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

                                  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 September 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
      incorporation or organization)                Identification No.)

       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" and "large  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 November 10, 2006, the issuer had outstanding 129,248,990 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 September 30, 2006 (unaudited)
         and December 31, 2005                                                3

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

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

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

         Condensed Statements of Cash Flows for the nine months ended
         September 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                                           15

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          23

Item 4.  Controls and Procedures                                             23

Part II. Other Information                                                   24

Item 1.  Legal Proceedings                                                   24

Item 5.  Other Information                                                   24

Item 6.  Exhibits                                                            26

Signatures                                                                   27

                                        2
<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

                                  BLUEFLY, INC.
                      CONDENSED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,    DECEMBER 31,
                                                                                          2006             2005
                                                                                     --------------   --------------
<S>                                                                                  <C>              <C>
                                      ASSETS
Current assets
    Cash and cash equivalents                                                        $   17,055,000   $    9,408,000
    Inventories, net                                                                     26,777,000       16,893,000
    Accounts receivable, net of allowance for doubtful accounts                           2,889,000        1,717,000
    Prepaid inventory                                                                     1,111,000          485,000
    Prepaid expenses                                                                      2,293,000          915,000
    Other current assets                                                                    352,000          419,000
                                                                                     --------------   --------------
          Total current assets                                                           50,477,000       29,837,000

Property and equipment, net                                                               2,664,000        2,895,000

Other assets                                                                                266,000          313,000
                                                                                     --------------   --------------
          Total assets                                                               $   53,407,000   $   33,045,000
                                                                                     ==============   ==============
Current liabilities
    Accounts payable                                                                 $    6,625,000   $    5,662,000
    Allowance for sales returns                                                           3,563,000        3,407,000
    Accrued expenses and other current liabilities                                        2,017,000        1,083,000
    Deferred revenue                                                                      2,494,000        1,784,000
                                                                                     --------------   --------------
          Total current liabilities                                                      14,699,000       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                                                          $   14,699,000   $   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 September 30, 2006 and
     December 31, 2005, respectively (liquidation preference: $0 as of
     September 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 September 30, 2006 and
     December 31, 2005, respectively (liquidation preference: $0 as of
     September 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 September 30, 2006 and
     December 31, 2005, respectively (liquidation preference: $0 as of
     September 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 September 30, 2006 and
     December 31, 2005, respectively (liquidation preference: $0 as of
     September 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 September 30, 2006 and
     December 31, 2005, respectively (liquidation preference: $0 as of
     September 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 September 30, 2006 and
     December 31, 2005, respectively (liquidation preference: $857,000 plus
     accrued dividends of  $77,000 as of September 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 September 30, 2006 and December 31, 2005, respectively, and
     129,248,990 and 19,059,166 shares issued and outstanding as of
     September 30, 2006 and December 31, 2005, respectively                               1,292,000          191,000
    Additional paid-in capital                                                          149,870,000      115,527,000
    Accumulated deficit                                                                (112,454,000)     (99,947,000)
                                                                                     --------------   --------------
          Total shareholders' equity                                                     38,708,000       15,865,000
                                                                                     --------------   --------------
          Total liabilities and shareholders' equity                                 $   53,407,000   $   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)

                                                       NINE MONTHS ENDED
                                                         SEPTEMBER 30,
                                                  ----------------------------
                                                      2006           2005
                                                  -------------  -------------
Net sales                                         $  49,991,000  $  37,576,000
Cost of sales                                        29,995,000     23,465,000
                                                  -------------  -------------
  Gross profit                                       19,996,000     14,111,000

Selling, marketing and fulfillment expenses          20,408,000     12,671,000
General and administrative expenses                   8,019,000      4,716,000
                                                  -------------  -------------
  Total operating expenses                           28,427,000     17,387,000

Operating loss                                       (8,431,000)    (3,276,000)

Interest and other income                               311,000        134,000
Interest and other expense                             (530,000)      (623,000)
                                                  -------------  -------------
Net loss                                          $  (8,650,000) $  (3,765,000)

Preferred stock dividends                            (2,237,000)    (3,671,000)

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

Net loss available to common shareholders         $ (14,744,000) $  (7,436,000)
                                                  =============  =============

Basic and diluted loss per common share           $       (0.23) $       (0.48)
                                                  =============  =============

Weighted average common shares outstanding
(basic and diluted)                                  63,612,059     15,516,454
                                                  =============  =============

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

                                        4
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                       THREE MONTHS ENDED
                                                          SEPTEMBER 30,
                                                  ----------------------------
                                                      2006           2005
                                                  -------------  -------------
Net sales                                         $  16,322,000  $  12,045,000
Cost of sales                                        10,211,000      7,470,000
                                                  -------------  -------------
  Gross profit                                        6,111,000      4,575,000

Selling, marketing and fulfillment expenses           7,367,000      4,568,000
General and administrative expenses                   2,369,000      1,528,000
                                                  -------------  -------------
  Total operating expenses                            9,736,000      6,096,000

Operating loss                                       (3,625,000)    (1,521,000)

Interest and other income                               199,000         65,000
Interest and other expense                              (59,000)      (247,000)
                                                  -------------  -------------

Net loss                                          $  (3,485,000) $  (1,703,000)

Preferred stock dividends                               (16,000)    (1,387,000)

Net loss available to common shareholders         $  (3,501,000) $  (3,090,000)
                                                  =============  =============

Basic and diluted loss per common share           $       (0.03) $       (0.20)
                                                  =============  =============

Weighted average common shares outstanding
(basic and diluted)                                 129,007,488     15,823,602
                                                  =============  =============

     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 NINE MONTHS ENDED SEPTEMBER 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 OF                       NUMBER OF                       NUMBER 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)                                --              --              --              --              --              --

Issuance of Common Stock                        --              --              --              --              --

Warrants Issued to Third-Party                  --              --              --              --              --              --

Dividends Paid                                  --              --              --              --              --              --

Deemed Dividend related to
 beneficial conversion feature on               --              --              --              --              --              --

  Series F Preferred Stock                      --              --              --              --              --              --

Exercise of Employee Options                    --              --              --              --              --              --

Net Loss                                        --              --              --              --              --              --
                                        ------------    ------------    ------------    ------------    ------------    ------------
Balance at September 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 OF                      NUMBER OF                      NUMBER 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
 Converted into Common Stock                    (823)   $       --             --              --             --              --

Shares Of Series F Preferred Stock
 Converted into Common Stock                    --              --             --              --           (1,720)   $       --

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)                                --              --             --              --             --              --

Issuance of Common Stock                        --              --             --              --             --              --

Warrants Issued to Third-Party                  --              --             --              --             --              --

Dividends Paid                                  --              --             --              --             --              --

Deemed Dividend related to
 beneficial conversion feature on               --              --             --              --             --              --

  Series F Preferred Stock                      --              --             --              --             --              --

Exercise of Employee Options                    --              --             --              --

Net Loss                                        --              --             --              --             --              --
                                        ------------    ------------   ------------    ------------   ------------    ------------
Balance at September 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 net of expenses
 of $249,000)                                   --             --         6,751,000            --         6,751,000

Shares Of Series D Preferred Stock
 Converted into Common Stock               1,454,645         15,000         (15,000)           --              --

Shares Of Series F Preferred Stock
 Converted into Common Stock                 765,481          8,000          (8,000)           --              --

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                                 --             --         1,820,000            --         1,820,000

Sale of Common Stock                            --             --              --              --              --
  (net of expenses of approximately
   $2.0 million)                          60,975,610        610,000      47,392,000            --        48,002,000

Issuance of Common Stock                   1,000,000         10,000       1,070,000            --         1,080,000

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                      --             --              --              --              --

Exercise of Employee Options                  43,330           --            36,000            --            36,000

Net Loss                                        --             --              --        (8,650,000)     (8,650,000)
                                        ------------   ------------    ------------    ------------    ------------
Balance at September 30, 2006            129,248,990   $  1,292,000    $149,870,000    $(112,454,000)  $ 38,708,000
                                        ------------   ------------    ------------    ------------    ------------
</TABLE>

                                        6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                            --------------------------------
                                                                 2006              2005
                                                            --------------    --------------
<S>                                                         <C>               <C>
Cash flows from operating activities
  Net loss                                                  $   (8,650,000)   $   (3,765,000)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
    Depreciation and amortization                                1,125,000           930,000
    Stock options expense                                        1,820,000            35,000
    Warrant issued to consultant                                    67,000                --
    Provisions for returns                                         156,000           309,000
    Bad debt expense                                               533,000           199,000
    Reserve for inventory obsolescence                             890,000           623,000
    Warrant issued to supplier                                     147,000           215,000
    Changes in operating assets and liabilities:
     (Increase) decrease in
      Inventories                                              (10,921,000)       (5,096,000)
      Accounts receivable                                       (1,705,000)         (933,000)
      Prepaid inventory                                           (626,000)         (352,000)
      Prepaid expenses                                          (1,378,000)         (996,000)
      Other current assets                                          67,000           434,000
      Other assets                                                      --          (187,000)
 Increase (decrease) in
      Accounts payable                                             963,000           274,000
      Accrued expenses and other current liabilities             2,027,000          (284,000)
      Interest payable to related party shareholders               271,000           409,000
      Deferred revenue                                             710,000           266,000
                                                            --------------    --------------
Net cash used in operating activities                          (14,504,000)       (7,919,000)
                                                            --------------    --------------

Cash flows from investing activities
   Cash collateral in connection with Rosenthal
    Pledge Agreement                                                    --         1,250,000
   Purchase of property and equipment                             (847,000)       (2,011,000)
                                                            --------------    --------------
Net cash used in investing activities                             (847,000)         (761,000)
                                                            --------------    --------------

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                       36,000           502,000
  Payments of capital lease obligation                             (40,000)         (139,000)
  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                     22,998,000         7,115,000
                                                            --------------    --------------

Net increase in cash and cash equivalents                        7,647,000        (1,565,000)
Cash and cash equivalents - beginning of period                  9,408,000         6,685,000
                                                            --------------    --------------
Cash and cash equivalents - end of period                   $   17,055,000    $    5,120,000
                                                            ==============    ==============

Supplemental schedule of non-cash investing and
 financing activities:
Cash paid for interest                                      $      116,000    $      120,000
                                                            ==============    ==============
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                        $    3,857,000                --
                                                            ==============    ==============
Issuance of Common Stock to placement agent                 $    1,080,000                --
                                                            ==============    ==============
Conversion of Preferred Stock to Common Stock               $     (387,000)               --
                                                            ==============    ==============
</TABLE>

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

                                        7
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
                               SEPTEMBER 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 were $50 million,  almost half of which was
purchased by each of Maverick  and  Prentice.  The  purchase  price of $0.82 per
share represented 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.  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.

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

                                        8
<PAGE>

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

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 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 Registration  Statement has
since been filed and declared effective.

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 had also been secured by a $2,000,000
letter of credit  issued by Soros in favor of Wells Fargo (the "Soros  LC").  In
August  2006,  Wells Fargo  agreed to release the Soros LC, and that it would no
longer  require an  availability  reserve  (although  it has the right under the
Credit Facility to establish  reserves in the future, as it deems  appropriate).
In return,  the Company agreed to maintain a minimum cash balance of $5,000,000.
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
September  30,  2006,   total   availability   under  the  Credit  Facility  was
approximately   $7,500,000,   of  which   $3,200,000  was   committed,   leaving
approximately $4,300,000 available for further borrowings.

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  September  30, 2006,  the Company  incurred  approximately
$25,000 in connection with these fees.

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:

                                        9
<PAGE>

<TABLE>
<CAPTION>
     Security         September 30, 2006    Exercise Prices      September 30, 2005       Exercise Prices
-------------------   ------------------   ------------------    ------------------      ------------------
<S>                            <C>          <C>                          <C>                <C>
Options                        8,007,910    $ 0.80 - $16.47               9,054,230         $ 0.69 - $16.47
Warrants                       1,945,893     $0.78 - $ 3.96               1,933,393         $ 0.78 - $3.96
Preferred Stock                       --(1)                              45,678,675(1)
Convertible Notes                     --                                          --(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
          September  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  September  30,  2005,  such  debt  was  not
          convertible  into Common Stock.  In June 2006, all of the  convertible
          notes were repaid.

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 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 nine months ended September 30,
2006 is $597,000 and $1,820,000, 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 Q3 2006 reported  amounts  relative to amounts that
would  have been  reported  using the  intrinsic  value  method  under  previous
accounting. As a

                                       10
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
                               SEPTEMBER 30, 2006

result of adopting SFAS No.  123(R),  the Company's  operating loss and net loss
for the  three  and nine  months  ended  September  30,  2006 was  $597,000  and
$1,820,000  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 nine  months  ended  September  30, 2006 would have been $0.01 and
$0.03 per share,  lower,  respectively,  if the  Company  had not  adopted  SFAS
No.123(R). There was no effect on the Company's operating cash flows.

The following  table  illustrates the effect on net loss and net loss per common
share  applicable  to common  stockholders  for the three and nine months  ended
September  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 ENDED   NINE MONTHS ENDED
                                              SEPTEMBER 30, 2005   SEPTEMBER 30, 2005
                                              ------------------   ------------------
<S>                                           <C>                  <C>
Net loss, as reported                         $       (1,703,000)  $       (3,765,000)

Deduct: total stock based compensation
 expense determined under fair value based
 methods for all awards                                 (734,000)          (2,148,000)
Add: Stock-based employee compensation
 expense included in net loss                              8,000               35,000
Adjusted for Preferred Stock Dividends                (1,387,000)          (3,671,000)

Pro forma net loss applicable to common
 shareholders                                         (3,816,000)          (9,549,000)

Net Loss per share applicable to common
 shareholders:
  Basic and diluted, as reported              $            (0.20)  $            (0.48)
  Basic and diluted, pro forma                $            (0.24)  $            (0.62)
</TABLE>

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 nine months ended  September 30, 2006 and
2005, respectively.

                                       11
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
                               SEPTEMBER 30, 2006

<TABLE>
<CAPTION>
                                       THREE MONTHS         NINE MONTHS          THREE MONTHS         NINE MONTHS
                                          ENDED                ENDED                ENDED                ENDED
                                      SEPTEMBER 30,        SEPTEMBER 30,        SEPTEMBER 30,        SEPTEMBER 30,
                                           2006                 2006                 2005                 2005
                                    ------------------   ------------------   ------------------   ------------------
<S>                                               <C>                  <C>                  <C>                  <C>
Expected holding period (years)                    6.0                  6.0                  6.0                  6.0

Risk-free interest rate                           4.95%                4.79%                4.11%                4.26%

Dividend yield                                    0.00%                0.00%                0.00%                0.00%

Volatility                                         107%                 108%                 128%                 132%
</TABLE>

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

                                                  NUMBER          WEIGHTED
                                                    OF            AVERAGE
                                                  SHARES       EXERCISE PRICE
                                              --------------   --------------
Balance at December 31, 2005                       8,038,528   $         1.97
                                              --------------

Options granted                                      161,000   $         1.11
Options canceled                                    (148,288)  $         1.92

Options exercised                                    (43,330)  $         0.82
                                              --------------
Balance at September 30, 2006                      8,007,910   $         1.96

Eligible for exercise at December 31, 2005         4,969,929   $         2.15
Eligible for exercise at September 30, 2006        6,152,047   $         2.07

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

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                     ------------------------------------------------------------   ---------------------------
                                                       WEIGHTED        WEIGHTED                      WEIGHTED
     RANGE OF                                          AVERAGE         AVERAGE                       AVERAGE
     EXERCISE                                         REMAINING        EXERCISE       OPTIONS        EXERCISE
      PRICES            VESTED        UNVESTED     CONTRACTUAL LIFE     PRICE       EXERCISABLE       PRICE
------------------   ------------   ------------   ----------------  ------------   ------------   ------------
<S>                     <C>            <C>            <C>            <C>               <C>         <C>
  $0.00 -  $1.66        3,881,647      1,138,103      7.0 Years      $       1.23      3,881,647   $       1.22

  $1.66 -  $3.32        1,951,035        691,477      6.8 Years      $       2.33      1,951,035   $       2.43

  $3.32 -  $4.98           54,965         26,283      6.8 Years      $       3.92         54,965   $       3.92

  $4.98 -  $6.64           22,250              -      2.2 Years      $       5.11         22,250   $       5.11

  $6.64 -  $9.96           52,750              -      2.9 Years      $       9.17         52,750   $       9.17

  $9.96 - $11.62          104,250              -      3.2 Years      $      11.20        104,250   $      11.20

 $11.62 - $14.94            6,250              -      3.2 Years      $      14.04          6,250   $      14.04

 $14.94 - $16.60           78,900              -      2.3 Years      $      15.13         78,900   $      15.13

  $0.69 - $16.60        6,152,047      1,855,863      6.8 Years      $       1.96      6,152,047   $       2.07
</TABLE>

                                       12
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
                               SEPTEMBER 30, 2006

The total fair value of the 311,424  options that vested  during the quarter and
the  1,182,118  options that vested  during the nine months ended  September 30,
2006 was  approximately  $467,000  and  $1,820,000,  respectively.  The weighted
average fair value of the options  granted  during the quarter was $0.86 and was
$0.95 for the nine months ended  September 30, 2006. At September 30, 2006,  the
aggregate  intrinsic  value of the fully  vested  options was  $148,000  and the
weighted  average  remaining  contractual life of the options was 6.3 years. The
Company has not capitalized any compensation  cost, or modified any of its stock
option  grants  during the first three  quarters of 2006.  Approximately  43,330
options with an intrinsic value of approximately  $7,000,  were exercised during
the quarter.  No cash was used to settle  equity  instruments  granted under the
Plans during the third quarter of 2006

As of September  30, 2006,  the total  compensation  cost related to  non-vested
awards not yet recognized was $2.5 million.  Total compensation cost is expected
to be recognized over 2 years on a weighted average basis.

NOTE 7 - RECENT ACCOUNTING PRONOUNCEMNTS

In September 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 157,  Fair Value  Measurements  ("SFAS  157"),  which defines fair
value,  establishes a framework for measuring  fair value in generally  accepted
accounting  principles,  and expands  disclosures about fair value measurements.
This  Statement is effective  for financial  statements  issued for fiscal years
beginning  after  November 15,  2007,  and interim  periods  within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial  statements for that fiscal year,  including  financial
statements  for an interim  period  within  that  fiscal  year.  The  Company is
evaluating  the  effects  of  adopting  SFAS No.  157,  and does not  expect the
adoption to have a material impact on its results of operations.

In July 2006, the 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  potential  effects of  implementing  this  Interpretation  on its financial
condition and results of operations.

NOTE 8 - SUBSEQUENT EVENTS

The Payner Agreement

On  November  14,  2006,  the  Company  entered  into a  thirty-six  (36)  month
employment  agreement  (the  "Payner  Agreement")  with  Melissa   Payner-Gregor
providing for her continued  service as our Chief Executive Officer and a member
of our Board of Directors.  The Payner Agreement is effective as of July 1, 2006
and replaces Ms.  Payner-Gregor's prior employment  agreement,  which would have
expired  on March 1, 2007.  Under the Payner  Agreement,  Ms.  Payner-Gregor  is
entitled to an annual base salary of $500,000,  subject to increases in the sole
discretion  of  the  Compensation  Committee  of the  Board  of  Directors  (the
"Compensation Committee"). She is also eligible to receive an annual performance
bonus based upon the  achievement  of certain  targets to be set for each fiscal
year by the Compensation Committee in its sole discretion.  The Payner Agreement
provides for the grant to Ms.  Payner-Gregor  of: (i) a  restricted  stock award
under our 2005 Stock  Incentive  Plan (the  "Plan")  for  591,256  shares of its
common stock,  par value $.01 per share ("Common  Stock"),  plus a cash bonus of
approximately  $394,686  intended to compensate her for the income taxes payable
on such restricted stock award, in exchange for Ms. Payner-Gregor forfeiting her
right to certain fully vested and out-of-the-money stock options that would have
been  exercisable to purchase an aggregate of 1,665,220  shares of Common Stock,
(ii) a deferred  stock unit award  under the Plan for and  representing  126,904
underlying shares of Common Stock, in exchange for Ms. Payner-Gregor  forfeiting
her right to certain unvested and out-of-the-money stock options that would have
been exercisable to purchase an aggregate of 234,780 shares of Common Stock, and
(iii)  subject  to  the  approval  of  the  Company's  stockholders  of  certain
amendments  to the Plan,  a deferred  stock  unit  award  under the Plan for and
representing  4,201,832  shares of Common Stock.  The foregoing  equity  awards,
together with stock options previously granted to Ms.  Payner-Gregor,  represent
approximately 4% of the Company's equity,  inclusive of management equity awards
and stock  options.  The  restricted  stock award  referred to in the  foregoing
clause (i) shall vest in full on  January  1,  2007.  A portion of the  deferred
stock unit awards referred to in the foregoing clauses (ii) and

                                       13
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
                               SEPTEMBER 30, 2006

(iii) vest over a one-year period,  with the remainder vesting over either a two
or three year period. If Ms.  Payner-Gregor's  employment is terminated  without
cause (as defined in the Payner Agreement) or through a constructive termination
(as defined in the Payner Agreement),  all equity benefits  previously  granted,
including stock options,  restricted stock awards and deferred stock unit awards
shall be deemed  fully  vested as of the date of  termination,  and she would be
entitled  to receive  her base  salary  through  the date of  termination,  plus
unreimbursed business expenses and bonuses that have been earned and awarded but
not yet paid,  as well as her  then-current  base  salary for a period of twelve
(12) months from the date of termination  and the  reimbursement  of the cost of
maintaining  (or the Company  shall  maintain)  in effect the medical and dental
insurance,  disability and hospitalization plans, and life insurance policies in
which Ms.  Payner-Gregor  participates for a period of one-year from the date of
termination.  In the event of a change of  control  (as  defined  in the  Payner
Agreement), any unvested stock options,  restricted stock awards and one-half of
any  deferred  stock  unit  awards  granted  to  Ms.   Payner-Gregor  which  are
outstanding as of the date of the change of control and have not yet vested (the
"Payner COC  Unvested  DSUs") shall be deemed fully vested as of the date of the
change of control.  The remaining one-half of the Payner COC Unvested DSUs shall
vest on the earliest to occur of: (a) the scheduled  vesting date and (b) twelve
(12)  months  from the date of the  change of  control.  In the  event  that Ms.
Payner-Gregor would be subject to tax under Section 4999 of the Internal Revenue
Code of 1986,  as amended  (the  "Code"),  the  payments to her under the Payner
Agreement will be reduced to the maximum  amount that she could receive  without
being subject to such tax. The Payner Agreement provides Ms.  Payner-Gregor with
a monthly housing  allowance of $4,000 and an annual  allowance of approximately
$27,500  for  life  insurance  and  supplemental   disability   insurance.   Ms.
Payner-Gregor  is  subject  to certain  covenants  under the  Payner  Agreement,
including a non-competition  covenant covering the term of her employment and an
additional period of eighteen (18) months thereafter.

The Barry Agreement

On  November  14,  2006,  the  Company  entered  into a  thirty-six  (36)  month
employment agreement (the "Barry Agreement") with Patrick C. Barry providing for
Mr. Barry's continued service as our Chief Operating Officer and Chief Financial
Officer.  The Barry  Agreement  is effective as of July 1, 2006 and replaces his
prior one-year evergreen employment  agreement.  Under the Barry Agreement,  Mr.
Barry is entitled to an annual base salary of $350,000,  subject to increases in
the sole discretion of the Compensation Committee. Mr. Barry is also eligible to
receive  an annual  performance  bonus  based  upon the  achievement  of certain
targets to be set for each fiscal year by the Compensation Committee in its sole
discretion.  The Barry  Agreement  provides for the grant to Mr. Barry of: (i) a
restricted stock award under the Plan for 269,965 shares of Common Stock, plus a
cash bonus of approximately  $123,204  intended to compensate him for the income
taxes  payable  on such  restricted  stock  award,  in  exchange  for Mr.  Barry
forfeiting his right to certain fully vested and out-of-the-money  stock options
that would have been  exercisable  to purchase an aggregate of 853,238 shares of
Common  Stock,  (ii) a  deferred  stock  unit  award  under  the  Plan  for  and
representing 45,837 underlying shares of Common Stock, in exchange for Mr. Barry
forfeiting his right to certain unvested and out-of-the-money stock options that
would have been  exercisable to purchase an aggregate of 91,674 shares of Common
Stock,  and (iii)  subject to the  approval  of the  Company's  stockholders  of
certain  amendments to the Plan, a deferred  stock unit award under the Plan for
and representing  4,062,692 shares of Common Stock. The foregoing equity awards,
together  with  stock  options  previously  granted  to  Mr.  Barry,   represent
approximately 4% of the Company's equity,  inclusive of management equity awards
and stock  options.  The  restricted  stock award  referred to in the  foregoing
clause (i) shall vest in full on  January  1,  2007.  A portion of the  deferred
stock unit awards referred to in the foregoing  clauses (ii) and (iii) vest over
a one-year  period,  with the remainder  vesting over either a two or three year
period. If Mr. Barry's employment is terminated without cause (as defined in the
Barry Agreement) or through a constructive  termination (as defined in the Barry
Agreement),  all equity benefits  previously  granted,  including stock options,
restricted  stock  awards and  deferred  stock unit awards shall be deemed fully
vested as of the date of  termination,  and he would be  entitled to receive his
base salary through the date of termination, plus unreimbursed business expenses
and bonuses  that have been earned and awarded but not yet paid,  as well as his
then-current  base  salary  for a  period  of nine (9)  months  from the date of
termination  and the  reimbursement  of the cost of maintaining  (or the Company
shall  maintain)  in effect the medical  and dental  insurance,  disability  and
hospitalization   plans,  and  life  insurance   policies  in  which  Mr.  Barry
participates for a period of one-year from the date of termination. In the event
of a change of control (as defined in the Barry  Agreement),  any unvested stock
options,  restricted stock awards and one-half of any deferred stock unit awards
granted  to Mr.  Barry  which are  outstanding  as of the date of the  change of
control and have not yet vested (the "Barry COC Unvested  DSUs") shall be deemed
fully vested as of the date of the change of control.  The remaining one-half of
the Barry COC  Unvested  DSUs  shall vest on the  earliest  to occur of: (a) the
scheduled vesting date and (b) twelve (12) months from the date of the change of
control.  In the event that Mr. Barry would be subject to tax under Section 4999
of the Code,  the payments to him under the Barry  Agreement  will be reduced to
the maximum amount that he could receive

                                       14
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS - UNAUDITED
                               SEPTEMBER 30, 2006

without  being  subject  to such tax.  The Barry  Agreement  contains  an annual
allowance  of   approximately   $17,500  for  life  insurance  and  supplemental
disability insurance.  Mr. Barry is subject to certain covenants under the Barry
Agreement,  including  a  non-competition  covenant  covering  the  term  of his
employment and an additional period of eighteen (18) months thereafter.

Compensation Expense under SFAS No. 123(R)

The equity  awards under the Payner  Agreement and the Barry  Agreement  will be
accounted for in accordance with the Company's stock based  compensation  policy
in  accordance  with SFAS No.  123(R) over the three year vesting  period of the
awards.

NASDAQ COMPLIANCE

On November 9, 2006, the Company was notified by Nasdaq Staff that it was not in
compliance with the continued listing requirements for the Nasdaq Capital Market
because  shares of its Common  Stock had closed at a per share bid price of less
than $1.00 for at least 30 trading days.  Under Nasdaq rules,  the Company has a
180-day grace period to regain compliance,  which extends to May 8, 2007. If the
Company  is unable to regain  compliance  by such date,  the  Nasdaq  Staff will
determine  whether it meets the initial  listing  criteria of the Nasdaq Capital
Market.  In the event that the Company meets such initial listing  criteria,  it
will be granted an  additional  180-day  grace period to regain  compliance.  In
order to regain compliance,  shares of its Common Stock would need to close at a
price of $1.00 or more for at least ten  consecutive  trading days. In the event
that it does not regain compliance within the requisite time period, the Company
intends to appeal any delisting.  However, no assurance can be provided that any
such appeal will be  successful.  The failure to maintain  listing on the Nasdaq
Capital Market may have an adverse  effect on the price and/or  liquidity of the
Company's Common Stock.

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 21%,
while our gross margin  percentage has increased from 21.3% in the third quarter
of 2003 to 37.4% in the third quarter of 2006.

The  increase  in our  margin  and sales  over the past few years 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 at the current levels.

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 36% to $16,322,000 for the three months
ended  September 30, 2006 from  $12,045,000 for the three months ended September
30,  2005.  Our gross  margin  decreased  slightly to 37.4% for the three months
ended  September  30, 2006 from 38.0% for the three months ended  September  30,
2005,  but was still  above our  levels  of 34.2%  for the  three  months  ended
September 30, 2004 and 21.3% for the three months ended  September 30, 2003. Our
gross profit increased by 34% to $6,111,000 for the three months ended September
30, 2006 from  $4,575,000  for the three months ended  September 30, 2005.  This
growth in gross  profit was driven by the increase in net sales.  Our  operating
loss  increased by

                                       15
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

138% to  $3,625,000  for  the  three  months  ended  September  30,  2006,  from
$1,521,000  for the three months ended  September  30, 2005.  This  increase was
primarily a result of the increased marketing  expenditures in the third quarter
of 2006and the inclusion of stock option expenses as a result of the adoption of
SFAS No. 123(R).

We increased our spending in marketing  (excluding  staff related costs) by 115%
to  $3,104,000  for the third  quarter of 2006,  from  $1,442,000  for the third
quarter 2005. The primary goal of our marketing campaign is to create awareness,
both with new customers as well as with our existing  customers.  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.

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 $597,000  for the three months ended  September  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 $726,000 would have been recorded for the
three months ended September 30, 2005, in accordance with SFAS No.123.

Our reserve for returns and credit card chargebacks  increased to 40.4% of gross
sales for the third  quarter  2006  compared  to 39.4% for the third  quarter of
2005. The increase was primarily  caused by an increase in average order size as
well as a shift in our merchandise mix.  However,  we believe that this increase
in return rates has been more than offset by the higher gross margin dollars 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 September 30, 2006, we had an accumulated  deficit of  $112,454,000.  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

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".

                                       16
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

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.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED  SEPTEMBER  30, 2006 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2005

The following  table sets forth our statement of operations  data,  for the nine
months ended September 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                                       $  49,991       100.0%      37,576       100.0%   $  29,284       100.0%
Cost of sales                                      29,995        60.0%      23,465        62.4%      18,729        64.0%
                                                ---------                ---------                ---------
         Gross profit                              19,996        40.0%      14,111        37.6%      10,555        36.0%

Selling, marketing and fulfillment expenses        20,408        40.8%      12,671        33.7%       9,718        33.2%
General and administrative expenses                 8,019        16.1%       4,716        12.6%       4,882        16.7%
                                                ---------                ---------                ---------
         Total operating expenses                  28,427        56.9%      17,387        46.3%      14,600        49.9%

Operating loss                                     (8,431)      (16.9)%     (3,276)       (8.7)%     (4,045)      (13.9)%
Interest (expense) and other income                  (219)       (0.4)%       (489)       (1.3)%        247         0.9%
                                                ---------                ---------                ---------
         Net loss                                  (8,650)      (17.3)%     (3,765)      (10.0)%     (3,798)      (13.0)%
</TABLE>

                                       17
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

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 nine months ended September 30th, as indicated below:

<TABLE>
<CAPTION>
                                                          2006         2005         2004
                                                       ----------   ----------   ----------
<S>                                                    <C>          <C>          <C>
Average Order Size (including shipping & handling)     $  250.65    $   214.07   $   185.83
New Customers Added during the Period                     112,457       95,088       84,605
</TABLE>

Net sales: Gross sales for the nine months ended September 30, 2006 increased by
approximately  37% to  $83,483,000  from  $61,092,000  for the nine months ended
September 30, 2005. For the nine months ended  September 30, 2006, we recorded a
provision  for  returns  and credit  card  chargebacks  and other  discounts  of
$33,492,000,  or  approximately  40.1% of gross sales. For the nine months ended
September 30, 2005,  the provision for returns and credit card  chargebacks  and
other discounts was  $23,516,000,  or  approximately  38.5% 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.  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 nine months ended
September   30,  2006  were   $49,991,000.   This   represents  an  increase  of
approximately  33.0%  compared to the nine months ended  September  30, 2005, in
which net sales totaled $37,576,000.  The growth in net sales resulted from both
an increase in the number of new customers acquired (over 18% higher compared to
the first nine months of 2005) and an  increase in average  order size (over 17%
higher  compared  to the first nine months of 2005).  For the nine months  ended
September 30, 2006, revenue from shipping and handling (which is included in net
sales) increased approximately 10% in 2006 to $2,909,000 from $2,645,000 for the
nine months ended 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 nine months ended  September 30, 2006
totaled  $29,995,000,  resulting in gross margin of approximately 40.0%. Cost of
sales  for the  nine  months  ended  September  30,  2005  totaled  $23,465,000,
resulting in gross margin of 37.6%. Gross profit increased by approximately 42%,
to  $19,996,000  for the nine  months  ended  September  30,  2006  compared  to
$14,111,000  for the nine months ended  September 30, 2005.  The growth in gross
margin was primarily the result of increased  product margins,  which was driven
by the  continuing  success  of our  merchandising  strategy,  which  focuses 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
commands higher margins.

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

<TABLE>
<CAPTION>
               Nine Months Ended     As a % of    Nine Months Ended     As a % of    Percentage Difference
               September 30, 2006    Net Sales    September 30, 2005    Net Sales     increase (decrease)
               ------------------    ---------    ------------------    ---------    ---------------------
<S>            <C>                        <C>     <C>                        <C>                       <C>
Marketing      $        9,255,000         18.5%   $        3,538,000          9.4%                     162%
Operating               5,638,000         11.3%            4,683,000         12.5%                      20%
Technology              3,068,000          6.1%            2,680,000          7.1%                      14%
E-Commerce              2,447,000          4.9%            1,770,000          4.7%                      38%
               ------------------    ---------    ------------------    ---------    ---------------------
                       20,408,000         40.8%   $       12,671,000         33.7%                      61%
</TABLE>

As a percentage of net sales,  our selling,  marketing and fulfillment  expenses
increased to 40.8% for the nine months ended  September  30, 2006 from 33.7% for
the nine months ended September 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

                                       18
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

increase in revenue because we focused more of our marketing  initiatives on our
national   advertising   campaign.   Total  expenses  related  to  the  national
advertising  campaign for the nine months ended  September 30, 2006 totaled $4.7
million  compared to $1.0 million for the nine months ended  September 30, 2005.
Of the $5.1 million total  incremental  marketing costs in the first nine months
of 2006  compared to the first nine months of 2005,  approximately  $3.6 million
related to the  national  advertising  campaign and $791,000 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 nine months of 2006 by approximately  20% compared to the
first nine  months of 2005 as a result of  variable  costs  associated  with the
increased sales volume (e.g.,  picking and packing orders,  processing  returns)
and an increase in customer service and 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 nine months ended September 30,
2006,  technology  expenses  increased by approximately 14% compared to the nine
months ended  September  30, 2005.  This  increase  resulted from an increase in
salary  related  expenses,  including the  expensing of non cash 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 nine months ended September 30, 2006,
e-commerce  expenses  increased  by  approximately  38% as  compared to the nine
months ended September 30, 2005,  primarily due to an increase in salary related
expenses including the recording of non cash employee stock option expenses,  as
well as an  increase  in expenses  associated  with photo  shoots 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 nine months ended
September 30, 2006 increased by  approximately  70% to $8,019,000 as compared to
$4,716,000 for the nine months ended September 30, 2005. The increase in general
and  administrative  expenses  was  primarily  the  result of the  recording  of
$1,419,000 of expense related to employee stock options, an increase of $379,000
in bad debt  expense  related to a  receivable  due from a third  party  service
provider that purchased  inventory  from us to be  distributed  internationally,
increased consulting and professional fees of $218,000, increased public company
expenses  of  $260,000  and  increased  depreciation  expense  of  $238,000.  In
addition,  in June 2006, we 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
nine months of 2006  increased to  approximately  16.1% from 12.6% for the first
nine months of 2005.

Loss from  operations:  Operating  loss increased by  approximately  157% in the
first nine months of 2006 to $8,431,000 from $3,276,000 in the first nine 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 nine months ended September 30,
2006 increased to $311,000 from $134,000 for the nine months ended September 30,
2005.  These  amounts  relate  primarily to interest  income  earned on our cash
balances.

Interest and other expense: Interest expense for the nine months ended September
30,  2006  totaled  $530,000,  compared to  $623,000  for the nine months  ended
September 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 SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005

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

                                       19
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

<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                                       $  16,322        100.0%    $  12,045        100.0%    $   8,675        100.0%
Cost of sales                                      10,211         62.6%        7,470         62.0%        5,709         65.8%
                                                ---------                  ---------                  ---------
         Gross profit                               6,111         37.4%        4,575         38.0%        2,966         34.2%

Selling, marketing and fulfillment expenses         7,367         45.1%        4,568         37.9%        3,059         35.2%
General and administrative expenses                 2,369         14.5%        1,528         12.7%        1,736         20.1%
                                                ---------                  ---------                  ---------
         Total operating expenses                   9,736         59.6%        6,096         50.6%        4,795         55.3%

Operating loss                                     (3,625)       (22.2)%      (1,521)       (12.6)%      (1,829)       (21.1%)
Interest (expense) and other income, net              140          0.9%         (182)        (1.5)%        (131)        (1.4)%
                                                ---------                  ---------                  ---------
         Net loss                                  (3,485)       (21.3)%      (1,703)       (14.1)%      (1,960)       (22.5)%
</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 September 30th, as indicated below:

<TABLE>
<CAPTION>
                                                          2006         2005         2004
                                                       ----------   ----------   ----------
<S>                                                    <C>          <C>          <C>
Average Order Size (including shipping & handling)     $   260.58   $   228.72   $   179.48
New Customers Added during the Period                      35,970       28,762       25,792
</TABLE>

Net sales:  Gross sales for the three months ended  September 30, 2006 increased
by approximately  38% to $27,366,000 from $19,878,000 for the three months ended
September 30, 2005. For the three months ended September 30, 2006, we recorded a
provision  for  returns  and credit  card  chargebacks  and other  discounts  of
$11,044,000,  or approximately  40.4% of gross sales. For the three months ended
September 30, 2005,  the provision for returns and credit card  chargebacks  and
other  discounts was  $7,832,000,  or  approximately  39.4% 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.  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 September 30, 2006 were $16,322,000.  This represents an increase of 35.5%
compared  to the three  months  ended  September  30,  2005,  in which net sales
totaled  $12,045,000.  The growth in net sales resulted from both an increase in
the number of new customers acquired (approximately 25% higher compared to third
quarter  2005) and an increase in average order size  (approximately  14% higher
compared to the third quarter  2005).  For the three months ended  September 30,
2006, revenue from shipping and handling increased approximately 14% to $939,000
in 2006 from $821,000 for the three months ended 2005.

Cost of sales:  Cost of sales for the three  months  ended  September  30,  2006
totaled  $10,211,000,  resulting in gross margin of approximately 37.4%. Cost of
sales  for the  three  months  ended  September  30,  2005  totaled  $7,470,000,
resulting  in gross  margin of  38.0%.  Gross  profit  increased  by  33.6%,  to
$6,111,000 for the three months ended  September 30, 2006 compared to $4,575,000
for the three months ended September 30, 2005. While there was a slight decrease
in growth in gross margin percentage,  due to some promotions and a shift in the
merchandise  sold, gross margin dollars increased as a result of the increase in
sales.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 61.3% in the third quarter of 2006 compared
to the third quarter of 2005. Selling, marketing and fulfillment expenses were
comprised of the following:

                                       20
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

<TABLE>
<CAPTION>
               Three Months Ended    As a % of    Three Months Ended    As a % of    Percentage Difference
               September 30, 2006    Net Sales    September 30, 2005    Net Sales     increase (decrease)
               ------------------    ---------    ------------------    ---------    ---------------------
<S>            <C>                        <C>     <C>                        <C>                       <C>
Marketing      $        3,496,000         21.4%   $        1,603,000         13.3%                     118%
Operating               1,939,000         11.9%            1,475,000         12.2%                      31%
Technology              1,079,000          6.6%              840,000          7.0%                      28%
E-Commerce                853,000          5.2%              650,000          5.4%                      31%
               ------------------    ---------    ------------------    ---------    ---------------------
                        7,367,000         45.1%   $        4,568,000         37.9%                      61%
</TABLE>

As a percentage of net sales,  our selling,  marketing and fulfillment  expenses
increased to 45.1% for the three months ended  September 30, 2006 from 37.9% for
the three months ended September 30, 2005.  This increase was primarily  related
to  increases in  advertising  spending  from our  advertising  campaign,  costs
related paid search,  and the recording of stock option  expenses as a result of
our adoption of SFAS No. 123(R).

Total expenses related to the national advertising campaign for the three months
ended September 30, 2006 totaled $1.5 million  compared to $900,000 for the nine
months ended September 30, 2005. Of the $1.7 million incremental marketing costs
in the third quarter 2006 compared to 2005,  approximately  $585,000  related to
the national  advertising  campaign and $480,000  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 third quarter of 2006 by approximately 31%
compared to the third 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) as well as an increase in customer service costs.

For the three months ended September 30, 2006,  technology expenses increased by
approximately  28% compared to the three months ended  September 30, 2005.  This
increase  resulted from an increase in salary  related  expenses,  including the
expensing of non cash employee  stock options in the current year, as well as an
increase in  depreciation  and web hosting  expense.  This  increase  was offset
partially by a decrease in consulting expense.

For the three months ended September 30, 2006,  e-commerce expenses increased by
approximately  31% as compared to the three  months  ended  September  30, 2005,
primarily  due to an  increase  in salary  related  expenses,  including  the of
recording of non cash employee  stock option  expenses as well as an increase in
expenses associated with photo shoots in the current period.

General and administrative expenses: General and administrative expenses for the
three  months  ended  September  30,  2006  increased  by  approximately  55% to
$2,369,000  as compared to $1,528,000  for the three months ended  September 30,
2005.  The increase in general and  administrative  expenses was  primarily  the
result of the  recording  of  $463,000 of expense  related to non cash  employee
stock options in the current period,  increased consulting and professional fees
of  $99,000,   increased  public  company  expenses  of  $89,000  and  increased
depreciation expense of $66,000.

As a percentage of net sales, general and administrative  expenses for the third
quarter  of 2006  increased  to  approximately  14.5%  from  12.7% for the third
quarter of 2005.

Loss from  operations:  Operating loss increased by 138% in the third quarter of
2006 to $3,625,000  from $1,521,000 in the third 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 third  quarter ended  September
30,  2006  increased  to  $199,000  from  $65,000  for the third  quarter  ended
September 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
September  30, 2006 totaled  $59,000,  compared to $247,000 for the three months
ended  September 30, 2005.  Interest  expense relates to fees paid in connection
with our Credit Facility, as well as interest expense on the Notes during 2005.

                                       21
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

LIQUIDITY AND CAPITAL RESOURCES

General

At September  30, 2006, we had  approximately  $17.1 million in the form of cash
and cash  equivalents.  Working capital at September 30, 2006 and 2005 was $35.8
million and $11.6 million,  respectively.  Working  capital at December 31, 2005
was $17.9 million.  In addition,  as of September 30, 2006, we had approximately
$3.2 million  committed under the Credit Facility,  leaving  approximately  $4.3
million of availability.

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.  In some instances,  new vendors may require prepayments.  We may make
prepayments  in order to open up these new  relationships,  or to gain access to
inventory that would not otherwise be available to us. In addition, we sometimes
make  prepayments  in  connection  with  our  advertising  campaign,  as in some
circumstances we need to pay in advance of production. As of September 30, 2006,
we had approximately $1,111,000 of prepaid inventory on our balance sheet.

Our inventory  levels as of September 30, 2006 were  approximately  $9.6 million
higher than at September 30, 2005. The increase in inventory  generally reflects
a ramp up in connection with our sales growth.  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  us 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 our
assets. Historically, the Credit Facility had also been secured by the Soros LC.
In August 2006, Wells Fargo agreed to release the Soros LC, and that it would no
longer  require an  availability  reserve  (although  it has the right under the
Credit Facility to establish  reserves in the future, as it deems  appropriate).
In  return,  we agreed  to  maintain  a  minimum  cash  balance  of  $5,000,000.
Availability  under the Credit  Facility is  determined  by a formula that takes
into account the amount of our  inventory and accounts  receivable.  The maximum
availability is currently $7,500,000, but can be increased to $12,500,000 at our
request,  subject  to  certain  conditions.  As of  September  30,  2006,  total
availability  under the Credit Facility,  was approximately  $7,500,000 of which
$3,200,000 was committed, leaving approximately $4,300,000 available for further
borrowings.

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  September  30,  2006,  we had the  following  commitments  and long  term
obligations:

                                       22
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

<TABLE>
<CAPTION>
                                                Less than          1-3             3-5         More than 5
                                  Total           1 year          years           years           years
                              -------------   -------------   -------------   -------------   -------------
<S>                           <C>                 <C>             <C>                    <C>             <C>
Marketing and Advertising     $     296,000         296,000              --              --              --
Purchase Orders               $   7,143,000       7,143,000              --              --              --
Operating Leases              $   1,561,000         521,000       1,040,000              --              --
Capital Leases                $      27,000          27,000              --              --              --
Technology Commitments        $   1,241,000         991,000         250,000              --              --
Employment Contracts          $   3,571,000         514,000       3,057,000              --              --
                              -------------   -------------   -------------   -------------   -------------
     Grand total              $  13,839,000       9,492,000       4,347,000              --              --
</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.

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 September 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 157,  Fair Value  Measurements  ("SFAS  157"),  which defines fair
value,  establishes a framework for measuring  fair value in generally  accepted
accounting  principles,  and expands  disclosures about fair value measurements.
This  Statement is effective  for financial  statements  issued for fiscal years
beginning  after  November 15,  2007,  and interim  periods  within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial  statements for that fiscal year,  including  financial
statements  for an interim  period  within  that  fiscal  year.  The  Company is
evaluating  the potential  effects of adopting SFAS No. 157, and does not expect
the adoption to have a material impact on its financial condition and results of
operations.

In July 2006, the 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  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.  Due  to  the  short-term  nature  of  these  instruments  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
and are effective to ensure that  information  required to be disclosed by us in
the reports that we file or submit under the  Exchange  Act is  accumulated  and
communicated to our management, including our

                                       23
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

principal executive and principal financial officers,  to allow timely decisions
regarding  required  disclosure.  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;
government regulation and legal uncertainties; and uncertainties relating to the
imposition of sales tax on Internet sales.

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 5.  OTHER INFORMATION

EMPLOYMENT AGREEMENTS

The Payner Agreement

On  November  14,  2006,  we entered  into a  thirty-six  (36) month  employment
agreement (the "Payner Agreement") with Melissa Payner-Gregor  providing for her
continued  service as our Chief  Executive  Officer and a member of our Board of
Directors. The Payner Agreement is effective as of July 1, 2006 and replaces Ms.
Payner-Gregor's prior employment agreement, which would have expired on March 1,
2007.  Under the Payner  Agreement,  Ms.  Payner-Gregor is entitled to an annual
base salary of  $500,000,  subject to increases  in the sole  discretion  of the
Compensation Committee of the Board of Directors (the "Compensation Committee").
She is also  eligible  to receive  an annual  performance  bonus  based upon the
achievement  of  certain  targets  to  be  set  for  each  fiscal  year  by  the
Compensation Committee in its sole discretion. The Payner Agreement provides for
the grant to Ms.  Payner-Gregor  of: (i) a restricted stock award under our 2005
Stock  Incentive Plan (the "Plan") for 591,256  shares of our common stock,  par
value  $.01 per  share  ("Common  Stock"),  plus a cash  bonus of  approximately
$394,686  intended  to  compensate  her for the  income  taxes  payable  on such
restricted stock award, in exchange for Ms.  Payner-Gregor  forfeiting her right
to certain fully vested and out-of-the-money  stock options that would have been
exercisable to purchase an aggregate of 1,665,220 shares of Common Stock, (ii) a
deferred stock unit award under the Plan for and representing 126,904 underlying
shares of Common Stock, in exchange for Ms.  Payner-Gregor  forfeiting her right
to certain  unvested  and  out-of-the-money  stock  options that would have been
exercisable  to purchase an aggregate  of 234,780  shares of Common  Stock,  and
(iii) subject to the approval of our  stockholders of certain  amendments to the
Plan, a deferred stock unit

                                       24
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

award under the Plan for and representing  4,201,832 shares of Common Stock. The
foregoing equity awards,  together with stock options  previously granted to Ms.
Payner-Gregor,  represent approximately 4% of the Company's equity, inclusive of
management equity awards and stock options.  The restricted stock award referred
to in the foregoing  clause (i) shall vest in full on January 1, 2007. A portion
of the deferred stock unit awards referred to in the foregoing  clauses (ii) and
(iii) vest over a one-year period,  with the remainder vesting over either a two
or three year period. If Ms.  Payner-Gregor's  employment is terminated  without
cause (as defined in the Payner Agreement) or through a constructive termination
(as defined in the Payner Agreement),  all equity benefits  previously  granted,
including stock options,  restricted stock awards and deferred stock unit awards
shall be deemed  fully  vested as of the date of  termination,  and she would be
entitled  to receive  her base  salary  through  the date of  termination,  plus
unreimbursed business expenses and bonuses that have been earned and awarded but
not yet paid,  as well as her  then-current  base  salary for a period of twelve
(12) months from the date of termination  and the  reimbursement  of the cost of
maintaining  (or the Company  shall  maintain)  in effect the medical and dental
insurance,  disability and hospitalization plans, and life insurance policies in
which Ms.  Payner-Gregor  participates for a period of one-year from the date of
termination.  In the event of a change of  control  (as  defined  in the  Payner
Agreement), any unvested stock options,  restricted stock awards and one-half of
any  deferred  stock  unit  awards  granted  to  Ms.   Payner-Gregor  which  are
outstanding as of the date of the change of control and have not yet vested (the
"Payner COC  Unvested  DSUs") shall be deemed fully vested as of the date of the
change of control.  The remaining one-half of the Payner COC Unvested DSUs shall
vest on the earliest to occur of: (a) the scheduled  vesting date and (b) twelve
(12)  months  from the date of the  change of  control.  In the  event  that Ms.
Payner-Gregor would be subject to tax under Section 4999 of the Internal Revenue
Code of 1986,  as amended  (the  "Code"),  the  payments to her under the Payner
Agreement will be reduced to the maximum  amount that she could receive  without
being subject to such tax. The Payner Agreement provides Ms.  Payner-Gregor with
a monthly housing  allowance of $4,000 and an annual  allowance of approximately
$27,500  for  life  insurance  and  supplemental   disability   insurance.   Ms.
Payner-Gregor  is  subject  to certain  covenants  under the  Payner  Agreement,
including a non-competition  covenant covering the term of her employment and an
additional period of eighteen (18) months thereafter.

The Barry Agreement

On  November  14,  2006,  we entered  into a  thirty-six  (36) month  employment
agreement  (the  "Barry  Agreement")  with  Patrick C. Barry  providing  for Mr.
Barry's  continued  service as our Chief  Operating  Officer and Chief Financial
Officer.  The Barry  Agreement  is effective as of July 1, 2006 and replaces his
prior one-year evergreen employment  agreement.  Under the Barry Agreement,  Mr.
Barry is entitled to an annual base salary of $350,000,  subject to increases in
the sole discretion of the Compensation Committee. Mr. Barry is also eligible to
receive  an annual  performance  bonus  based  upon the  achievement  of certain
targets to be set for each fiscal year by the Compensation Committee in its sole
discretion.  The Barry  Agreement  provides for the grant to Mr. Barry of: (i) a
restricted stock award under the Plan for 269,965 shares of Common Stock, plus a
cash bonus of approximately  $123,204  intended to compensate him for the income
taxes  payable  on such  restricted  stock  award,  in  exchange  for Mr.  Barry
forfeiting his right to certain fully vested and out-of-the-money  stock options
that would have been  exercisable  to purchase an aggregate of 853,238 shares of
Common  Stock,  (ii) a  deferred  stock  unit  award  under  the  Plan  for  and
representing 45,837 underlying shares of Common Stock, in exchange for Mr. Barry
forfeiting his right to certain unvested and out-of-the-money stock options that
would have been  exercisable to purchase an aggregate of 91,674 shares of Common
Stock,  and  (iii)  subject  to the  approval  of our  stockholders  of  certain
amendments  to the Plan,  a deferred  stock  unit  award  under the Plan for and
representing  4,062,692  shares of Common Stock.  The foregoing  equity  awards,
together  with  stock  options  previously  granted  to  Mr.  Barry,   represent
approximately 4% of the Company's equity,  inclusive of management equity awards
and stock  options.  The  restricted  stock award  referred to in the  foregoing
clause (i) shall vest in full on  January  1,  2007.  A portion of the  deferred
stock unit awards referred to in the foregoing  clauses (ii) and (iii) vest over
a one-year  period,  with the remainder  vesting over either a two or three year
period. If Mr. Barry's employment is terminated without cause (as defined in the
Barry Agreement) or through a constructive  termination (as defined in the Barry
Agreement),  all equity benefits  previously  granted,  including stock options,
restricted  stock  awards and  deferred  stock unit awards shall be deemed fully
vested as of the date of  termination,  and he would be  entitled to receive his
base salary through the date of termination, plus unreimbursed business expenses
and bonuses  that have been earned and awarded but not yet paid,  as well as his
then-current  base  salary  for a  period  of nine (9)  months  from the date of
termination  and the  reimbursement  of the cost of maintaining  (or the Company
shall  maintain)  in effect the medical  and dental  insurance,  disability  and
hospitalization   plans,  and  life  insurance   policies  in  which  Mr.  Barry
participates for a period of one-year from the date of termination. In the event
of a change of control (as defined in the Barry  Agreement),  any unvested stock
options,  restricted stock awards and one-half of any deferred stock unit awards
granted  to Mr.  Barry  which are  outstanding  as of the date of the  change of
control and have not yet vested (the "Barry COC Unvested  DSUs") shall be deemed
fully vested as of the date of the change of control.  The remaining one-half of
the Barry COC  Unvested  DSUs  shall vest on the  earliest  to occur of: (a) the
scheduled vesting date and (b) twelve (12) months from the date of the change of
control.  In the event that Mr. Barry would be subject to tax under Section 4999
of the Code, the payments

                                       25
<PAGE>

                                 BLUEFLY, INC.
                               SEPTEMBER 30, 2006

to him under the Barry  Agreement  will be reduced to the maximum amount that he
could receive without being subject to such tax. The Barry Agreement contains an
annual  allowance of  approximately  $17,500 for life insurance and supplemental
disability insurance.  Mr. Barry is subject to certain covenants under the Barry
Agreement,  including  a  non-competition  covenant  covering  the  term  of his
employment and an additional period of eighteen (18) months thereafter.

Compensation Expense under SFAS No. 123(R)

The equity  awards under the Payner  Agreement and the Barry  Agreement  will be
accounted for in accordance with the Company's stock based  compensation  policy
in  accordance  with SFAS No.  123(R) over the three year vesting  period of the
awards.

NASDAQ COMPLIANCE

On  November  9,  2006,  we were  notified  by Nasdaq  Staff  that we are not in
compliance with the continued listing requirements for the Nasdaq Capital Market
because  shares of our Common  Stock had closed at a per share bid price of less
than $1.00 for at least 30 trading days.  Under Nasdaq rules,  we have a 180-day
grace  period to regain  compliance,  which  extends to May 8,  2007.  If we are
unable to regain  compliance  by such  date,  the Nasdaq  Staff  will  determine
whether we meet the initial listing  criteria of the Nasdaq Capital  Market.  In
the event  that we meet such  initial  listing  criteria,  we will be granted an
additional  180-day  grace  period  to  regain  compliance.  In order to  regain
compliance,  shares of our Common  Stock would need to close at a price of $1.00
or more for at least ten  consecutive  trading days. In the event that we do not
regain  compliance  within the  requisite  time period,  we intend to appeal any
delisting.  However,  no assurance  can be provided that any such appeal will be
successful.  The failure to maintain  listing on the Nasdaq  Capital  Market may
have an adverse effect on the price and/or liquidity of our Common Stock.

ITEM 6.  EXHIBITS

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

       EXHIBIT NUMBER   DESCRIPTION
       --------------   --------------------------------------------------------
       10.1             First Amendment to Loan and Security Agreement, dated as
                        of August 14, 2006, by and between the Company and Wells
                        Fargo Retail Finance, Inc. (incorporated by reference to
                        Exhibit 99.1 to the Company's Current Report on Form 8-K
                        filed on August 14, 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.

                                       26
<PAGE>

                                   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

November 14, 2006

                                       27