrued severance and restructuring expenses               -                  50,000
    Other current liabilities                                  277,000           431,000
                                                          --------------    --------------
         Total current liabilities
                                                               725,000         1,759,000

Interest payable - long-term                                    39,000            86,000
Long-term debt, less current maturities                      1,269,000           517,000
Pension obligation
                                                               295,000           280,000
                                                          --------------    --------------
         Total liabilities
                                                             2,328,000         2,642,000
                                                          --------------    --------------

Stockholders' Equity:
    Preferred Stock - $.01 par value; authorized
       1,000,000 shares, no shares issued and
       outstanding                                                -                 -
    Common Stock - $.01 par value; authorized 16,000,000 shares,
      issued and
      outstanding 7,167,671 - 2003 and 2002                     72,000            72,000
    Additional paid in capital
                                                            39,919,000        39,904,000
    Accumulated deficit                                    (37,735,000)      (37,340,000)
                                                          --------------    --------------
         Total Stockholders' Equity                          2,256,000         2,636,000
                                                          --------------    --------------
         Total Liabilities and Stockholders' Equity     $    4,584,000    $    5,278,000
                                                          ==============    ==============

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

</TABLE>
                                      -F3-

<PAGE>

                              DIGITAL FUSION, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002


                                                       2003          2002
                                                 -----------   -----------

Revenues
 Services                                        $6,075,000   $ 9,503,000
 Product                                            345,000             -
                                                 -----------   -----------
    Total Revenues                                6,420,000     9,503,000
                                                 -----------   -----------
Cost of services and goods sold
 Services                                         4,580,000     7,319,000
 Product                                            325,000             -
                                                 -----------   -----------
    Total cost of services and goods sold         4,905,000     7,319,000
                                                 -----------   -----------
    Gross Profit                                  1,515,000     2,184,000
                                                 -----------   -----------

Operating expenses:
  Selling, general and administrative             1,715,000     3,143,000
  Impairment of goodwill                                  -     1,200,000
  Severance and restructuring                             -      (271,000)
  Gain on forgiveness of debt                             -    (1,585,000)
                                                 -----------   -----------
    Total operating expenses                      1,715,000     2,487,000
                                                 -----------   -----------

    Operating loss                                 (200,000)     (303,000)
                                                 -----------   -----------

Other income (expense):
  Interest expense                                 (197,000)     (154,000)
  Interest income                                     2,000        12,000
  Other income                                            -        42,000
                                                 -----------   -----------
    Total other expense                            (195,000)    (100,000))
                                                 -----------   -----------

    Loss before income taxes                       (395,000)     (403,000)

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

    Net loss                                       (395,000)     (403,000)
                                                 ===========   ===========


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


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      -F4-

<PAGE>

<TABLE>
<CAPTION>

                              DIGITAL FUSION, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003


                                                                 Common stock
                                                              ------------------ Additional
                                                               No. of              Paid-in   Accumulated  Stockholders'
                                                                shares   Amount    Capital      Deficit       Equity
------------------------------------------------------------------------ ------- ----------- ------------ -------------
<S>                                                          <C>        <C>     <C>         <C>             <C>
Balance, January 1, 2002                                      7,163,936  72,000  39,754,000  (36,937,000)    2,889,000
Additional shares issued in connection with acquisitions          3,235       -      71,000            -        71,000
Warrants issued in connection with settlement                         -       -      67,000            -        67,000
Warrants issued in connection with debt financing                     -       -      12,000            -        12,000
Shares issued in connection with options exercised                  500       -           -            -             -
Net loss                                                              -       -           -     (403,000)     (403,000)
------------------------------------------------------------------------ ------- ----------- ------------ -------------
Balance, December 31, 2002                                    7,167,671  72,000  39,904,000  (37,340,000)    2,636,000
Warrants issued in connection with debt financing                     -       -      15,000            -        15,000
Net loss                                                              -       -           -     (395,000)     (395,000)
------------------------------------------------------------------------ ------- ----------- ------------ -------------
Balance, December 31, 2003                                    7,167,671  72,000  39,919,000  (37,735,000)    2,256,000
======================================================================== ======= =========== ============ =============


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

</TABLE>
                                      -F5-

<PAGE>

<TABLE>
<CAPTION>


                              DIGITAL FUSION, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002


                                                                   2003          2002
                                                           -------------  ------------
Cash flows from operating activities:
<S>                                                       <C>            <C>
  Net loss                                                $    (395,000) $   (403,000)
  Adjustments to reconcile net loss to net cash
       used in operating activities:
       Depreciation                                             160,000       324,000
       Provision for uncollectible accounts                           -         1,000
       Recovery of bad debt                                     (50,000)            -
       Gain on write-offs and adjustments                      (227,000)
       Stock options issued for services                          2,000
       Non-cash restructuring                                         -      (187,000)
       Impairment of goodwill                                         -     1,200,000
       Forgiveness of debt                                            -    (1,585,000)
       Amortization of deferred financing costs                  66,000        46,000
       Changes in operating assets and liabilities
            Accounts receivable                                 291,000       984,000
            Prepaid expenses and other assets                    21,000       (18,000)
            Accounts payable, accrued expenses, and
               other liabilities                                 10,000    (1,427,000)
            Deferred revenue                                          -      (138,000)
            Deposits and other                                        -        21,000
            Pension obligation                                   15,000       156,000
                                                           -------------  ------------
                 Net cash used in operating activities         (107,000)   (1,026,000)
                                                           -------------  ------------

Cash flows from investing activities:
  Capital expenditures - property and equipment                  (4,000)      (23,000)
                                                           -------------  ------------
                 Net cash used in investing activities           (4,000)      (23,000)
                                                           -------------  ------------

Cash flows from financing activities:
  Repayments of notes payable                                  (379,000)     (365,000)
  Net proceeds from note issued                                 256,000       717,000
                                                           -------------  ------------
                 Net cash (used in) provided by financing
                  activities                                   (123,000)      352,000
                                                           -------------  ------------

Net decrease in cash and cash equivalents                      (234,000)     (697,000)
Cash and cash equivalents, at beginning of year                 653,000     1,350,000
                                                           -------------  ------------

Cash and cash equivalents, at end of year                 $     419,000  $    653,000
                                                           =============  ============

      SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

</TABLE>

                                      -F6-

<PAGE>


                              DIGITAL FUSION, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

(1)     ORGANIZATION, BACKGROUND AND BASIS OF PRESENTATION


       Digital Fusion, Inc. (used herein, "Digital Fusion", "DFI", and the
       "Company", refer to Digital Fusion, Inc.)") and its subsidiaries are an
       information technology (IT) consulting firm that helps its customers
       maximize the use of modern technology to access business information,
       enhance the performance of their human resources, and meet various
       business needs. The Company's success is based on a total approach that
       provides the people, processes, and technology needed to translate
       business needs into sound IT strategies. Services are provided to
       business organizations and public sector institutions primarily in the
       Eastern United States. The Company was incorporated in 1995 under the
       name Internet Broadcasting System, Inc. and changed its name to IBS
       Interactive, Inc. when it went public in May 1998. During 2001, the
       shareholders approved a name change to Digital Fusion, Inc. ("DFI"). The
       Company is incorporated in Delaware with its main administrative office
       located in Huntsville, Alabama and regional offices in Florida, New
       Jersey, and Virginia.

       The Tampa office was closed in April 2003 and the corporate headquarters
       was moved from Tampa, Florida to Huntsville, Alabama to take advantage of
       federal market prospects and to eliminate costs associated with that
       facility.

 (2)   SIGNIFICANT ACCOUNTING POLICIES

       (a)    PRINCIPLES OF CONSOLIDATION

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

       (b)    REVENUE RECOGNITION

              Revenue is recognized as services are provided and product sold 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.

       (c)    STOCK BASED COMPENSATION

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

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



                                      -F7-
<PAGE>


                                                 2003             2002
                                        --------------   --------------

Net loss. as reported                       $(395,000)       $(403,000)
Deduct:  Total stock-based employee
  compensation expense determined under
  fair value based methods for all
   awards, net of related tax effects        (315,000)      (1,050,000)
                                        --------------   --------------

Pro forma net loss                          $(710,000)     $(1,453,000)
                                        ==============   ==============

Net loss per common share
Basic and diluted loss, as reported            $(0.06)          $(0.06)
                                        ==============   ==============

Basic and diluted (loss), pro forma            $(0.10)          $(0.20)
                                        ==============   ==============

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation-Transition and Disclosure".  SFAS No. 148 amends the transition and
disclosure  provisions of SFAS No. 123. The Company is currently evaluating SFAS
No. 148 to determine if it will adopt SFAS No. 123 to account for Employee stock
options using the fair value method and, if so, when to begin transition to that
method.

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:

                                                       2003            2002
                                                       ----            ----

       Dividend yield                                    0%              0%
       Expected volatility                               61%            60%
       Risk-free interest rate                          3.52%          4.52%
       Expected life - years                             10              10
       Weighted average fair value of options granted   $0.31          $0.51


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 9)
     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.


                                      -F8-
<PAGE>

              Valuation allowances have been established against the Company's
              deferred tax assets due to uncertainties in the Company's ability
              to generate sufficient taxable income in future periods to make
              realization of such assets more likely than not. The Company has
              not recognized an income tax benefit for its operating losses
              generated during 2003 and 2002 based on uncertainties concerning
              its ability to generate taxable income in future periods. There
              was no income tax receivable at December 31, 2003 and 2002. In
              future periods, tax benefits and related deferred tax assets will
              be recognized when management considers realization of such
              amounts to be more likely than not.

       (f)    CASH EQUIVALENTS

              The Company considers all highly liquid debt instruments and other
              short-term investments with an initial maturity date of three
              months or less from the purchase date to be cash equivalents. The
              cash and short-term investments are maintained with 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, 2003 and 2002, one
              customer accounted for 15% and 24% of total net accounts
              receivable, respectively.

              The Company performs credit evaluations of its customers on a
              regular basis and generally does not require collateral on
              accounts receivable. The Company monitors the allowance for
              potential credit losses and adjusts the allowance accordingly each
              quarter. During the years ended December 31, 2003 and 2002 the
              Company's allowance for doubtful accounts was decreased by $52,000
              and increased by $1,000, respectively and was decreased by
              $183,000 and $16,000, respectively, for balances written off and
              recovered. The Company does not accrue interest on past due
              accounts receivable.

       (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.

       (i)    LONG-LIVED ASSETS

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

       (j)    INTANGIBLE ASSETS

              Intangible assets are comprised of goodwill arising from various
              acquisitions. The Company applies the Statement of Financial
              Accounting Standards ("SFAS") No. 142, Goodwill and Other
              Intangible Assets. SFAS 142 addresses financial accounting and
              reporting for acquired goodwill and other intangible assets. SFAS
              142 requires, among other things, that companies no longer
              amortize goodwill, but instead test goodwill for impairment at
              least annually. The Company tested goodwill for impairment as of
              December 31, 2002 and December 31, 2003. See footnote 4 for a
              discussion of the impairment of goodwill charges. The Company will
              continue to test goodwill for impairment at least annually.

                                      -F9-

<PAGE>

       (k)    PENSION ACCOUNTING

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

       (l)    ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

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

       (m)    LOSS PER SHARE

              Basic loss per share has been computed using the weighted average
              number of shares of common stock outstanding for the period. The
              Company's diluted loss per share includes the effect, if any, of
              unissued shares under options, warrants and stock awards computed
              using the treasury stock method. In all periods presented, there
              were no differences between basic and diluted loss per common
              share because the assumed exercise of common share equivalents was
              anti-dilutive. The assumed exercise of stock options and warrants,
              as well as the issuance of common stock under compensation and
              acquisition agreements (aggregating 2,505,774 and 2,818,860 shares
              at December 31, 2003 and 2002 respectively), could potentially
              dilute basic earnings per share.

       (n)    USE OF ESTIMATES

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

       (o)    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

              See footnote 2(j) above for a discussion of the Company  adopting
              SFAS 142, Goodwill and Other Intangible Assets.

              In June 2002, the FASB issued SFAS 146, "Accounting for Costs
              Associated with Exit or Disposal Activities", which is effective
              for the Company for exit or disposal activities that are initiated
              after December 31, 2002. The Company adopted SFAS 146 for all exit
              or disposal activities that are initiated after December 31, 2002
              and does not expect this statement to have a material effect on
              its financial statements.

              The FASB issued SFAS 148, "Accounting for Stock-Based
              Compensation-Transition and Disclosure", which was effective for
              the Company as of January 1, 2003. This Statement amended FASB
              Statement No. 123, "Accounting for Stock-Based Compensation", to
              provide alternative methods of transition for a voluntary change
              to the fair value based method of accounting for stock-based
              employee compensation. In addition, this Statement amended the
              disclosure requirements of Statement 123 to require prominent
              disclosures in both annual and interim financial statements about
              the method of accounting for stock-based employee compensation and
              the effect of the method used on reported results. Management
              continues to evaluate the impact that adoption of SFAS 148 will
              have on its consolidated financial statements.

              In January 2003, the Financial Accounting Standards Board (FASB)
              issued Interpretation No. 46, "Consolidation of Variable Interest
              Entities, an Interpretation of Accounting Research Bulletin No.
              51" (the "Interpretation"). The Interpretation requires the
              consolidation of variable interest entities in which an enterprise
              absorbs a majority of the entity's expected losses, receives a

                                     -F10-

<PAGE>


              majority of the entity's expected residual returns, or both, as a
              result of ownership, contractual, or other financial interests in
              the entity. Currently, entities are generally consolidated by an
              enterprise that has controlling financial interest through
              ownership of a majority voting interest in the entity. The
              Interpretation was originally immediately effective for variable
              interest entities created after January 31, 2003, and effective in
              the fourth quarter of the Company's fiscal 2003 for those created
              prior to February 1, 2003. However, in October 2003, the FASB
              deferred the effective date for those variable interest entities
              created prior to February 1, 2003, until the Company's first
              quarter of fiscal 2004. The Company has substantially completed
              the process of evaluating this interpretation and believes its
              adoption will not have a material impact on its consolidated
              financial statements.

              In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
              Financial Instruments with Characteristics of Both Liabilities and
              Equity." This statement establishes standards for how an issuer
              classifies and measures certain financial instruments with
              characteristics of both liabilities and equity. This statement is
              effective for financial instruments entered into or modified after
              May 31, 2003 and pre-existing instruments as of the beginning of
              the first interim period that commences after June 15, 2003,
              except for mandatory redeemable financial instruments. Mandatory
              redeemable financial instruments are subject to the provisions of
              this statement beginning on January 1, 2004. Digital Fusion has
              not entered into or modified any financial instruments subsequent
              to May 31, 2003 affected by the statement. It does not expect the
              adoption of this statement will have a material impact on its
              financial condition or results of operations.

(3)    PROPERTY AND EQUIPMENT

       Major classes of property and equipment, net, consist of the following at
December 31, 2003 and 2002:

                                                       2003      2002
                                                   --------- ---------

Computer equipment                                $ 837,000 $ 837,000
Office equipment, fixtures and vehicles              96,000    92,000
                                                   --------- ---------

                                                    933,000   929,000
Less: accumulated depreciation                     (904,000) (744,000)
                                                   --------- ---------

                                                  $  29,000 $ 185,000
                                                   ========= =========

       Depreciation expense for the years ended December 31, 2003 and 2002 was
$160,000 and $324,000, respectively.

(4)    INTANGIBLE ASSETS

       Intangible assets, net, are comprised of the following at
       December 31, 2003 and 2002

                                                   2003          2002
                                           ------------- -------------

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

                                          $   3,347,000 $   3,347,000
                                           ============= =============

         The Company adopted SFAS 142 during 2002 as discussed in Note 2(j)
         above. In accordance with SFAS 142, the Company discontinued
         amortization of goodwill as of January 1, 2002.


                                     -F11-

<PAGE>


         During the fourth quarter of 2002, the Company recorded an impairment
         of goodwill of $1.2 million that was associated with prior years'
         acquisitions. No impairment was recorded for 2003. The value of the
         remaining $3.3 million of goodwill on the balance sheet as of December
         31, 2003 was determined not to be impaired by comparing the quoted
         market value of Digital Fusion stock at year-end to the total
         stockholders' equity at year-end and by analyzing other factors that
         could decrease the value of goodwill. The Company will review the
         goodwill balance during 2004 to determine if any further write-downs
         are needed.

(5)    CURRENT LIABILITIES

         The following is a recap of the other current liabilities outstanding
at December 31, 2003and 2002:

                                                        2003              2002
                                                     -------             ----
         Interest payable                            $132,000          $122,000
         Other                                        145,000           309,000
                                                     ---------         ---------
                                                     $277,000          $431,000

(6)    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, $3.9 million of these liabilities were
       settled and paid as of December 31, 2002. This resulted in a forgiveness
       of debt gain of $1,585,000 during 2002.

(7)    BORROWINGS

       At December 31, 2003 and 2002, the Company's outstanding borrowings were
comprised of the following:
                                                      2003       2002
                                                 ---------- ----------

PowerCerv Note                                  $  135,000 $  135,000
Digital Shareholders' Note                         598,000    497,000
Laurus Note                                        582,000    693,000
                                                 ---------- ----------

                                                 1,315,000  1,325,000
Less: current portion                              (46,000)  (808,000)
                                                 ---------- ----------

Total-long term borrowings                      $1,269,000 $  517,000
                                                 ========== ==========

       (a)    POWERCERV NOTE

              In connection with the acquisition of digital fusion, inc.
              (Digital), a Florida company, the Company assumed Digital's
              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 $5,000 and $12,000 during
              2003 and 2002, respectively. See Note 13 (a) for related party
              discussion.

              On January 15, 2004, the note to PowerCerv was paid by Digital
              Fusion's President and CEO, Roy E. Crippen, III, tendering to
              PowerCerv $110,000 in cash and 25,000 shares of PowerCerv
              preferred stock. In consideration therefore, Digital Fusion issued
              a note to Mr. Crippen in the amount of $136,580.32 (representing
              the amount of principal and interest on the PowerCerv note at the
              time of its retirement). The note bears an interest rate of prime
              plus 6% and is payable at $600 per month plus interest for the
              first twelve months, $4,400 per month plus interest for the next
              eleven months, and a balloon payment of approximately $81,000 plus
              interest on January 15, 2006. Subject to a subordination agreement

                                     -F12-

<PAGE>

              with Digital Fusion's primary lender, the note is secured by a
              security interest in property currently owned or later acquired by
              the Debtor (Digital Fusion) to secure the prompt payment and
              performance of all liabilities, obligations, and indebtedness of
              the Debtor under the note.

       (b)    DIGITAL SHAREHOLDERS' NOTE

              In connection with the 2000 Digital acquisition, the Company
              entered into unsecured promissory notes with the former Digital
              shareholders totaling $500,000. These notes bear interest at 6%
              and are payable at maturity. The interest rate was below the
              market rate and a discount of $46,000 was recorded to be amortized
              to interest expense over the period of the notes and results in an
              effective interest rate of 9%. Interest expense on these notes
              totaled $47,000 and $34,000 during 2003 and 2002, respectively.

              On November 12, 2002, the Company renegotiated the terms of notes
              due to certain former Digital shareholders totaling $470,000.
              Effective March 2, 2003, the interest rate increased from 6% to
              8%, and the accrued interest was converted into principal in the
              amended notes. The maturity date was extended from March 1, 2003
              to March 1, 2005. These renegotiated notes and related accrued
              interest are classified as long-term liabilities on the December
              31, 2003 balance sheet.

       (c)    LAURUS NOTE

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


              On April 7, 2004, the Company restructured its outstanding note
              with its primary lender to suspend monthly payments until February
              2005. The note bears an interest rate of 10% with monthly payments
              due on the first day of each month of $50,000 plus interest
              commencing on February 1, 2005 until the maturity date of January
              1, 2006. In addition, the Company will pay an amendment fee of
              $25,000 to the note-holder which will be amortized to interest
              expense over the life of the loan. In relation to the first note,
              the note-holder will have the right to convert the principal
              portion of the note and/or interest due and payable into fully
              paid and non-assessable shares of common stock of the Company at
              the fixed conversion price of $0.922. In relation to the second
              note, the note-holder will have the right to convert the principal
              and/or interest due and payable into fully paid and non-assessable
              shares of common stock of the Company at the fixed conversion
              price of $0.35.

       (d)    DEBT MATURITIES

              At December 31, 2003, aggregate required principal payments of
long-term debt are as follows:

                Year Ending
               December 31,                         Amount
                -----------                     ----------------
                   2004                        $       46,000

                   2005                             1,158,000

                   2006                               111,000
                                                ----------------


                                     -F13-

<PAGE>

                         Total                 $     1,315,000
                                                ================

(8)    BENEFIT PLANS

       (a)    DEFINED BENEFIT PLAN

              Certain employees from a company that Digital Fusion acquired who
              met certain requirements of age and length of service at the time
              of acquisition are covered by the Company's sponsored
              non-qualified, non-contributory defined benefit pension plan. The
              benefits become fully vested upon the employees' retirements.
              Benefits paid to retirees are based upon age at retirement,
              compensation levels and years of credited service. The plan was
              amended to no longer require the Company to accrue future service
              benefits. Plan assets are stated at fair value and are comprised
              of stocks and bonds. Net periodic pension cost at December 31,
              2003 and 2002 for this plan includes the following components:

<TABLE>
<CAPTION>

                   Change in benefit obligation                                          2003                 2002
                                                                                 ----------------     ---------------
<S>                                                                          <C>                  <C>
                   Benefit obligation at beginning of year                   $           757,000  $          717,000
                   Service cost                                                                -                   -

                   Interest cost                                                          39,000              41,000

                   Amendments                                                                  -                   -

                   Benefit transactions                                                 (31,000)                   -

                   Actuarial loss/(gain)                                                  52,000                   -

                   Effect of settlement                                                 (41,000)                   -
                                                                                 ----------------     ---------------

                   Benefit obligation at end of year                         $           776,000  $          758,000
                                                                                 ----------------     ---------------

                   Change in plan assets

                   Fair value of plan assets at beginning of year            $           478,000  $          593,000

                   Actual return on plan assets                                           90,000           (115,000)

                   Employer contributions                                                      -                   -

                   Benefit transactions                                                 (87,000)                   -
                                                                                 ----------------     ---------------
                   Fair value of plan assets at end of year                  $           481,000  $
                                                                                                             478,000

                   Funded status

                   Fair value of plan assets                                 $           481,000  $          478,000

                   Benefit obligation                                                  (776,000)           (758,000)
                                                                                 ----------------     ---------------
                   Funded status at end of year                                        (295,000)
                                                                                                           (280,000)

                   Unrecognized net actuarial loss (gain)                                165,000             181,000

                   Unrecognized prior service cost (benefit)                           (165,000)           (181,000)
                                                                                 ----------------     ---------------
                   Accrued liability at end of year                          $         (295,000)  $        (280,000)
                                                                                 ================     ===============

                   Amounts recognized in the statement of financial position

                   Prepaid benefit cost                                      $          (98,000)  $         (59,000)

</TABLE>


                                     -F14-

<PAGE>

<TABLE>
<CAPTION>

<S>                                                                                    <C>                  <C>
                   Accrued benefit cost                                                (182,000)            (67,000)
                   Intangible assets

                   Accumulated other comprehensive income                               (15,000)           (154,000)
                                                                                 ----------------     ---------------
                   Net amount recognized at end of year                      $         (295,000)  $        (280,000)

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

                   Components of net periodic benefit cost

                   Service cost                                              $                 -  $                -

                   Interest cost                                                          39,000              41,000

                   Expected return on plan assets                                       (34,000)             115,000
                   Amortization of:

                          Prior service cost                                            (17,000)

                          Actuarial loss                                                  25,000

                   Settlement loss                                                        27,000           (167,000)
                                                                                 ----------------     ---------------

                   Net periodic pension cost                                 $            40,000  $         (11,000)
                                                                                 ================     ===============

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

</TABLE>

        (b)   401(K) PLAN

              The Company sponsors a defined contribution benefit plan covering
              its employees. Currently, eligible employees are allowed to
              contribute annually up to the maximum annual contribution allowed
              for 401(k) plans. The Company matches 30% of participant
              contributions to a maximum matching amount of 6% of participant
              base compensation which totaled $56,000 for the year ended
              December 31, 2002. Effective August 1, 2002, the Board of
              Directors of DFI suspended the matching contribution due to the
              Company being cash flow negative. Company contributions are at the
              sole discretion of management.

(9)    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)  WARRANTS

              At December 31, 2003, 651,680 shares of common stock were reserved
              for the exercise of stock warrants comprised of the following:

     1999 Private Placement                   166,680

                                     -F15-
<PAGE>


     Investment advisory firms
                                               135,000
     Legacy Liability Settlement               250,000
     Debt financing                            100,000
                                           ------------
         Total                                 651,680
                                             ============

              On January 12, 2000, the Company entered into a consulting
              agreement with an investment advisory 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. 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 that such charge will be recognized will be
              determined based upon the nature of the merger or acquisition
              involved.

              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.

              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.

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

              On July 26, 2002, the Company closed on an $800,000 convertible
              note. In conjunction with this financing, the Company issued a
              five-year warrant to purchase 75,000 shares of the Company's
              common stock at $1.15 per share. The Company recorded these
              warrants at fair market value, recording additional equity of
              $12,000. On April 29, 2003, the Company closed on a $267,000
              convertible note. In conjunction with this financing, the Company
              issued a seven-year warrant to purchase 25,000 shares of the
              Company's common stock @ $0.4375 per share. In addition, the
              Company executed an allonge to the warrant dated July 26, 2002
              amending the purchase price to $0.4375.

              On April 17, 2003, the Company entered into a consulting agreement
              with an independent consultant in which the Company agreed to
              issue five-year warrants to purchase 10,000 shares of the
              Company's common stock @ $0.33 per share.


       (d)    SHARES ISSUED FOR ACQUISITIONS

              The Company issued 3,235 shares of reserved common stock during
              2002 in connection with the resolution of contingencies in prior
              acquisitions.

              The acquisition liability account was reduced by $71,000 during
              2002 for the issuance of certain reserve shares related to
              acquisitions the Company made in prior years.

       (e)    DELISTING NOTICE FROM NASDAQ

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

       (f)    STOCK OPTION PLAN

                                     -F16-

<PAGE>

              The Company maintains three qualified stock option plans. Under
              the terms of these plans, the Company has reserved 1,369,000
              shares of common stock for future grants. The Company also granted
              38,000 and 66,000 of nonqualified stock options during 2003 and
              2002 respectively. These were granted to Board of Directors as
              part of their compensation for being on the Company's BOD's, and
              certain management to retain key personnel 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,
              2003, the Company could grant an aggregate of 585,206 shares under
              these plans.

              The following table summarizes information about qualified and
              non-qualified stock options outstanding at December 31, 2003:
<TABLE>
<CAPTION>

                                                          Weighted
                                                           Average       Weighted                         Weighted
                                                          Remaining       average                         Average
                                           Number        contractual      exercise      Number            Exercise
                    Exercise Price       Outstanding    life (years)       price     exercisable           Price
                    --------------       -----------    ------------       -----     -----------           -----
<S>                 <C>      <C>              <C>           <C>        <C>                  <C>      <C>
                    $0.29 to $0.37            499,500       8.08       $    0.30            370,500  $      0.30
                    $0.40 to $0.55            473,544       7.97            0.41            454,502         0.41
                    $0.62 to $1.19            259,700       7.21            0.89            225,890         0.93
                    $5.78 to $8.13            138,100       6.27            6.15            137,187         6.16
                    $9.97 to $10.49           461,250       6.16           10.46            461,250        10.46
                   $17.19 to $22.00            22,000       5.36           20.37             22,000        20.37
                                        --------------                             -----------------
                                            1,854,094       7.28       $    3.61          1,671,329  $      3.96
                                        ==============                             =================

</TABLE>

              Transactions under various qualified and non-qualified option
plans for 2002 and 2003 are summarized as follows:
<TABLE>
<CAPTION>
                                                                                          Weighted
                                                                                           Average
                                                                                          Exercise
                                                                     Options                price

<S>                                                 <C>              <C>               <C>
                             Outstanding at January 1, 2002          1,842,650         $    3.93
                             Granted                                    99,750              0.71
                             Exercised                                    (500)             0.40
                             Canceled                                 (114,550)             2.15
                                                                   -------------

                             Outstanding at December 31, 2002        1,827,350         $    3.85
                             Granted                                   149,500              0.31
                             Exercised                                  -                     -
                             Canceled                                 (122,756)             2.29
                                                                   -------------

                             Outstanding at December 31, 2003        1,854,094         $    3.61
                                                                   =============

                             Options exercisable at December 31,     1,671,329         $    3.96
                             2003
                                                                   =============

                             Options available for grant at            585,206
                             December 31, 2003
                                                                   =============

</TABLE>

                                     -F17-

<PAGE>

(10)     TAXES

        Benefits for federal and state income taxes consist of the following as
of December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                                 2003              2002
                                                                                 ----              ----
                    Current:
<S>                                                                       <C>                <C>
                    Federal                                               $       -          $      -
                    State                                                         -                 -
                                                                            ---------------    -------------
                                                                                  -                 -
                    Deferred:
                    Federal                                                       -                 -
                    State                                                         -                 -
                                                                            ---------------    -------------
                                                                            ---------------    -------------
                                                                                  -                 -
                                                                            ---------------    -------------
                                                                            ---------------    -------------

                    Total income tax benefit                              $       -          $      -
                                                                            ===============    =============
                                                                            ===============    =============


       Deferred tax assets (liabilities) arise from the following temporary
       differences and are classified as follows as of December 31, 2003 and
       2002:

                                                                           2003                2002
                                                                           ----                ----

              Deferred Tax Asset, Current:
              Accounts receivables                                  $        36,000      $    130,000
              Vacation payable                                               21,000            30,000
              Other, net                                                      1,600             -
              Valuation allowance                                            (58,600)         (160,000)
                                                                      ----------------     -------------
                                                                    $        -            $      -
                                                                      ================      ============
                                                                      ================     =============

              Deferred Tax Asset (Liabilities), Non-Current:
              Intangible assets                                     $      (658,000)     $    (72,000)
              Property and equipment                                        (161,000)         (165,000)
              Net operating loss carryforward                              10,118,000         9,285,600
              Accrued pension                                               118,000           112,000
              Valuation allowance                                         (9,417,000)       (9,160,600)
                                                                      ----------------     -------------
                                                                    $        -           $      -
                                                                      ================     =============

       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, 2003 and 2002:

                                                                 2003                2002
                                                                 ----                ----

Statutory benefit                                      $       (134,000)    $    (137,000)
State tax benefit, net of federal effect                        (24,000)          (24,000)
Amortization of non-deductible goodwill                        -                   -
Write-off of non-deductible goodwill                           -                   -
Non-deductible expenses                                           3,000             3,000
Increase in deferred income tax valuation allowance              155,000          158,000

=====================================================
                                                       $        -           $      -
                                                         ================     =============

</TABLE>

                                     -F18-

<PAGE>


       The Company has not recognized an income tax benefit for its operating
       losses generated during 2002 and 2003 based on uncertainties concerning
       its ability to generate taxable income in future periods. The tax benefit
       for 2002, and 2003 is offset by a valuation allowance established against
       deferred tax assets arising from operating losses and other temporary
       differences, the realization of which could not be considered more likely
       than not. In future periods, tax benefits and related deferred tax assets
       will be recognized when management considers realization of such amounts
       to be more likely than not.

       As of December 31, 2003, the Company had available federal and state net
       operating loss carry forwards of approximately $21 million and $23
       million respectively, which begin expiring in 2019 and 2006,
       respectively.


(11)   COMMITMENTS AND CONTINGENCIES

       (a)    OPERATING LEASES

              The Company leases facilities and equipment under operating leases
              and subleases expiring through August 2006. Some of the leases
              have renewal options and most contain provisions for passing
              through certain incremental costs. At December 31, 2003 future net
              minimum annual rental payments under non-cancelable leases are as
              follows:

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


       2004                           97,000
       2005                           50,000
       2006                           18,000
       2007                         -
                             ----------------
      Total                 $        165,000
                             ================

              Total rental and lease expenses for the years ended December 31,
              2003 and 2002 were approximately $152,000 and $312,000,
              respectively.

       (b)    LITIGATION

              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.


 (12) RELATED PARTY TRANSACTIONS

      (a)     CONSULTING AGREEMENT

              During 2002, the Company provided $27,500 of consulting services
              to PowerCerv. The Company offset its note owed to PowerCerv by
              $27,500 for these consulting services provided to PowerCerv. Roy
              E. Crippen, III, the Company's President and CEO, at that time was
              a member of the Board of Directors of PowerCerv.

      (b)     DFI ACQUISITION

              In connection with the 2000 Digital acquisition, the Company
              entered into unsecured promissory notes with the former Digital
              shareholders in 2002 as described in footnote 7(b). Roy E.
              Crippen, III, the Company's Chief Executive Officer and President,
              was a former Digital shareholder and in connection with this
              transaction is owed $343,000 of principal and interest.

                                     -F19-

<PAGE>

      (c)     POWERCERV NOTE

              The Company's note to PowerCerv was paid by Digital Fusion's
              President and CEO, Roy E. Crippen, III, tendering to PowerCerv
              $110,000 in cash and 25,000 shares of PowerCerv preferred stock.
              In consideration therefore, Digital Fusion issued a note to Mr.
              Crippen in the amount of $136,580.32 (representing the amount of
              principal and interest on the PowerCerv note at the time of its
              retirement). The note bears an interest rate of prime plus 6% and
              is payable at $600 per month plus interest for the first twelve
              months, $4,400 per month plus interest for the next eleven months,
              and a balloon payment of approximately $81,000 plus interest on
              January 15, 2006. Subject to a subordination agreement with
              Digital Fusion's primary lender, the note is secured by a security
              interest in property currently owned or later acquired by the
              Debtor (Digital Fusion) to secure the prompt payment and
              performance of all liabilities, obligations, and indebtedness of
              the Debtor under the note.

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

(13)    CASH FLOW INFORMATION

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

       On July 26, 2002, the Company closed on an $800,000 convertible note. In
       conjunction with this financing, the Company issued a five-year warrant
       to purchase 75,000 shares of the Company's common stock at $1.15 per
       share. The Company recorded these warrants at fair market value,
       recording additional equity of $12,000. The Company also recorded $83,000
       additional deferred financing costs related to legal fees and other fees
       that were netted against the debt proceeds given to the Company in
       conjunction with this convertible note.

       During 2002, the Company reduced its acquisition liability account by
       $71,000 for the issuance of shares of common stock that were reserved for
       various acquisitions as discussed in Note 9(d). There were no reductions
       to the liability account in 2003.

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

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


(14)   MAJOR CUSTOMERS OF THE COMPANY

       One customer accounted for 28% and 24% of the Company's revenues for the
years ended December 31, 2003 and 2002, respectively.

(15)   SEVERANCE AND RESTRUCTURING EXPENSES

       During 2002, the Company reduced its severance and restructuring
       liability by $271,000 based upon its current estimates of remaining
       liabilities associated with the 2001 restructuring.

       No adjustments were made during 2003 to the severance and restructuring
accrual.

(16)   FORGIVENESS OF DEBT

                                     -F20-

<PAGE>

       During 2002, the Company reached settlement agreements on certain debts
       incurred as a result of significant restructuring, closing of
       unprofitable offices and selling certain business divisions during 2000
       and 2001. These debts included terminated equipment leases, real property
       leases and telecommunication contracts as well as certain professional
       fees. Through productive negotiations with these creditors, $3.9 million
       of these liabilities were settled and paid as of December 31, 2002. This
       resulted in a forgiveness of debt gain of $1,585,000 during 2002.

                                     -F21-