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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the quarterly period ended June 30, 2006

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

                        Commission File Number: 001-14498

                                   ----------

                                  BLUEFLY, INC.
             (Exact name of registrant as specified in its charter)

                Delaware                             13-3612110
    (State or other jurisdiction of     (I.R.S. Employer Identification No.)
     incorporation or organization)

         42 West 39th Street, New York, NY              10018
     (Address of principal executive offices)        (Zip Code)

                    Issuer's telephone number: (212) 944-8000

                                   ----------

Indicate by check mark whether the registrant (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 [ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]   Accelerated filer [ ]   Non-accelerated filer [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of August 2, 2006, the issuer had  outstanding  129,205,660  shares of Common
Stock, $.01 par value.

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

<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
Part I.  Financial Information

Item 1.  Financial Statements

         Condensed Balance Sheets as of June 30, 2006
              and December 31, 2005 (unaudited)                             3

         Condensed Statements of Operations for the six months ended
              June 30, 2006 and 2005 (unaudited)                            4

         Condensed Statements of Operations for the three months ended
              June 30, 2006 and 2005 (unaudited)                            5

         Condensed Statements of Changes in Shareholders' Equity for the
              six months ended June 30, 2006 (unaudited)                    6

         Condensed Statements of Cash Flows for the six months ended
              June 30, 2006 and 2005 (unaudited)                            7

         Condensed Notes to Financial Statements (unaudited)                8

Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                    13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk        22

Item 4.  Controls and Procedures                                           22

Part II. Other Information                                                 23

Item 1.  Legal Proceedings                                                 23

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds       23

Item 4.  Submission of Matters to a Vote of Security Holders               23

Item 6.  Exhibits                                                          24

Signature                                                                  25

<PAGE>

Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements

                                  BLUEFLY, INC.

CONDENSED BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      JUNE 30,       DECEMBER 31,
                                                                                                        2006            2005
                                                                                                    -------------   -------------
<S>                                                                                                 <C>             <C>
                                               ASSETS
Current assets
    Cash and cash equivalents                                                                       $  23,997,000   $   9,408,000
    Inventories, net                                                                                   21,130,000      16,893,000
    Accounts receivable, net of allowance for doubtful accounts                                         2,119,000       1,717,000
    Prepaid inventory                                                                                     615,000         485,000
    Prepaid expenses                                                                                      464,000         915,000
    Other current assets                                                                                  528,000         419,000
                                                                                                    -------------   -------------
         Total current assets                                                                          48,853,000      29,837,000

Property and equipment, net                                                                             2,789,000       2,895,000

Other assets                                                                                              282,000         313,000
                                                                                                    -------------   -------------
         Total assets                                                                               $  51,924,000   $  33,045,000
                                                                                                    =============   =============

Current liabilities
    Accounts payable                                                                                $   3,531,000   $   5,662,000
    Allowance for sales returns                                                                         2,926,000       3,407,000
    Accrued expenses and other current liabilities                                                      2,723,000       1,083,000
    Deferred revenue                                                                                    2,264,000       1,784,000
                                                                                                    -------------   -------------
         Total current liabilities                                                                     11,444,000      11,936,000

Notes payable to related party shareholders                                                                    --       4,000,000
Long-term interest payable to related party shareholders                                                       --       1,217,000
Long-term obligations under capital lease                                                                      --          27,000
                                                                                                    -------------   -------------
         Total liabilities                                                                             11,444,000      17,180,000
                                                                                                    -------------   -------------

Commitments and contingencies

Shareholders' equity
    Series A Preferred stock - $.01 par value; 500,000 shares authorized, 0 and 460,000
     shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
     (liquidation preference: $0 as of June 30, 2006, and $9.2 million plus accrued
     dividends of  $5.9 million as of  December 31, 2005)                                                      --           5,000
    Series B Preferred stock - $.01 par value; 9,000,000 shares authorized,0 and 8,889,414
     shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
     (liquidation preference: $0 as of June 30, 2006, and $30 million plus accrued dividends
     of $9.5 million as of  December 31, 2005)                                                                 --          89,000
    Series C Preferred stock - $.01 par value; 3,500 shares authorized, 0 and 1,000 shares
     issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
     (liquidation preference: $0 as of June 30, 2006, and $1 million plus accrued dividends
     of $286,000 as of December 31, 2005)                                                                      --              --
    Series D Preferred stock - $.01 par value; 7,150 shares authorized, 0 and 6,313.43 issued
     and outstanding as of June 30, 2006 and December 31, 2005, respectively (liquidation
     preference: $0 as of June 30, 2006, and $6.3 million plus accrued dividends of $2.4 million
     as of December 31, 2005)                                                                                  --              --
    Series E Preferred stock - $.01 par value; 1,000 shares authorized, 0 and 1,000 issued and
     outstanding as of June 30, 2006 and December 31, 2005, respectively (liquidation preference:
     $0 as of June 30, 2006, and $1.0 million plus accrued dividends of  $347,000 as of  December
     31, 2005)                                                                                                 --              --
    Series F Preferred stock - $.01 par value; 7,000 shares authorized, 857.143 and 5,279.714
     issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
     (liquidation preference: $3.9 million plus accrued dividends of  $61,000 as of June 30,
     2006, and $5.3 million plus accrued dividends of $192,000 as of December 31, 2005)                        --              --
    Common stock - $.01 par value; 152,000,000 and 92,000,000 shares authorized as of June 30,
     2006 and December 31, 2005, respectively, and 128,205,660 and 19,059,166 shares issued
     and outstanding as of June 30, 2006 and December 31, 2005, respectively                            1,282,000         191,000
    Additional paid-in capital                                                                        148,167,000     115,527,000
    Accumulated deficit                                                                              (108,969,000)    (99,947,000)
                                                                                                    -------------   -------------
         Total shareholders' equity                                                                    40,480,000      15,865,000
                                                                                                    -------------   -------------
         Total liabilities and shareholders' equity                                                 $  51,924,000   $  33,045,000
                                                                                                    =============   =============
</TABLE>

         The accompanying notes are an integral part of these condensed
                              financial statements.

                                       3
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                       JUNE 30,
                                                              ---------------------------
                                                                  2006           2005
                                                              ------------   ------------
<S>                                                           <C>            <C>
Net sales                                                     $ 33,669,000   $ 25,531,000
Cost of sales                                                   19,784,000     15,995,000
                                                              ------------   ------------
   Gross profit                                                 13,885,000      9,536,000

Selling, marketing and fulfillment expenses                     13,041,000      8,103,000
General and administrative expenses                              5,650,000      3,188,000
                                                              ------------   ------------
   Total operating expenses                                     18,691,000     11,291,000

Operating loss                                                  (4,806,000)    (1,755,000)

Interest and other income                                          112,000         69,000
Interest and other expense                                        (471,000)      (376,000)
                                                              ------------   ------------

Net loss                                                      $ (5,165,000)  $ (2,062,000)

Preferred stock dividends                                       (2,221,000)    (2,284,000)

Deemed dividends related to beneficial conversion feature
 on Series F Preferred Stock                                    (3,857,000)            --
                                                              ------------   ------------

Net loss available to common shareholders                     $(11,243,000)  $ (4,346,000)
                                                              ============   ============

Basic and diluted loss per common share                       $      (0.37)  $      (0.28)
                                                              ============   ============
Weighted average common shares outstanding
 (basic and diluted)                                            30,372,393     15,360,334
                                                              ============   ============
</TABLE>

         The accompanying notes are an integral part of these condensed
                              financial statements.

                                       4
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                     JUNE 30,
                                                           ---------------------------
                                                               2006           2005
                                                           ------------   ------------
<S>                                                        <C>            <C>
Net sales                                                  $ 16,793,000   $ 12,029,000
Cost of sales                                                 9,747,000      7,378,000
                                                           ------------   ------------
   Gross profit                                               7,046,000      4,651,000

Selling, marketing and fulfillment expenses                   5,577,000      4,068,000
General and administrative expenses                           3,223,000      1,602,000
                                                           ------------   ------------
   Total operating expenses                                   8,800,000      5,670,000

Operating loss                                               (1,754,000)    (1,019,000)

Interest and other income                                        67,000         29,000
Interest and other expense                                     (214,000)      (179,000)
                                                           ------------   ------------

Net loss                                                   $ (1,901,000)  $ (1,169,000)

Preferred stock dividends                                      (990,000)    (1,169,000)

Deemed dividends related to beneficial conversion feature
 on Series F Preferred Stock                                 (3,857,000)            --
                                                           ------------   ------------

Net loss available to common shareholders                  $ (6,748,000)  $ (2,338,000)
                                                           ============   ============

Basic and diluted loss per common share                    $      (0.17)  $      (0.15)
                                                           ============   ============
Weighted average common shares outstanding
 (basic and diluted)                                         40,267,334     15,420,956
                                                           ============   ============
</TABLE>

         The accompanying notes are an integral part of these condensed
                              financial statements.

                                       5
<PAGE>

                                  BLUEFLY, INC.
             CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
  YEAR ENDED DECEMBER 31, 2005, 2004 AND FOR THE SIX MONTHS ENDED JUNE 30, 2006
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   SERIES A                SERIES B               SERIES C
                                                               PREFERRED STOCK         PREFERRED STOCK        PREFERRED STOCK
                                                               $.01 PAR VALUE          $.01 PAR VALUE         $.01 PAR VALUE
                                                             ------------------   -----------------------   ------------------
                                                              NUMBER                 NUMBER                  NUMBER
                                                                OF                     OF                      OF
                                                              SHARES     AMOUNT      SHARES       AMOUNT     SHARES     AMOUNT
                                                             --------   -------   ------------   --------   --------   -------
<S>                                                          <C>        <C>         <C>          <C>          <C>      <C>
Balance at January 1, 2004                                    460,000     5,000      8,889,414     89,000      1,000         -
                                                             --------   -------   ------------   --------   --------   -------
Sale of Common Stock and Warrants in connection with the
January 2004 financing (net of issuance costs of $423,000)          -         -              -          -          -         -
Change in Value of Warrants                                         -         -              -          -          -         -
Exercise of Employee Stock Options                                  -         -              -          -          -         -
Expense recognized in connection with Issuance of Options           -         -              -          -          -         -
Net loss                                                            -         -              -          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Balance at December 31, 2004                                  460,000   $ 5,000      8,889,414   $ 89,000      1,000   $     -
                                                             --------   -------   ------------   --------   --------   -------
Sale of Series F Preferred Stock ($1,000 per share
 net of expenses of $249,000)                                       -         -              -          -          -         -
Shares Of Series D Preferred Stock                                  -         -              -          -          -         -
     Converted into Common Stock
Shares Of Series F Preferred Stock                                  -         -              -          -          -         -
     Converted into Common Stock
Expense recognized in connection with Issuance of Options           -         -              -          -          -         -
Exercise of Employee Options                                        -         -              -          -          -         -
Net Loss                                                            -         -              -          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Balance at December 31, 2005                                  460,000   $ 5,000      8,889,414   $ 89,000      1,000   $     -
                                                             --------   -------   ------------   --------   --------   -------
Conversion Of Preferred Stock                                (460,000)   (5,000)    (8,889,414)   (89,000)    (1,000)        -
Options Expense                                                     -         -              -          -          -         -
Sale of Common Stock                                                -         -              -          -          -         -
 (net of expenses of approximately $2.0 million)                    -         -              -          -          -         -
Warrants Issued to Third-Party                                      -         -              -          -          -         -
Dividends Paid                                                      -         -              -          -          -         -
Deemed Dividend related to beneficial conversion feature on         -         -              -          -          -         -
 Series F Preferred Stock                                           -         -              -          -          -         -
Net Loss                                                            -         -              -          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Balance at June 30, 2006                                            -   $     -              -   $      -          -   $     -
                                                             --------   -------   ------------   --------   --------   -------

<CAPTION>
                                                                   SERIES D                SERIES E               SERIES F
                                                               PREFERRED STOCK         PREFERRED STOCK        PREFERRED STOCK
                                                               $.01 PAR VALUE          $.01 PAR VALUE         $.01 PAR VALUE
                                                             ------------------   -----------------------   ------------------
                                                              NUMBER                 NUMBER                  NUMBER
                                                                OF                     OF                      OF
                                                              SHARES     AMOUNT      SHARES       AMOUNT     SHARES     AMOUNT
                                                             --------   -------   ------------   --------   --------   -------
<S>                                                            <C>      <C>             <C>      <C>          <C>      <C>
Balance at January 1, 2004                                      7,136         -          1,000          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Sale of Common Stock and Warrants in connection with the
January 2004 financing (net of issuance costs of $423,000)          -         -              -          -          -         -
Change in Value of Warrants                                         -         -              -          -          -         -
Exercise of Employee Stock Options                                  -         -              -          -          -         -
Expense recognized in connection with Issuance of Options           -         -              -          -          -         -
Net loss                                                            -         -              -          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Balance at December 31, 2004                                    7,136   $     -          1,000   $      -          -   $     -
                                                             --------   -------   ------------   --------   --------   -------
Sale of Series F Preferred Stock ($1,000 per share
 net of expenses of $249,000)                                       -         -              -          -      7,000         -
Shares Of Series D Preferred Stock                               (823)  $     -              -          -          -         -
     Converted into Common Stock
Shares Of Series F Preferred Stock                                  -         -              -          -     (1,720)  $     -
     Converted into Common Stock
Expense recognized in connection with Issuance of Options           -         -              -          -          -         -
Exercise of Employee Options                                        -         -              -          -          -         -
Net Loss                                                            -         -              -          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Balance at December 31, 2005                                    6,313   $     -          1,000   $      -      5,280   $     -
                                                             --------   -------   ------------   --------   --------   -------
Conversion Of Preferred Stock                                  (6,313)        -         (1,000)         -     (4,423)        -
Options Expense                                                     -         -              -          -          -         -
Sale of Common Stock                                                -         -              -          -          -         -
 (net of expenses of approximately $2.0 million)                    -         -              -          -          -         -
Warrants Issued to Third-Party                                      -         -              -          -          -         -
Dividends Paid                                                      -         -              -          -          -         -
Deemed Dividend related to beneficial conversion feature on         -         -              -          -          -         -
 Series F Preferred Stock                                           -         -              -          -          -         -
Net Loss                                                            -         -              -          -          -         -
                                                             --------   -------   ------------   --------   --------   -------
Balance at June 30, 2006                                            -   $     -              -   $      -        857   $     -
                                                             --------   -------   ------------   --------   --------   -------

<CAPTION>
                                                                  COMMON STOCK
                                                                 $.01 PAR VALUE
                                                             ------------------------   ADDITIONAL                        TOTAL
                                                              NUMBER OF                  PAID-IN       ACCUMULATED    SHAREHOLDERS'
                                                                SHARES       AMOUNT      CAPITAL         DEFICIT         EQUITY
                                                             -----------  ----------- -------------   -------------   -------------
<S>                                                          <C>          <C>         <C>             <C>             <C>
Balance at January 1, 2004                                    12,894,166      129,000   102,392,000     (92,336,000)     10,279,000
                                                             -----------  ----------- -------------   -------------   -------------
Sale of Common Stock and Warrants in connection with the
January 2004 financing (net of issuance costs of $423,000)     1,543,209       15,000     4,562,000               -       4,577,000
Change in Value of Warrants                                            -            -      (564,000)              -        (564,000)
Exercise of Employee Stock Options                               804,381        8,000       733,000               -         741,000
Expense recognized in connection with Issuance of Options              -            -       147,000               -         147,000
Net loss                                                               -            -             -      (3,791,000)     (3,791,000)
                                                             -----------  ----------- -------------   -------------   -------------
Balance at December 31, 2004                                  15,241,756  $   152,000 $ 107,270,000   $ (96,127,000)  $  11,389,000
                                                             -----------  ----------- -------------   -------------   -------------
Sale of Series F Preferred Stock ($1,000 per share                     -            -     6,751,000               -       6,751,000
 net of expenses of $249,000)
Shares Of Series D Preferred Stock                             1,454,645       15,000       (15,000)              -               -
     Converted into Common Stock
Shares Of Series F Preferred Stock                               765,481        8,000        (8,000)              -               -
     Converted into Common Stock
Expense recognized in connection with Issuance of Options              -           -         41,000               -          41,000
Exercise of Employee Options                                   1,597,284       16,000     1,488,000               -       1,504,000
Net Loss                                                               -            -             -      (3,820,000)     (3,820,000)
                                                             -----------  ----------- -------------   -------------   -------------
Balance at December 31, 2005                                  19,059,166  $   191,000 $ 115,527,000   $ (99,947,000)  $  15,865,000
                                                             -----------  ----------- -------------   -------------   -------------
Conversion Of Preferred Stock                                 48,170,884      481,000      (387,000)              -               -
Options Expense                                                        -            -     1,223,000               -       1,223,000
Sale of Common Stock                                                   -            -             -               -               -
(net of expenses of approximately $2.0 million)               60,975,610      610,000    47,392,000               -      48,002,000
Warrants Issued to Third-Party                                         -            -        67,000               -          67,000
Dividends Paid                                                         -            -   (19,512,000)              -     (19,512,000)
Deemed Dividend related to beneficial conversion feature on            -            -     3,857,000      (3,857,000)              -
 Series F Preferred Stock                                              -            -             -               -               -
Net Loss                                                               -            -             -      (5,165,000)     (5,165,000)
                                                             -----------  ----------- -------------   -------------   -------------
Balance at June 30, 2006                                     128,205,660  $ 1,282,000 $ 148,167,000   $(108,969,000)  $  40,480,000
                                                             -----------  ----------- -------------   -------------   -------------
</TABLE>

         The accompanying notes are an integral part of these condensed
                              financial statements.

                                       6
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                             SIX MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                        ---------------------------
                                                                                            2006           2005
                                                                                        ------------   ------------
<S>                                                                                     <C>            <C>
Cash flows from operating activities
  Net loss                                                                              $ (5,165,000)  $ (2,062,000)
  Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization                                                         729,000        639,000
       Stock options expense                                                               1,223,000         27,000
       Warrant issued to consultant                                                           67,000             --
       Provisions for returns                                                               (482,000)      (607,000)
       Bad debt expense                                                                      448,000        142,000
       Reserve for inventory obsolescence                                                    615,000        453,000
       Warrant issued to supplier                                                            133,000        135,000
     Changes in operating assets and liabilities:
       (Increase) decrease in
          Inventories                                                                     (4,985,000)    (2,310,000)
          Accounts receivable                                                               (850,000)      (645,000)
          Prepaid inventory                                                                 (130,000)       (66,000)
          Prepaid expenses                                                                   451,000        176,000
          Other current assets                                                              (109,000)       543,000
       Increase (decrease) in
          Accounts payable                                                                (2,131,000)      (291,000)
          Accrued expenses and other current liabilities                                   1,641,000       (504,000)
          Interest payable to related party shareholders                                     271,000        267,000
          Deferred revenue                                                                   480,000        203,000
                                                                                        ------------   ------------
Net cash used in operating activities                                                     (7,794,000)    (3,900,000)
                                                                                        ------------   ------------
Cash flows from investing activities
  Purchase of property and equipment                                                        (592,000)    (1,608,000)
                                                                                        ------------   ------------
Net cash used in investing activities                                                       (592,000)    (1,608,000)
                                                                                        ------------   ------------

Cash flows from financing activities
  Net proceeds from June 2006 Financing                                                   48,002,000             --
  Net proceeds from June 2005 Financing                                                           --      6,752,000
  Net proceeds from exercise of stock options                                                     --        410,000
  Payments of capital lease obligation                                                       (27,000)      (124,000)
  Repayment of related party Notes Payable and interest                                   (5,488,000)            --
  Dividends paid to related party shareholders                                           (19,512,000)            --
                                                                                        ------------   ------------
Net cash provided by financing activities                                                 22,975,000      7,038,000
                                                                                        ------------   ------------

Net increase in cash and cash equivalents                                                 14,589,000      1,530,000
Cash and cash equivalents - beginning of period                                            9,408,000      6,685,000
                                                                                        ------------   ------------
Cash and cash equivalents - end of period                                               $ 23,997,000   $  8,215,000
                                                                                        ============   ============

Supplemental schedule of non-cash investing and financing activities:
  Cash paid for interest                                                                $     92,000   $     56,000
                                                                                        ============   ============
  Cash paid for interest - to related shareholder                                       $  1,488,000             --
                                                                                        ============   ============
  Warrant issued to consultant                                                          $     67,000             --
                                                                                        ============   ============
  Deemed dividend related to beneficial conversion feature on Series F Preferred Stock  $  3,875,000             --
                                                                                        ============   ============
</TABLE>

         The accompanying notes are an integral part of these condensed
                              financial statements.

                                       7
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                                  JUNE 30, 2006

NOTE 1 - BASIS OF PRESENTATION

The accompanying financial statements include the accounts of Bluefly, Inc. (the
"Company").  The financial  statements  have been  prepared in  accordance  with
generally accepted accounting  principles for interim financial  information and
with  the   instructions  to  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly, they do not include all of the information and footnote disclosures
required by generally  accepted  accounting  principles  for complete  financial
statements. In the opinion of management,  all adjustments (consisting mainly of
normal recurring accruals)  considered  necessary for a fair statement have been
included.  The results of operations of any interim  period are not  necessarily
indicative  of the results of  operations to be expected for the fiscal year due
to seasonal and other factors. For further  information,  refer to the financial
statements and  accompanying  footnotes  included in the Company's Form 10-K for
the year  ended  December  31,  2005.  On January  1, 2006 the  Company  adopted
Statement of Financial  Accounting  Standards  ("SFAS") No. 123(R)  "Share-Based
Payment."

The Company has  sustained  net losses and negative  cash flows from  operations
since  the  formation  of  Bluefly.com.   The  Company's  ability  to  meet  its
obligations  in the  ordinary  course of business is dependent on its ability to
establish profitable operations,  or find other sources to fund operations.  The
Company believes that its current funds,  together with working capital, and its
availability under its existing Credit Facility, will be sufficient to enable it
to meet its planned expenditures through at least the next 12 months.

NOTE 2 - THE COMPANY

The  Company  is a leading  Internet  retailer  that  sells  over 350  brands of
designer apparel, accessories and home products at discounts of up to 75% off of
retail value. The Company's  e-commerce Web site  ("Bluefly.com"  or "Web Site")
was launched in September 1998.

During 2005, the Company dissolved its wholly owned subsidiary.  This subsidiary
had no operations.

NOTE 3 - JUNE 2006 FINANCING

On June 15, 2006 (the "Closing Date"), the Company completed a private placement
(the "Private  Placement")  through the sale of 60,975,610  shares of its common
stock, par value $0.01 per share (the "Common  Stock"),  at a price of $0.82 per
share. The Private  Placement was made to affiliates of Maverick  Capital,  Ltd.
("Maverick") and Prentice  Capital  Management,  LP ("Prentice").  The aggregate
proceeds from the Private  Placement  was $50 million,  almost half of which was
purchased by each of Maverick  and  Prentice.  The  purchase  price of $0.82 per
share  represents an 11% premium to the closing bid price of the Common Stock on
June 5, 2006,  the date of signing of the definitive  stock purchase  agreement.
The shares purchased in the Private Placement  included 203,016 shares of Common
Stock that were purchased by a holder of Series D Convertible Preferred Stock in
connection  with the exercise of such  holder's  preemptive  rights.  The amount
purchased by Maverick and Prentice in the Private Placement was reduced on a pro
rata basis as a result of the exercise of such holder's preemptive rights.

Concurrent with the closing of the Private  Placement,  affiliates of Soros Fund
Management LLC ("Soros")  converted all of their outstanding Series A, Series B,
Series  C,  Series  D,  Series  E  and  Series  F  Convertible  Preferred  Stock
(collectively,  the "Preferred  Stock") into 44,729,960  shares of the Company's
Common Stock.  The remaining  shares of Series D  Convertible  Preferred  Stock,
which were held by investors other than Soros,  automatically  converted into an
aggregate of 1,073,936  shares of Common Stock.  The only  Preferred  Stock that
remains  outstanding  is  approximately  857  shares  of  Series  F  Convertible
Preferred  Stock. As a result of the Private  Placement,  and in accordance with
the  terms of the  anti-dilution  provisions  contained  in the  Certificate  of
Powers,  Designations,  Preferences and Rights of Series F Convertible Preferred
Stock,  the  conversion  price of the Series F Convertible  Preferred  Stock was
adjusted to $0.82 per share.  The Company has the right to redeem such shares of
Series F  Convertible  Preferred  Stock,  at the face value thereof of $857,143,
plus  accrued  dividends,  to the extent the Board of  Directors  of the Company
determines  to do so.  Allen &  Company  LLC  acted as  placement  agent for the
Private Placement and was paid a commission of 5% of the gross proceeds, half of
which was paid by the  Company  and the other half by Soros.  Of the  commission
paid by the  Company,  $1 million was paid  through the issuance of Common Stock
and the remainder was paid in cash.

                                       8
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                                  JUNE 30, 2006

On the  Closing  Date,  the  Company  paid  Soros  $25  million  in cash,  which
represented  $4,000,000 of the  principal  and  $1,488,376 of accrued but unpaid
interest on the  outstanding  convertible  notes (the "Notes") held by Soros and
the  majority  of the accrued but unpaid  dividends  on the shares of  Preferred
Stock that were  converted by Soros in  connection  with the Private  Placement,
with the  remaining  accrued but unpaid  dividends  on such shares of  Preferred
Stock paid in shares of common stock. The remaining proceeds will be used by the
Company for general corporate purposes. As a result of the Private Placement and
the conversion of the Preferred Stock, Soros collectively owns approximately 39%
of  the  Company's   Common  Stock,  and  each  of  Maverick  and  Prentice  own
approximately 24% of the Company's Common Stock.

As a result of the Private  Placement,  the  conversion  price of the  Company's
Series F Convertible  Preferred  Stock, the majority of which was held by Soros,
automatically  decreased from $2.32 to $0.82.  In accordance  with FASB Emerging
Issue Task Force  Issue No.  00-27,  "Application  of Issue No.  98-5 to Certain
Convertible  Instruments,"  this  reduction  in  the  conversion  price  of  the
Company's  Series  F  Preferred  Stock  resulted  in  the  Company  recording  a
beneficial  conversion  feature in the approximate  amount of approximately $3.9
million as part of its second quarter financial  results.  This non-cash charge,
which is analogous to a dividend,  resulted in an  adjustment  to the  Company's
computation of Loss Per Share.

The Company has agreed to use its commercially reasonable efforts to (i) prepare
and file with the  Securities  and  Exchange  Commission  (the  "Commission")  a
registration statement (the "Registration  Statement") to register the shares of
Common Stock sold in the Private  Placement  within 120 days of the Closing Date
and (ii)  cause the  Registration  Statement  to be  declared  effective  by the
Commission  within 180 days of the Closing Date.  The Company will be liable for
certain  penalties  for the  failure  to meet such  filing  and  effective  date
deadlines. The Investors also received certain "piggy-back"  registration rights
covering the Common Stock purchased in the Private Placement.

NOTE 4 - FINANCING AGREEMENT

The Company has a three year revolving  credit facility (the "Credit  Facility")
with Wells Fargo Retail  Finance,  LLC ("Wells  Fargo").  Under the terms of the
Credit  Facility,  Wells  Fargo  provides  the Company  with a revolving  credit
facility  and issues  letters of credit in favor of  suppliers  or factors.  The
Credit  Facility  is secured  by a lien on  substantially  all of the  Company's
assets. Historically,  the Credit Facility has also been secured by a $2,000,000
letter  of credit  issued by Soros in favor of Wells  Fargo  (the  "Soros  LC").
Subsequent  to  quarter  end,  Wells  Fargo  agreed  to  release  the  Soros LC.
Availability  under the Credit  Facility is  determined  by a formula that takes
into account the amount of the Company's inventory and accounts  receivable,  as
well as the Soros LC. The maximum availability is currently $7,500,000,  but can
be  increased  to  $12,500,000  at the  Company's  request,  subject  to certain
conditions.  As of June 30, 2006, total  availability under the Credit Facility,
after  giving  effect to an $850,000  availability  reserve that Wells Fargo had
historically  required,  was approximately  $6,650,000,  of which $2,859,000 was
committed,  leaving  approximately  $3,791,000 available for further borrowings.
Subsequent  to quarter end,  Wells Fargo agreed that it would no longer  require
the availability reserve, although it has the right under the Credit Facility to
establish reserves in the future, as it deems appropriate.

Interest  accrues  monthly on the average  daily  amount  outstanding  under the
Credit  Facility  during  the  preceding  month at a per annum rate equal to the
prime rate plus  0.75% or LIBOR  plus  2.75%.  The  Company  also pays a monthly
commitment fee on the unused portion of the facility (i.e.,  $7,500,000 less the
amount of loans  outstanding)  equal to 0.35%. The Company also pays Wells Fargo
certain  fees to open letters of credit and  guarantees  in an amount equal to a
certain  percentage  of the face  amount of the letter of credit for each thirty
(30) days such letter of credit,  or a portion  thereof,  remains open.  For the
three months ended June 30, 2006, the Company incurred  approximately $42,000 in
connection with these fees.

Subject  to  certain  conditions,  if  the  Company  defaulted  on  any  of  its
obligations  under the Credit  Facility,  Wells Fargo had the right to draw upon
the Soros LC to satisfy any such  obligations.  If Wells Fargo drew on the Soros
LC, pursuant to the terms of a reimbursement  agreement  between the Company and
Soros,  the  Company  would have had the  obligation  to,  among  other  things,
reimburse Soros for any amounts drawn under the Soros LC, plus interest  accrued
thereon. In addition,  the Company was required to pay Soros Fund Management LLC
an annual fee in connection with the issuance and maintenance of the Soros LC in
an amount equal to the fee that the Company would be required to pay in order to
have a similar  letter of credit  issued  under  the  Credit  Facility.  For the
current  year the annual fee was  $55,000.  The  Company  was also  required  to
reimburse  Soros for any costs and  expenses  associated  with the  issuance and
maintenance of the Soros LC.

                                       9
<PAGE>

                                 BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                                  JUNE 30, 2006

Under the terms of the Credit  Facility,  Soros has the right to purchase all of
the Company's obligations from Wells Fargo at any time if the Company is then in
default under the Credit Facility.

NOTE 5 - LOSS PER SHARE

The  Company has  determined  Loss Per Share in  accordance  with  Statement  of
Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings Per Share." Basic
loss per share  excludes  dilution and is computed by dividing loss available to
common  shareholders by the weighted average number of common shares outstanding
for the period.

Diluted  loss per  share is  computed  by  dividing  loss  available  to  common
shareholders by the weighted average number of common shares outstanding for the
period,  adjusted to reflect potentially  dilutive  securities.  Due to the loss
from  continuing  operations,  the  following  options and  warrants to purchase
shares of Common Stock and  Preferred  Stock  convertible  into shares of Common
Stock were not included in the computation of diluted loss per share because the
result of the exercise of such inclusion would be antidilutive:

<TABLE>
<CAPTION>
Security             June 30, 2006    Exercise Prices   June 30, 2005    Exercise Prices
------------------   -------------    ---------------   -------------    ---------------
<S>                      <C>          <C>                  <C>           <C>
Options                  8,103,028    $0.69  - $16.47       8,791,285    $0.69  - $16.47
Warrants                 1,945,893    $0.78  - $ 3.96       2,083,393    $0.78  - $ 3.96
Preferred Stock                 --(1)                      46,340,671(1)
Convertible Notes               --(3)                              --(2)
</TABLE>

     (1)  Excludes  dividends on preferred  stock,  which are payable in cash or
          common stock, at the Company's option, upon conversion,  redemption or
          liquidation.   In  June  2006,  substantially  all  of  the  Company's
          Preferred Stock was converted into shares of Common Stock. At June 30,
          2006,  there were 857 shares of Series F Convertible  Preferred  Stock
          outstanding that are convertible into  approximately  1,045,296 shares
          of Common Stock (excluding dividends).

     (2)  Excludes  debt issued in connection  with the July 2003  financing and
          the October 2003  financing,  which would have been  convertible  into
          equity  securities  of the  Company  sold in any  subsequent  round of
          financing,  at the  holders  option,  at a price  that is equal to the
          lowest  price per share  accepted by any  investor in such  subsequent
          round of financing.  At June 30, 2005,  such debt was not  convertible
          into Common Stock.

     (3)  In June 2006, all of the convertible notes were paid off.

NOTE 6 - STOCK BASED COMPENSATION

The Company's  Board of Directors  has adopted three stock option plans,  one in
April  2005,  one in July  2000  and the  other in May  1997  (collectively  the
"Plans").  The Plans were adopted for the purpose of encouraging  key employees,
consultants  and  directors  who are not  employees  to  acquire  a  proprietary
interest  in the growth  and  performance  of the  Company,  and are  similar in
nature.  Options  are  granted  in terms  not to exceed  ten  years  and  become
exercisable  as  specified  when the  option is  granted.  Vesting  terms of the
options range from  immediately to a ratable  vesting period of four years.  The
Plans have an aggregate of 15,700,000 shares authorized for issuance.

Before January 1, 2006, the Company accounted for stock-based compensation under
the  recognition  and  measurement  principles  of Accounting  Principles  Board
Opinion ("APB") No. 25,  "Accounting for Stock Issued to Employees"  ("APB 25"),
and related interpretations.  The Company did not recognize compensation expense
related to stock options  granted to employees and directors  where the exercise
price was at or above fair value at the date of grant.  Statement  of  Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation,"
established  accounting and  disclosure  requirements  using a  fair-value-based
method of accounting for stock-based  employee  compensation plans. As permitted
by  SFAS  No.   123,   the   Company   elected   to   continue   to  apply   the
intrinsic-value-based method of APB No. 25 described above, and

                                       10
<PAGE>

                                 BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                                  JUNE 30, 2006

adopted only the disclosure requirements of SFAS No. 123, as amended by SFAS No.
148, "Accounting For Stock-Based Compensation - Transition and Disclosure."

On January 1, 2006,  the start of the first quarter of fiscal 2006,  the Company
adopted the  provisions of Statement of Financial  Accounting  Standards No. 123
(revised 2004),  "Share-Based Payment" ("SFAS No. 123(R)"),  which requires that
the costs resulting from all share-based  payment  transactions be recognized in
the  financial  statements  at their fair values.  The Company  adopted SFAS No.
123(R)  using  the  modified  prospective  application  method  under  which the
provisions  of SFAS No.  123(R)  apply to new  awards  and to  awards  modified,
repurchased,  or cancelled after the adoption date.  Additionally,  compensation
cost for the portion of the awards for which the requisite  service has not been
rendered  that are  outstanding  as of the adoption  date is  recognized  in the
Statement of  Operations  over the remaining  service  period after the adoption
date based on the award's  original  estimate  of fair value.  Results for prior
periods have not been restated.  Total share-based compensation expense recorded
in the Statement of Operations  for the three and six months ended June 30, 2006
is $611,000 and $1,223,000, respectively.

On March 29, 2005, the SEC published Staff Accounting  Bulletin ("SAB") No. 107,
which provides the Staff's views on a variety of matters relating to stock-based
payments.  SAB No. 107 requires  stock-based  compensation  be classified in the
same expense line items as cash compensation. The application of SFAS No. 123(R)
had the following  effect on Q2 2006 reported  amounts  relative to amounts that
would  have been  reported  using the  intrinsic  value  method  under  previous
accounting:

As a result of adopting SFAS No.  123(R),  the Company's  operating loss and net
loss for the  three  and six  months  ended  June  30,  2006  was  $611,000  and
$1,223,000  higher,  respectively,  than  if it had  continued  to  account  for
share-based  compensation under APB No. 25. Basic and diluted loss per share for
the three and six months ended June 30, 2006 would have been $0.02 and $0.04 per
share, respectively,  lower if the Company had not adopted SFAS No.123(R). There
was no effect on the Company's cash flows.

The  following  table  illustrates  the  effect on net income and net income per
common  share  applicable  to common  stockholders  for the three and six months
ended June 30, 2005 as if the  Company  had  applied the fair value  recognition
provisions for  stock-based  employee  compensation of SFAS No. 123, as amended.
For purposes of the pro forma presentation, option forfeitures are accounted for
as they occurred and no amounts of  compensation  expense have been  capitalized
into inventory or other assets,  but instead were  considered as period expenses
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                                           THREE MONTHS     SIX MONTHS
                                                              ENDED            ENDED
                                                          JUNE 30, 2005    JUNE 30, 2005
                                                          -------------    -------------
<S>                                                       <C>              <C>
Net loss, as reported                                     $  (1,169,000)   $  (2,062,000)
Deduct: total stock based compensation
 expense determined under fair value
 based methods for all awards                                  (702,000)      (1,414,000)
Add: Stock-based employee compensation
 Expense included in net loss                                    11,000           27,000
Pro forma net loss applicable to common shareholders         (1,860,000)      (3,449,000)
Net Loss per share applicable to common shareholders
  Basic and diluted, as reported                          $       (0.15)   $       (0.28)
  Basic and diluted, pro forma                            $       (0.20)   $       (0.37)
</TABLE>

                                       11
<PAGE>

                                 BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                                  JUNE 30, 2006

The fair value of  options  granted is  estimated  on the date of grant  using a
Black-Scholes option pricing model.  Expected  volatilities are calculated based
on the historical  volatility of the Company's stock.  Management monitors share
option exercise and employee  termination  patterns to estimate forfeiture rates
within the valuation model.  The expected  holding period of options  represents
the period of time that  options  granted are  expected to be  outstanding.  The
risk-free  interest  rate for periods  within the expected life of the option is
based on the interest  rate of U.S.  Treasury  note in effect on the date of the
grant. The Company had previously recorded expense in accordance with APB No. 25
for certain  options  issued to its CEO and  President  that were  issued  below
market.  Prior to the  adoption of FAS 123(R),  the  Company  recognized  actual
forfeitures  when  they  occurred  but  has not  recorded  a  cumulative  effect
adjustment to record estimated forfeitures related to these below market options
as the balance was immaterial.

The table below  presents the  assumptions  used to calculate  the fair value of
options  granted  during the three and six months  ended June 30, 2006 and 2005,
respectively.

                                   THREE        SIX        THREE        SIX
                                   MONTHS      MONTHS      MONTHS      MONTHS
                                   ENDED       ENDED       ENDED       ENDED
                                  JUNE 30,    JUNE 30,    JUNE 30,    JUNE 30,
                                    2006        2006        2005        2005
                                  --------    --------    --------    --------
Expected holding period (years)        6.0         6.0         6.0         6.0
Risk-free interest rate               4.40%       4.76%       3.86%       4.39%
Dividend yield                        0.00%       0.00%       0.00%       0.00
Volatility                             109%        109%        128%        135%

The following table summarizes the Company's stock option activity:

                                                                 WEIGHTED
                                                                  AVERAGE
                                                  NUMBER OF      EXERCISE
                                                   SHARES         PRICE
                                                ------------    ------------
Balance at December 31, 2005                       8,038,528    $       1.97
                                                ------------
Options granted                                      131,000    $       1.12
Options canceled                                     (66,500)   $       1.66
Options exercised                                          -    $       0.00
                                                ------------
Balance at June 30, 2006                           8,103,028    $       1.96
Eligible for exercise at December 31, 2005         4,969,929    $       2.15
Eligible for exercise at June 30, 2006             5,840,623    $       2.08

The stock options are exercisable in different periods through 2016.  Additional
information  with respect to the outstanding  options as of June 30, 2006, is as
follows:

                                       12
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                                  JUNE 30, 2006

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                       ---------------------------------------------------   --------------------------
                                                  WEIGHTED
                                                   AVERAGE      WEIGHTED                     WEIGHTED
RANGE OF                                          REMAINING      AVERAGE                      AVERAGE
EXERCISE                                         CONTRACTUAL    EXERCISE        OPTIONS      EXERCISE
PRICES                   VESTED      UNVESTED       LIFE         PRICE        EXERCISABLE     PRICE
--------------------   ----------   ----------   -----------   -----------   ------------   -----------
<S>                     <C>          <C>           <C>         <C>              <C>         <C>
  $0.00 - $1.66         3,720,121    1,354,995     7.4 Years   $      1.23      3,720,121   $      1.20
  $1.66 - $3.32         1,797,117      865,395     7.1 Years   $      2.33      1,797,117   $      2.46
  $3.32 - $4.98            58,985       42,015     7.6 Years   $      3.92         58,985   $      3.92
  $4.98 - $6.64            22,250            -     2.5 Years   $      5.11         22,250   $      5.11
  $6.64 - $9.96            52,750            -     3.1 Years   $      9.17         52,750   $      9.17
 $9.96 - $11.62           104,250            -     3.5 Years   $     11.20        104,250   $     11.20
$11.62 - $14.94             6,250            -     3.4 Years   $     14.04          6,250   $     14.04
$14.94 - $16.60            78,900            -     2.6 Years   $     15.13         78,900   $     15.13

 $0.69 - $16.60         5,840,623    2,262,405     7.1 Years   $      1.96      5,840,623   $      2.08
</TABLE>

The total fair value of the 360,954  shares  that vested  during the quarter and
the 870,694  shares that vested  during the six months  ended Ju ne 30, 2006 was
approximately $549,000 and $1,341,000,  respectively.  The weighted average fair
value of the options granted during the quarter was $0.95. At June 30, 2006, the
aggregate  intrinsic  value of the fully vested  options  "expected to vest" was
$565,000 and the weighted average remaining  contractual life of the options was
6.5 years.  The Company has not capitalized any  compensation  cost, or modified
any of its stock option  grants  during the first half of 2006.  No options were
exercised  during the quarter and no cash was used to settle equity  instruments
granted under the Plans during the second quarter of 2006.

As of June 30, 2006, the total  compensation  cost related to non-vested  awards
not yet recognized was $3.2 million.  Total  compensation cost is expected to be
recognized over 2 years on a weighted average basis.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Bluefly,  Inc.  is a leading  Internet  retailer  that  sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value.  We launched our Web site in September 1998. Over the past four
years,  our sales have grown at a compounded  annual  growth rate of almost 22%,
while our gross margin percentage has increased from 31.0% in the second quarter
of 2003 to 42.0% in the second quarter of 2006.

The  recent  increase  in our  margin  and  sales is the  direct  result  of the
merchandise  strategy that we began to implement in spring 2004. As part of that
strategy,  we are bringing  current  season  merchandise  and the latest fashion
trends to our customer for great value.  While there will be some fluctuation in
our gross margin  percentage  from quarter to quarter as we further  develop our
merchandising  and  marketing  strategy,  we  believe  that  we  will be able to
maintain margins well above our levels from 2003 and earlier.

We believe that there is an opportunity to accelerate the growth of our business
while  continuing to provide our customers  with the great values that they have
become  accustomed  to. In an effort to take advantage of this  opportunity,  we
launched a national advertising campaign in 2005. We continued the campaign into
the first half of 2006,  and plan to  continue  it for the rest of the year.  We
intend to continuously  review the results of the campaign and use the learnings
to refine and improve upon our marketing strategy.

Our net sales increased by approximately 40% to $16,793,000 for the three months
ended June 30, 2006 from  $12,029,000  for the three months ended June 30, 2005.
Our gross margin  increased  to 42.0% in 2006 from 38.7% in 2005,  40.1% in 2004
and 31% in 2003.  Our gross profit  increased by 51% to $7,046,000 for the three
months ended June 30, 2006 from  $4,651,000  for

                                       13
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

the three months ended June 30, 2005.  This growth in gross profit was driven by
the increase in net sales,  and by the increase in gross margins.  Our operating
loss  increased  by 72% to  $1,754,000  for the three  months  ended 2006,  from
$1,019,000 for the three months ended 2005. This increase was primarily a result
of the  increased  marketing  expenditures  in the second  quarter of 2006,  the
payment of executive  bonuses in  connection  with our recent  financing in June
2006, and the inclusion of stock option  expenses as a result of the adoption of
SFAS No. 123(R).

As of June 30,  2006,  we had a  receivable  of $352,000  due from a third party
service  provider that  purchases  inventory  from the Company to be distributed
internationally.  This amount related to activity that occurred primarily in the
second  quarter.  We believe that it is not  probable  that we will collect this
amount in its  entirety.  Accordingly,  we have  increased  our bad debt expense
which is included in general and administrative expenses.

We increased our spending in marketing (excluding staff related costs) by 63% to
$1,309,000 for the second quarter of 2006,  from $804,000 for the second quarter
2005. A large  portion of the  increased  marketing  expense was a result of the
costs associated with our national advertising  campaign,  which was launched in
September 2005. In general,  we intend to market our business more  aggressively
than we have in previous years.  This more aggressive growth strategy will cause
our marketing  expense as a percentage of revenue to increase in the short-term;
however,  we believe that it is a prudent  investment in our business given that
our margin  structure  and average  order size have  historically  resulted in a
relatively high positive  contribution to overhead and marketing on a customer's
first order.

In  connection  with the recent  financing  in June 2006,  we paid  $675,000  of
bonuses.  Of this amount,  $650,000  are included in general and  administrative
expenses.

On January 1, 2006,  we adopted SFAS No.  123(R),  which  requires  expensing of
stock options. As a result, we recorded total share-based  compensation expenses
of $611,000 for the three months ended June 30, 2006.  Results for prior periods
have not been  restated  due to the adoption  based on the modified  prospective
approach. Had they been restated,  additional share-based  compensation expenses
of  approximately  $691,000  would have been recorded for the three months ended
June 30, 2005.

Our reserve for returns and credit card chargebacks  increased to 41.8% of gross
sales for the second  quarter 2006  compared to 39.9% for the second  quarter of
2005. The increase was primarily  caused by an increase in average order size as
well as a shift in our merchandise  mix towards certain product  categories that
historically have generated higher return rates.  However,  we believe that this
increase in return rates has been more than offset by the higher  gross  margins
and average  order sizes that have been  generated by this shift in  merchandise
mix.

A portion of our inventory  includes  merchandise  that we either purchased with
the  intention  of holding  for the  appropriate  season or were  unable to sell
through in its  entirety in a prior season and have  determined  to hold for the
next  selling  season,  subject (in some cases) to  appropriate  mark-downs.  In
recent years, we have increased the amount of inventory  purchased on a pack and
hold basis in order to take advantage of opportunities in the market.

At June 30, 2006, we had an accumulated deficit of $108,969,000.  The net losses
and  accumulated  deficit  resulted  primarily  from the costs  associated  with
developing and marketing our Web site and building our  infrastructure,  as well
as non cash  beneficial  conversion  charges  resulting  from  decreases  in the
conversion  price of our Preferred Stock and the payment of dividends to holders
of  preferred  stock.  In order to expand our  business,  we intend to invest in
sales,   marketing,   merchandising,   operations,   information  systems,  site
development and additional personnel to support these activities.  Therefore, we
may continue to incur substantial operating losses. Although we have experienced
revenue growth in recent years, this growth may not be sustainable and therefore
should not be considered indicative of future performance.

CRITICAL ACCOUNTING POLICIES

Management 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 the  disclosure  of
contingent  assets and liabilities at the dates of the financial  statements and
the reported amounts of revenues and expenses during the reporting periods.  The
most  significant  estimates  and  assumptions  relate  to the  adequacy  of the
allowances for sales returns,  recoverability

                                       14
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

of  inventories,  useful lives of property and  equipment,  calculation of stock
based  compensation  and the realization of deferred tax assets.  Actual amounts
could differ significantly from these estimates.

Revenue Recognition

We recognize  revenue in accordance with Staff  Accounting  Bulletin ("SAB") No.
104  "Revenue  Recognition".  Gross sales  consists  primarily  of revenue  from
product  sales and  shipping  and  handling  charges  and is net of  promotional
discounts.  Net sales represent gross sales, less provisions for returns, credit
card  chargebacks,  and  adjustments  for  uncollected  sales taxes.  Revenue is
recognized when all the following criteria are met:

     o      A customer executes an order.

     o      The  product  price  and the  shipping  and  handling  fee have been
            determined.

     o      Credit card  authorization has occurred and collection is reasonably
            assured.

     o      The product has been shipped and received by the customer.

Shipping  and  handling  billed  to  customers  are  classified  as  revenue  in
accordance  with  Financial  Accounting  Standards  Board  ("FASB") Task Force's
Emerging  Issues Task Force  ("EITF") No.  00-10,  "Accounting  for Shipping and
Handling Fees and Costs" ("EITF No. 00-10").

Provision for Returns and Doubtful Accounts

We  generally  permit  returns  for any  reason  within  90  days  of the  sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical  data. We perform credit card
authorizations  and check the verification of our customers prior to shipment of
merchandise.  However,  our future  return and bad debt rates could  differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business,  prospects, cash flows,
financial condition and results of operations.

Stock-Based Compensation

As of January 1, 2006, we adopted SFAS No. 123(R),  which requires us to measure
compensation cost for all outstanding  unvested share-based awards at fair value
and recognize  compensation over the service period for awards expected to vest.
The estimation of stock awards that will ultimately vest requires judgment,  and
to the extent actual  results  differ from our  estimates,  such amounts will be
recorded as a cumulative  adjustment  in the period  estimates  are revised.  We
consider  historical  experience when estimating  expected  forfeitures.  Actual
results may differ substantially from these estimates.

Inventory Valuation

Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in,  first-out ("FIFO") method. We
review our inventory  levels in order to identify  slow-moving  merchandise  and
establish a reserve for such merchandise.

Deferred Tax Valuation Allowance

We  recognize  deferred  income tax assets and  liabilities  on the  differences
between the financial  statement and tax bases of assets and  liabilities  using
enacted  statutory  rates in effect for the years in which the  differences  are
expected  to reverse.  The effect on deferred  taxes of a change in tax rates is
realized in income or loss in the period that  included the  enactment  date. We
have assessed the future taxable income and determined  that a 100% deferred tax
valuation allowance is deemed necessary.  In the event that we were to determine
that we would be able to realize our deferred tax assets,  an  adjustment to the
deferred  tax  valuation  allowance  would  increase  income in the period  such
determination is made.

                                       15
<PAGE>
                                  BLUEFLY, INC.
                                  JUNE 30, 2006

RESULTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2005

The following  table sets forth our statement of  operations  data,  for the six
months ended June 30th. All data is in thousands except as indicated below:

<TABLE>
<CAPTION>
                                                            2006                       2005                       2004
                                                   ----------------------     ----------------------     ----------------------
                                                                As a % of                  As a % of                  As a % of
                                                                Net Sales                  Net Sales                  Net Sales
                                                                ---------                  ---------                  ---------
<S>                                                <C>              <C>       <C>              <C>       <C>              <C>
Net sales                                          $  33,669        100.0%    $  25,531        100.0%    $  20,609        100.0%
Cost of sales                                         19,784         58.8%       15,995         62.6%       13,020         63.2%
                                                   ---------                  ---------                  ---------
  Gross profit                                        13,885         41.2%        9,536         37.4%        7,589         36.8%

Selling, marketing and fulfillment expenses           13,041         38.7%        8,103         31.7%        6,659         32.3%
General and administrative expenses                    5,650         16.8%        3,188         12.5%        3,146         15.3%
                                                   ---------                  ---------                  ---------
  Total operating expenses                            18,691         55.5%       11,291         44.2%        9,805         47.6%

Operating loss                                        (4,806)       (14.3)%      (1,755)        (6.8)%      (2,216)       (10.8)%
Interest (expense) and other income                     (359)        (1.1)%        (307)        (1.2)%         378          1.9%
                                                   ---------                  ---------                  ---------

  Net loss                                            (5,165)       (15.4)%      (2,062)        (8.0)%      (1,838)        (8.9)%
</TABLE>

We also measure and evaluate  ourselves  against  certain other key  operational
metrics.  The following table sets forth our actual results based on these other
metrics for the six months ended June 30th, as indicated below:

<TABLE>
<CAPTION>
                                                             2006         2005         2004
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Average Order Size (including shipping & handling)        $   246.13   $   207.54   $   188.61
New Customers Added during the Period                         76,487       66,326       58,813
</TABLE>

Net sales:  Gross  sales for the six months  ended June 30,  2006  increased  by
approximately  36% to $56,117,000 from $41,214,000 for the six months ended June
30, 2005.  For the six months ended June 30, 2006,  we recorded a provision  for
returns and credit card  chargebacks  and other  discounts  of  $22,448,000,  or
approximately  40% of gross sales.  For the six months ended June 30, 2005,  the
provision  for returns  and credit  card  chargebacks  and other  discounts  was
$15,683,000,  or  approximately  38.1%  of gross  sales.  The  increase  in this
provision as a percentage of gross sales resulted from an increase in the return
rate. The increase was primarily  caused by an increase in average order size as
well as a shift in our merchandise  mix towards certain product  categories that
historically have generated higher return rates.  However,  we believe that this
increase in return rates has been more than offset by the higher  gross  margins
and average  order sizes that have been  generated by this shift in  merchandise
mix.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments for uncollected  sales taxes, our net sales for the six months ended
June 30, 2006 were  $33,669,000.  This  represents an increase of  approximately
31.9% compared to the six months ended June 30, 2005, in which net sales totaled
$25,531,000.  The  growth in net sales  resulted  from both an  increase  in the
number of new customers acquired (approximately 15% higher compared to the first
half 2005) and an  increase in average  order size (over 18% higher  compared to
the first half  2005).  For the six  months  ended June 30,  2006  revenue  from
shipping and handling (which is included in net sales)  increased  approximately
8% in 2006 to $1,970,000 from $1,825,000 in 2005.

COST OF SALES:  Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound  shipping  costs,  inventory  reserves,  commissions  and
packing materials.  Cost of sales for the six months ended June 30, 2006 totaled
$19,784,000, resulting in gross margin of approximately 41.2%. Cost of sales for
the six months  ended June 30,  2005  totaled  $15,995,000,  resulting  in gross
margin of 37.4%. Gross profit increased by approximately 46%, to $13,885,000 for
the six months  ended June 30, 2006  compared

                                       16
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

to $9,536,000 for the six months ended June 30, 2005. The growth in gross margin
was primarily  the result of increased  product  margins,  which was driven by a
merchandising strategy that focused on negotiating better prices with vendors as
well as selling more in-season product.  In-season merchandise has more value to
our customers and therefore demands higher margins.

Selling, marketing and fulfillment expenses:  Selling, marketing and fulfillment
expenses  increased by 61% in the first six months of 2006 compared to the first
six months of 2005. Selling,  marketing and fulfillment  expenses were comprised
of the following:

<TABLE>
<CAPTION>
                  Six Months Ended       As a % of        Six Months Ended       As a % of        Percentage Difference
                   June 30, 2006         Net Sales          June 30, 2005        Net Sales        increase (decrease)
                  ----------------    ----------------    ----------------    ----------------    ---------------------
<S>               <C>                             <C>     <C>                             <C>                       <C>
Marketing         $      5,760,000                17.1%   $      1,935,000                 7.6%                     198%
Operating                3,699,000                11.0%          3,208,000                12.6%                      15%
Technology               1,989,000                 5.9%          1,840,000                 7.2%                       8%
E-Commerce               1,593,000                 4.7%          1,120,000                 4.3%                      42%
                  $     13,041,000                38.7%   $      8,103,000                31.7%                      61%
</TABLE>

As a percentage of net sales,  our selling,  marketing and fulfillment  expenses
increased to 38.7% for the six months ended June 30, 2006 from 31.7% for the six
months ended June 30, 2005. This increase was primarily  related to the increase
in advertising spending from our advertising campaign and the recording of stock
option expenses as a result of our adoption of SFAS No. 123(R).

Marketing  expenses include  expenses  related to paid search,  online and print
advertising,  television, fees to marketing affiliates, direct mail campaigns as
well as staff related costs. Marketing expenses increased by a higher percentage
than our percentage increase in revenue because we focused more of our marketing
initiatives  on  our  national  advertising   campaign.   Of  the  $3.8  million
incremental  marketing  costs  in the  first  half of  2006  compared  to  2005,
approximately  $3.1  million  related to the national  advertising  campaign and
$403,000 was related to paid search.  While this more aggressive growth strategy
will cause our  marketing  expense as a percentage of revenue to increase in the
short-term,  we believe that it is a prudent  investment  in our business  given
that our improved  margin  structure  and average  order size have  historically
resulted in a relatively high positive  contribution to overhead on a customer's
first order.

Operating   expenses   include  all  costs  related  to  inventory   management,
fulfillment,  customer service,  and credit card processing.  Operating expenses
increased in the first six months of 2006 by  approximately  15% compared to the
first six  months  of 2005 as a result of  variable  costs  associated  with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit card fees) and an increase in salary related  expenses.  These  increases
were partially  offset by a decrease in credit card fees  attributed to a refund
from one of our credit card processors.

Technology  expenses consist  primarily of staff related costs,  amortization of
capitalized costs and Web site hosting.  For the six months ended June 30, 2006,
technology  expenses  increased by  approximately  8% compared to the six months
ended June 30, 2005.  This increase  resulted from an increase in salary related
expenses, including the expensing of employee stock options in the current year,
as well as an increase in software  support.  This increase was partially offset
by a decrease in depreciation and web hosting expense.

E-Commerce  expenses  include  expenses  related  to  our  photo  studio,  image
processing,  and Web site  design.  For the six  months  ended  June  30,  2006,
e-commerce expenses increased by approximately 42% as compared to the six months
ended June 30, 2005,  primarily due to an increase in salary related expenses as
well as an increase in expenses  associated  with photo shoots and the result of
recording employee stock option expenses in the current period.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses include
merchandising,   finance  and  administrative  salaries  and  related  expenses,
insurance  costs,  accounting  and legal  fees,  depreciation  and other  office
related expenses.  General and administrative  expenses for the six months ended
June 30,  2006  increased  by  approximately  77% to  $5,650,000  as compared to
$3,188,000  for the six months ended June 30, 2005.  The increase in general and
administrative expenses was primarily the result of the recording of $957,000 of
expense  related to employee stock options in the six month period,  an increase
of $352,000 in

                                       17
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

bad debt expense related to a receivable due from a third party service provider
that purchases  inventory  from the Company to be  distributed  internationally,
increased consulting and professional fees of $119,000, increased public company
expenses  of  $172,000  and  increased  depreciation  expense  of  $172,000.  In
addition,  in June 2006 the Company  paid  approximately  $650,000 of  executive
bonuses in connection  with the financing  that closed during the second quarter
2006. Most of these bonuses are included in general and administrative expenses.

As a percentage of net sales, general and administrative  expenses for the first
half of 2006 increased to  approximately  16.8% from 12.5% for the first half of
2005.

Loss from  operations:  Operating  loss increased by  approximately  174% in the
first six months of 2006 to $4,806,000  from  $1,755,000 in the first six months
of 2005,  as the increase in net sales and gross margin were more than offset by
the incremental marketing expenses and the recording of stock option expenses as
a result of the adoption of SFAS No. 123(R).

Interest and other  income:  Other income for the six months ended June 30, 2006
increased to $112,000 from $69,000 for the six months ended June 30, 2005. These
amounts relate primarily to interest income earned on our cash balances.

Interest and other expense:  Interest  expense for the six months ended June 30,
2006  totaled  $471,000,  compared to $376,000 for the six months ended June 30,
2005.  Interest  expense  relates  to fees paid in  connection  with our  Credit
Facility, as well as interest expense on the Notes.

FOR THE THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 2005

The following  table sets forth our statement of operations  data, for the three
months ended June 30th. All data is in thousands, except as indicated below:

<TABLE>
<CAPTION>
                                                           2006                         2005                         2004
                                                ------------------------     ------------------------     ------------------------
                                                               As a % of                    As a % of                    As a % of
                                                               Net Sales                    Net Sales                    Net Sales
                                                               ---------                    ---------                    ---------
<S>                                             <C>                <C>       <C>                <C>       <C>                <C>
Net sales                                       $   16,793         100.0%    $   12,029         100.0%    $    9,495         100.0%
Cost of sales                                        9,747          58.0%         7,378          61.3%         5,688          59.9%
                                                ----------                   ----------                   ----------
  Gross profit                                       7,046          42.0%         4,651          38.7%         3,807          40.1%

Selling, marketing and fulfillment expenses          5,577          33.2%         4,068          33.8%         3,210          33.8%
General and administrative expenses                  3,223          19.2%         1,602          13.3%         1,394          14.7%
                                                ----------                   ----------                   ----------
  Total operating expenses                           8,800          52.4%         5,670          47.1%         4,604          48.5%

Operating loss                                      (1,754)        (10.4)%       (1,019)         (8.4)%         (797)         (8.4)%
Interest (expense) and other income, net              (147)         (0.9)%         (150)         (1.2)%           89           0.9%
                                                ----------                   ----------                   ----------
  Net loss                                          (1,901)        (11.3)%       (1,169)         (9.6)%         (708)         (7.5)%
</TABLE>

We also measure and evaluate  ourselves  against  certain other key  operational
metrics.  The following table sets forth our actual results based on these other
metrics for the three months ended June 30th, as indicated below:

<TABLE>
<CAPTION>
                                                             2006         2005         2004
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Average Order Size (including shipping & handling)        $   248.32   $   216.09   $   187.52
New Customers Added during the Period                         37,779       29,561       25,478
</TABLE>

NET SALES:  Gross sales for the three  months  ended June 30, 2006  increased by
approximately  44% to $28,872,000  from  $20,003,000  for the three months ended
June 30, 2005. For the three months ended June 30, 2006, we recorded a provision
for returns and credit

                                       18
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

card chargebacks and other discounts of $12,079,000,  or approximately  41.8% of
gross sales. For the three months ended June 30, 2005, the provision for returns
and credit card chargebacks and other discounts was $7,974,000, or approximately
39.9% of gross sales.  The increase in this  provision as a percentage  of gross
sales  resulted from an increase in the return rate.  The increase was primarily
caused  by an  increase  in  average  order  size  as  well  as a  shift  in our
merchandise  mix towards  certain  product  categories  that  historically  have
generated higher return rates.  However, we believe that this increase in return
rates has been more than offset by the higher  gross  margins and average  order
sizes that have been generated by this shift in merchandise mix.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments  for  uncollected  sales  taxes,  our net sales for the three months
ended June 30,  2006 were  $16,793,000.  This  represents  an  increase of 39.6%
compared to the three  months ended June 30,  2005,  in which net sales  totaled
$12,029,000.  The  growth in net sales  resulted  from both an  increase  in the
number of new customers  acquired  (approximately  28% higher compared to second
quarter  2005) and an increase in average order size  (approximately  15% higher
compared to the second quarter 2005).  For the three months ended June 30, 2006,
revenue from shipping and handling  increases  approximately 16% to 1,005,000 in
2006 from 864,000 in 2005.

Cost of sales:  Cost of sales for the three  months  ended June 30, 2006 totaled
$9,747,000,  resulting in gross margin of approximately 42.0%. Cost of sales for
the three  months  ended June 30, 2005  totaled  $7,378,000,  resulting in gross
margin of 38.7%.  Gross  profit  increased by 51%, to  $7,046,000  for the three
months  ended June 30, 2006  compared to  $4,651,000  for the three months ended
June 30, 2005.  The growth in gross margin was primarily the result of increased
product  margins,  which was driven by a merchandising  strategy that focused on
negotiating  better  prices  with  vendors  as well as  selling  more  in-season
product.  In-season  merchandise  has more value to our  customers and therefore
demands higher margins.

Selling, marketing and fulfillment expenses:  Selling, marketing and fulfillment
expenses increased by approximately 37.1% in the second quarter of 2006 compared
to the second quarter of 2005. Selling,  marketing and fulfillment expenses were
comprised of the following:

<TABLE>
<CAPTION>
                                             As a %                                      As a %
                  Three Months Ended         of Net           Three Months Ended         of Net           Percentage Difference
                      June 30, 2006          Sales               June 30, 2005           Sales            increase (decrease)
                  ------------------    ------------------    ------------------    ------------------    ---------------------
<S>               <C>                                 <C>     <C>                                 <C>                        <C>
Marketing                  1,729,000                  10.3%            1,041,000                   8.7%                      66%
Operating                  1,949,000                  11.6%            1,504,000                  12.5%                      30%
Technology                 1,017,000                   6.0%              945,000                   7.8%                       8%
E-Commerce                   882,000                   5.3%              578,000                   4.8%                      53%
                  ------------------    ------------------    ------------------    ------------------    ---------------------
                  $        5,577,000                  33.2%   $        4,068,000                  33.8%                      37%
</TABLE>

As a percentage of net sales,  our selling,  marketing and fulfillment  expenses
decreased  slightly to 33.2% for the three months ended June 30, 2006 from 33.8%
for the three months ended June 30, 2005. This decrease was primarily related to
economies of scale in operating and  technology  expenses,  which were partially
offset by increases in advertising  spending from our  advertising  campaign and
the  recording of stock option  expenses as a result of our adoption of SFAS No.
123(R).

Of the $688,000 incremental  marketing costs in the second quarter 2006 compared
to 2005, approximately $261,000 related to the national advertising campaign and
$253,000 related to paid search. While this more aggressive growth strategy will
cause our  marketing  expense as a  percentage  of revenue  to  increase  in the
short-term,  we believe that it is a prudent  investment  in our business  given
that our improved  margin  structure  and average  order size have  historically
resulted in a relatively high positive  contribution to overhead on a customer's
first order.

Operating  expenses increased in the second quarter of 2006 by approximately 30%
compared to the second quarter of 2005 as a result of variable costs  associated
with the increased sales volume (e.g.,  picking and packing  orders,  processing
returns  and credit card  fees).  These  increases  were  partially  offset by a
decrease in credit card fees  attributed to a refund from one of our credit card
processors.

For the three  months  ended June 30,  2006,  technology  expenses  increased by
approximately 8% compared to the three months ended June 30, 2005. This increase
resulted from an increase in salary related expenses, including the expensing of
employee

                                       19
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

stock options in the current  year, as well as an increase in software  support.
This increase was offset partially by a decrease in depreciation and web hosting
expense.

For the three  months  ended June 30,  2006,  e-commerce  expenses  increased by
approximately 53% as compared to the three months ended June 30, 2005, primarily
due to an increase in salary related expenses as well as an increase in expenses
associated  with photo shoots and the result of recording  employee stock option
expenses in the current period.

General and administrative expenses: General and administrative expenses for the
three months ended June 30, 2006 increased by  approximately  101% to $3,223,000
as compared to $1,602,000 for the three months ended June 30, 2005. The increase
in general and administrative expenses was primarily the result of the recording
of $475,000 of expense  related to employee stock options in the current period,
an increase of $352,000 in bad debt expense  related to a receivable  due from a
third party service  provider that  purchases  inventory  from the Company to be
distributed  internationally,  increased  public company expenses of $83,000 and
increased  depreciation  expense of  $70,000.  In  addition,  the  Company  paid
approximately $650,000 in executive bonuses related to the financing that closed
in the second quarter of 2006. Most of these bonuses are included in general and
administrative expenses.

As a percentage of net sales, general and administrative expenses for the second
quarter  of 2006  increased  to  approximately  19.2%  from 13.3% for the second
quarter of 2005.

Loss from  operations:  Operating loss increased by 72% in the second quarter of
2006 to $1,754,000 from $1,019,000 in the second quarter of 2005 as the increase
in net sales and gross margin were more than offset by the incremental marketing
expenses and the recording of stock option  expenses as a result of the adoption
of SFAS No. 123(R).

Interest and other  income:  Other income for the second  quarter ended June 30,
2006  increased to $67,000 from  $29,000 for the second  quarter  ended June 30,
2005.  These  amounts  relate  primarily to interest  income  earned on our cash
balances.

Interest and other expense: Interest expense for the three months ended June 30,
2006 totaled $214,000,  compared to $179,000 for the three months ended June 30,
2005.  Interest  expense  relates  to fees paid in  connection  with our  Credit
Facility, as well as interest expense on the Notes.

LIQUIDITY AND CAPITAL RESOURCES

General

At June 30, 2006,  we had  approximately  $24.0  million in the form of cash and
cash  equivalents.  Working  capital at June 30, 2006 and 2005 was $37.4 million
and $12.3 million, respectively, and at December 31, 2005 was $17.9 million (the
June 30, 2005 amount excludes the approximately $1.26 million of restricted cash
that we regained access to upon  refinancing our previous credit  facility).  In
addition, as of June 30, 2006, we had approximately $2.8 million committed under
the  Credit  Facility,  leaving  approximately  $3.8  million  of  availability,
compared to  availability of $600,000 under our previous credit facility at June
30, 2005.

We fund our operations through cash on hand, operating cash flow, as well as the
proceeds  of any equity or debt  financing.  Operating  cash flow is affected by
revenue and gross margin levels,  as well as return rates, and any deterioration
in our performance on these  financial  measures would have a negative impact on
our liquidity.  Total  availability under the Credit Facility is based primarily
upon our  inventory  levels.  In addition,  both  availability  under the Credit
Facility and our operating  cash flows are affected by the payment terms that we
receive from suppliers and service providers,  and the extent to which suppliers
require us to request  Wells Fargo to provide  credit  support  under the Credit
Facility. We believe that our suppliers' decision-making with respect to payment
terms and/or the type of credit  support  requested  is largely  driven by their
perception of our credit rating,  which is affected by  information  reported in
the industry and financial  press and  elsewhere as to our  financial  strength.
Accordingly,  negative  perceptions  as to our financial  strength  could have a
negative impact on our liquidity.  In addition,  newer vendors  generally do not
provide  us with  payment  terms  that  are as  favorable  as  those we get from
existing  relationships  and,  in  some  instances,   new  vendors  may  require
prepayments.  We  have  increased  our  prepayments  in  order  to  open  up new
relationships and gain access to inventory that was not previously  available to
us,  as  well  as in  connection  with  our  advertising  campaign,  as in  some
circumstances  we need to pay in advance of production.  As of June 30, 2006, we
had approximately $615,000 of prepaid inventory on our balance sheet.

                                       20
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

In addition,  our inventory levels as of June 30, 2006 were  approximately  $6.5
million  higher  than at June 30,  2005.  The  increase in  inventory  generally
reflects a ramp up in connection with our sales growth as well as  opportunistic
buying of fresh inventory that has not previously been available to us. However,
the increased  inventory level could adversely  affect our flexibility in taking
advantage of other buying  opportunities  that may become  available in the near
term.

On June 15, 2006, we raised $50 million of additional  capital  through the sale
of 60,975,610  shares of our Common  Stock.  We used $25 million of the proceeds
from such sale to pay all accrued but unpaid  dividends on the  Preferred  Stock
converted by Soros in  connection  with such sale and to payoff the  convertible
promissory  notes held by Soros.  The  remaining  proceeds from the sale will be
used for general corporate purposes.

We believe  that our current  funds,  together  with  operating  cash flow,  and
availability  under our existing Credit Facility will be sufficient to enable us
to meet our planned expenditures through at least the next 12 months.

Credit Facility

In July 2005, we entered into a new three year  revolving  credit  facility with
Wells Fargo Retail Finance,  LLC.  Pursuant to the Credit Facility,  Wells Fargo
provides the Company with a revolving loan and issues letters of credit in favor
of suppliers or factors.  The Credit Facility is secured by a lien on all of the
Company's assets. Historically, the Credit Facility has also been secured by the
Soros LC. Subsequent to quarter end, Wells Fargo agreed to release the Soros LC.
Availability  under the Credit  Facility is  determined  by a formula that takes
into account the amount of the Company's inventory and accounts receivable.  The
maximum  availability  is  currently   $7,500,000,   but  can  be  increased  to
$12,500,000 at the Company's request, subject to certain conditions.  As of June
30, 2006, total availability  under the Credit Facility,  after giving effect to
the required $850,000  availability  reserve,  was  approximately  $6,650,000 of
which $2,859,000 was committed,  leaving approximately  $3,791,000 available for
further borrowings.  Subsequent to quarter end, Wells Fargo agreed that it would
no longer require the $850,000  availabilty  reserve,  although it has the right
under the  Credit  Facility  to  establish  reserves  in the  future as it deems
appropriate.

Interest  accrues  monthly on the average  daily  amount  outstanding  under the
Credit  Facility  during  the  preceding  month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. We also pay a monthly  commitment fee
on the unused portion of the facility (i.e., $7,500,000 less the amount of loans
outstanding)  equal to  0.35%.  We also pay  Wells  Fargo  certain  fees to open
letters  of credit  and  guarantees  in an amount  equal to a certain  specified
percentage  of the face amount of the letter of credit for each thirty (30) days
such letter of credit, or a portion thereof, remains open.

Under the terms of the Credit  Facility,  Soros has the right to purchase all of
our obligations from Wells Fargo at any time if we are then in default under the
Credit Facility.

Commitments and Long Term Obligations

As of June 30, 2006, we had the following commitments and long term obligations:

<TABLE>
<CAPTION>
                                            Less than         1-3            3-5         More than
                               Total          1 year         years          years         5 years
                            ------------   ------------   ------------   ------------   ------------
<S>                         <C>              <C>             <C>                   <C>            <C>
Marketing and Advertising   $  1,625,000      1,625,000             --             --             --
Purchase Orders             $ 10,062,000     10,062,000             --             --             --
Operating Leases            $  1,689,000        527,000      1,162,000             --             --
Capital Leases              $     40,000         40,000             --             --             --
Employment Contracts        $  2,317,000        980,000      1,337,000             --             --
                            ------------   ------------   ------------   ------------   ------------
     Grand total            $ 15,733,000     13,234,000      2,499,000             --             --
</TABLE>

We believe that in order to grow the business,  we will need to make  additional
marketing and advertising  commitments in the future. In addition,  we expect to
hire and train  additional  employees  for the  operations  and  development  of
Bluefly.com.  However,  our  marketing  budget  and our  ability  to  hire  such
employees is subject to a number of factors, including our results of operations
as well as the amount of additional capital that we raise.

                                       21
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

Off Balance Sheet Arrangements

Certain  warrants  issued in conjunction  with our preferred stock financing are
equity  linked  derivatives  and  accordingly  represent  an off  balance  sheet
arrangement.  Each of these warrants meet the scope exception in paragraph 11(a)
of FAS 133 and are  accordingly not accounted for as derivatives for purposes of
FAS 133, but instead included as a component of equity.

RECENT ACCOUNTING PRONOUNCEMENTS

In  July  2006,  the  Financial   Accounting  Standards  Board  ("FASB")  issued
Interpretation   No.  48,   "Accounting  for  Uncertainty  in  Income  Taxes--an
interpretation  of FASB  Statement  No. 109" ("FIN  48"),  which  clarifies  the
accounting for  uncertainty in tax positions.  This  Interpretation  requires an
entity to recognize the impact of a tax position in its financial  statements if
that  position  is more likely  than not to be  sustained  on audit based on the
technical  merits of the position.  The provisions of FIN 48 are effective as of
the beginning of fiscal year 2007,  with the cumulative  effect of the change in
accounting  principle  recorded as an adjustment to opening  retained  earnings.
Early application of FIN 48 is encouraged.  The Company is evaluating the timing
of its  adoption  of FIN 48 and  the  potential  effects  of  implementing  this
Interpretation on its financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have assessed our vulnerability to certain market risks,  including  interest
rate  risk  associated  with  financial  instruments  included  in cash and cash
equivalents  and our  notes  payable.  Due to the  short-term  nature  of  these
investments  we have  determined  that the risks  associated  with interest rate
fluctuations related to these financial  instruments do not pose a material risk
to us.

ITEM 4.  CONTROLS AND PROCEDURES.

As of the end of the  period  covered  by this  Form  10-Q,  we  carried  out an
evaluation,  under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the  effectiveness  of the design and operation of our  disclosure  controls and
procedures  (as defined in Exchange Act Rules  13a-15(e) and  15d-15(e)).  Based
upon that evaluation, our Chief Executive Officer along with our Chief Financial
Officer  concluded that our disclosure  controls and procedures are effective in
ensuring that information  required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded,  processed,  summarized  and
reported, within the time periods specified in the Commission's rules and forms.
There have been no changes in our internal control over financial reporting that
occurred  during the Company's most recent fiscal  quarter that have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report may include statements that constitute "forward-looking" statements,
usually  containing  the  words  "believe",   "project",  "expect",  or  similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently  involve risks and  uncertainties  that could cause actual results to
differ   materially  from  the   forward-looking   statements.   The  risks  and
uncertainties  are  detailed  from time to time in reports  filed by us with the
Securities and Exchange  Commission,  including  Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and  uncertainties  include,  but are not limited to, the following:
our  history  of losses  and  anticipated  future  losses;  the  success  of our
advertising  campaign;  risks associated with Soros,  Maverick and Prentice each
owning a significant  portion of our stock;  the  potential  failure to forecast
revenues and/or to make adjustments to our operating plans necessary as a result
of any failure to forecast  accurately;  unexpected  changes in fashion  trends;
cyclical variations in the apparel and e-commerce  markets;  the risk of default
by us under the Credit  Facility and the  consequences  that might arise from us
having granted a lien on  substantially  all of our assets under that agreement;
risks of litigation  for sale of  unauthentic  or damaged  goods and  litigation
risks related to sales in foreign countries; the dependence on third parties and
certain  relationships for certain services,  including our dependence on U.P.S.
(and the risks of a mail slowdown due to terrorist  activity) and our dependence
on our third-party web hosting, fulfillment and customer service centers; online
commerce  security  risks;  risks related to brand owners'  efforts to limit our
ability to purchase products  indirectly;  management of potential  growth;  the
competitive  nature of our  business  and the  potential  for  competitors  with
greater  resources to enter the business;  the availability of merchandise;  the
need to further  establish  brand name  recognition;  risks  associated with our
ability to handle  increased  traffic and/or  continued  improvements to our Web
site; rising return rates;  dependence upon executive personnel;  the successful
hiring and  retaining of new  personnel;  risks  associated  with  expanding our
operations; risks associated with potential infringement of other's intellectual
property;  the potential  inability to protect our  intellectual  property;  and
government  regulation and legal  uncertainties;  uncertainties  relating to the
imposition of sales tax on Internet sales.

                                       22
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

PART II  - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We currently and from time to time are involved in litigation  incidental to the
conduct of our business.  However, we are not party to any lawsuit or proceeding
which in the opinion of management is likely to have a material  adverse  effect
on us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In July  2006,  we  issued  1,000,000  shares  of  Common  Stock  to  Allen,  in
satisfaction  of $1,000,000 of the placement fee due to Allen in connection with
the June 2006  Financing.  The issuance of such Common  Stock was deemed  exempt
from the registration  provisions of the Securities Act of 1933, as amended (the
"Securities  Act"), by reason of the provision of Section 4(2) of the Securities
Act regarding Allen's status as an accredited  investor (as such term is defined
under Rule 501  promulgated  under the Securities  Act), and its  acquisition of
shares  of  Common  Stock  for  investment  and  not  with  a  current  view  to
distribution  thereof,  except as such  distribution  may be  permissible  under
applicable law. The certificates  representing the shares of Common Stock issued
in the  transaction  contain a legend to the  effect  that such  shares  are not
registered  under the Securities Act and may not be transferred  except pursuant
to a  registration  which  has  become  effective  under the  Securities  Act or
pursuant to an exemption from such registration.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 19, 2006, we held our annual meeting of stockholders. At the meeting, our
stockholders voted for six directors, electing Alan Kane, Melissa Payner-Gregor,
Barry Erdos,  Christopher G. McCann, Martin Miller and Ann Jackson as members of
our  board of  directors.  In  addition,  our  stockholders  voted in favor of a
proposal to approve an amendment to our certificate of incorporation to increase
the number of  authorized  shares of common  stock and in favor of a proposal to
approve certain anti-dilution  adjustment provisions of our Series F Convertible
Preferred Stock. The results of the voting were as follows:

PROPOSAL                                  VOTES FOR    VOTES WITHHELD
-------------------------------------    ----------   --------------
Election of Alan Kane                    69,162,678          294,370
Election of Melissa Payner-Gregor        69,380,648           76,400
Election of Barry Erdos                  69,166,825          290,223
Election of Christopher G. McCann        69,219,178          237,870
Election of Martin Miller                69,138,775          318,273
Election of Ann Jackson                  69,221,378          235,670

<TABLE>
<CAPTION>
                                                                        Abstentions and
                                         Votes For    Votes Against     Broker Non-Votes
                                         ----------   --------------    ----------------
<S>                                      <C>                 <C>              <C>
Approval of Charter Amendment            68,863,397          579,621              14,030
Approval of Certain Anti-Dilution
Adjustment Provisions to our Series
F Convertible Preferred Stock            58,191,361          853,758          10,411,929
</TABLE>

In addition to the directors  elected at the meeting,  Neal Moszkowski and David
Wassong were elected to the Board of Directors as the  designees of the Series A
Preferred  Stock and the Series B  Preferred  Stock,  respectively.  Information
regarding changes in the Board of Directors  subsequent to the annual meeting of
stockholders  is  described  in a  Current  Report  on Form 8K  filed  with  the
Securities and Exchange  Commission on August 2, 2006 which is  incorporated  by
reference herein.

                                       23
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

ITEM 6. EXHIBITS

The following is a list of exhibits filed as part of this Report:

EXHIBIT NUMBER                             DESCRIPTION
--------------   ---------------------------------------------------------------
10.1             Stock  Purchase  Agreement,  dated as of June 5,  2006,  by and
                 among  Bluefly,  Inc.,  Quantum  Industrial  Partners  LDC, SFM
                 Domestic  Investments,  LLC and  the  investors  listed  on the
                 signature pages attached  thereto (filed as Exhibit 10.1 to the
                 Current  Report on Form 8-K filed by  Bluefly,  Inc. on June 7,
                 2006).*

10.2             Form of Voting  Agreement by and among Bluefly,  Inc.,  Quantum
                 Industrial  Partners  LDC,  SFM  Domestic   Investments,   LLC,
                 Maverick Fund USA, Ltd.,  Maverick Fund, L.D.C.,  Maverick Fund
                 II, Ltd.  and  Prentice-Bluefly,  LLC (filed as Exhibit 10.2 to
                 the Current  Report on Form 8-K filed by Bluefly,  Inc. on June
                 7, 2006).*

10.3             Fee Letter,  dated June 5, 2006,  by and among  Bluefly,  Inc.,
                 Quantum Industrial  Partners LDC and SFM Domestic  Investments,
                 LLC (filed as Exhibit  10.3 to the  Current  Report on Form 8-K
                 filed by Bluefly, Inc. on June 7, 2006).*

10.4             Waiver Letter, dated June 5, 2006, by and between Bluefly, Inc.
                 and Wells Fargo Retail  Finance,  LLC (filed as Exhibit 10.4 to
                 the Current  Report on Form 8-K filed by Bluefly,  Inc. on June
                 7, 2006).*

31.1             Certification Pursuant to Rule 13a-14(a)/15d-14(a)

31.2             Certification Pursuant to Rule 13a-14(a)/15d-14(a)

32.1             Certification  Pursuant to 18 U.S.C.  Section  1350, as Adopted
                 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2             Certification  Pursuant to 18 U.S.C.  Section  1350, as Adopted
                 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed; incorporated herein by reference.

                                       24
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2006

                                   SIGNATURES

In accordance with the requirements of the Securities  Exchange Act of 1934, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                                   BLUEFLY, INC.


                                                   By: /s/ Melissa Payner-Gregor
                                                       -------------------------
                                                       Melissa Payner-Gregor
                                                       Chief Executive Officer


                                                   By: /s/ Patrick C. Barry
                                                       -------------------------
                                                       Patrick C. Barry
                                                       Chief Financial Officer

August 4, 2006

                                       25