UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549










FORM 10-Q










|x  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|-- |  | ----------------------------------------------------------------------------------------
|   |  | For the quarterly period ended June 30, 2012                                            
|OR | 
|   |  |                                                                                         
| ̈  |  | TRANSITION REPORT PURSUANT TO 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 incorporation or organization)             |  | (I.R.S. Employer Identification Number)
|                                                                           |  |                                        
|42 West 39th Street, New York, NY (Address of principal executive offices) |  | 10018(Zip Code)                        



Registrant’s
telephone number, including area code: (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 Securities Exchange Act of 1934 during the preceding 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
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes x No  ̈



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act:



|Large accelerated filer  ̈ | Accelerated filer     ̈ | Non-accelerated filer  ̈                       | Smaller reporting company  x
|------------------------- | ---------------------- | --------------------------------------------- | ----------------------------
|                          |                        | (Do not check if a smaller reporting company) |                             



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



As of August 13, 2012, there were 28,576,612
shares of Common Stock, $.01 par value, of the registrant outstanding.















BLUEFLY, INC.

TABLE OF CONTENTS

JUNE 30, 2012



|           |  |                                                                                                                               |    |  | PAGE   
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------- | -- |  | -------
|PART I –   |  | FINANCIAL INFORMATION                                                                                                         |    |  |        
|           |  |                                                                                                                               |    |  |        
|Item 1.    |  | Financial Statements:                                                                                                         |    |  |        
|           |  |                                                                                                                               |    |  |        
|           |  | Consolidated Balance Sheets as of June 30, 2012 (unaudited)
        and December
        31, 2011                             |    |  | 3      
|           |  |                                                                                                                               |    |  |        
|           |  | Consolidated Statements of Operations for the three months ended
        June
        30, 2012 and 2011 (unaudited)           |    |  | 4      
|           |  |                                                                                                                               |    |  |        
|           |  | Consolidated Statements of Operations for the six months ended
        June 30, 2012 and 2011 (unaudited)                     |    |  | 5      
|           |  |                                                                                                                               |    |  |        
|           |  | Consolidated Statements of Changes in Stockholders’ Equity
        for the
        six months ended June 30, 2012 (unaudited) |    |  | 6      
|           |  |                                                                                                                               |    |  |        
|           |  | Consolidated Statements of Cash Flows for the six months ended
        June 30, 2012 and 2011 (unaudited)                     |    |  | 7      
|           |  |                                                                                                                               |    |  |        
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                                        |    |  | 8 – 13 
|           |  |                                                                                                                               |    |  |        
|Item 2.    |  | Management’s
        Discussion and Analysis of Financial Condition
        and
        Results of Operations                 |    |  | 14 – 21
|           |  |                                                                                                                               |    |  |        
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |    |  | 21     
|           |  |                                                                                                                               |    |  |        
|Item 4.    |  | Controls and Procedures                                                                                                       |    |  | 21     
|           |  |                                                                                                                               |    |  |        
|PART II –  |  | OTHER INFORMATION                                                                                                             |    |  |        
|           |  |                                                                                                                               |    |  |        
|Item 5.    |  | Other Information                                                                                                             |    |  | 23     
|           |  |                                                                                                                               |    |  |        
|Item 6.    |  | Exhibits                                                                                                                      |    |  | 24     
|           |  |                                                                                                                               |    |  |        
|Signatures |  |                                                                                                                               | 25







2







Part I – FINANCIAL INFORMATION

Item 1. – Financial Statements

BLUEFLY, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                                                                                                           |  | (Unaudited) |              |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------------ | - | ------------ | -
|                                                                                                                                                                                                                                                                                                                           |  | June 30,    |              |   | December 31, |  
|                                                                                                                                                                                                                                                                                                                           |  | 2012        |              |   | 2011         |  
|Assets                                                                                                                                                                                                                                                                                                                     |  |             |              |   |              |  
|Current assets:                                                                                                                                                                                                                                                                                                            |  |             |              |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                  |  | $           | 1,686,000    |   |              | $
|Accounts receivable — net of allowance for doubtful accounts                                                                                                                                                                                                                                                               |  |             | 1,633,000    |   |              |  
|Inventories, net                                                                                                                                                                                                                                                                                                           |  |             | 25,243,000   |   |              |  
|Prepaid inventory                                                                                                                                                                                                                                                                                                          |  |             | 1,350,000    |   |              |  
|Prepaid expenses                                                                                                                                                                                                                                                                                                           |  |             | 71,000       |   |              |  
|Other current assets                                                                                                                                                                                                                                                                                                       |  |             | 394,000      |   |              |  
|Total current assets                                                                                                                                                                                                                                                                                                       |  |             | 30,377,000   |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Property and equipment, net                                                                                                                                                                                                                                                                                                |  |             | 6,512,000    |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Intangible assets, net                                                                                                                                                                                                                                                                                                     |  |             | 503,000      |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Other assets                                                                                                                                                                                                                                                                                                               |  |             | 200,000      |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Total assets                                                                                                                                                                                                                                                                                                               |  | $           | 37,592,000   |   |              | $
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Liabilities and Stockholders’ Equity                                                                                                                                                                                                                                                                                       |  |             |              |   |              |  
|Current liabilities:                                                                                                                                                                                                                                                                                                       |  |             |              |   |              |  
|Accounts payable                                                                                                                                                                                                                                                                                                           |  | $           | 12,661,000   |   |              | $
|Allowance for sales returns                                                                                                                                                                                                                                                                                                |  |             | 2,482,000    |   |              |  
|Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                             |  |             | 3,186,000    |   |              |  
|Deferred revenue                                                                                                                                                                                                                                                                                                           |  |             | 3,472,000    |   |              |  
|Total current liabilities                                                                                                                                                                                                                                                                                                  |  |             | 21,801,000   |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Deferred rent liability                                                                                                                                                                                                                                                                                                    |  |             | 397,000      |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Total liabilities                                                                                                                                                                                                                                                                                                          |  |             | 22,198,000   |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Commitments and contingencies (Note 4)                                                                                                                                                                                                                                                                                     |  |             |              |   |              |  
|                                                                                                                                                                                                                                                                                                                           |  |             |              |   |              |  
|Stockholders’ equity:                                                                                                                                                                                                                                                                                                      |  |             |              |   |              |  
|Bluefly, Inc. stockholders’ equity:                                                                                                                                                                                                                                                                                        |  |             |              |   |              |  
|Common stock – $.01 par value; 50,000,000 shares authorized as of June 30, 2012 and December 31, 2011, respectively; 28,915,010 and 28,629,296 shares issued as of June 30, 2012 and December 31, 2011, respectively, 28,576,612 and 28,290,898 shares outstanding as of June 30, 2012 and December 31, 2011, respectively |  |             | 286,000      |   |              |  
|Treasury stock                                                                                                                                                                                                                                                                                                             |  |             | (1,824,000   | ) |              |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                 |  |             | 192,355,000  |   |              |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                        |  |             | (175,304,000 | ) |              |  
|Total Bluefly, Inc. stockholders’ equity                                                                                                                                                                                                                                                                                   |  |             | 15,513,000   |   |              |  
|Non-controlling interest in Eyefly LLC                                                                                                                                                                                                                                                                                     |  |             | (119,000     | ) |              |  
|Total stockholders’ equity                                                                                                                                                                                                                                                                                                 |  |             | 15,394,000   |   |              |  
|Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                 |  | $           | 37,592,000   |   |              | $



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





3









BLUEFLY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                       |  | Three Months Ended |           
|-------------------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                                       |  | June 30,           |           
|                                                                                       |  | 2012               |           
|                                                                                       |  |                    |           
|Net sales                                                                              |  | $                  | 22,215,000
|Cost of sales                                                                          |  |                    | 17,786,000
|Gross profit                                                                           |  |                    | 4,429,000 
|                                                                                       |  |                    |           
|Selling and fulfillment expenses                                                       |  |                    | 5,150,000 
|Marketing expenses                                                                     |  |                    | 2,231,000 
|General and administrative expenses                                                    |  |                    | 1,955,000 
|Total operating expenses                                                               |  |                    | 9,336,000 
|                                                                                       |  |                    |           
|Operating loss                                                                         |  |                    | (4,907,000
|                                                                                       |  |                    |           
|Other interest expense, net                                                            |  |                    | (113,000  
|                                                                                       |  |                    |           
|Net loss                                                                               |  |                    | (5,020,000
|                                                                                       |  |                    |           
|Less: net loss attributable to non-controlling interest in Eyefly LLC                  |  |                    | (71,000   
|                                                                                       |  |                    |           
|Net loss attributable to Bluefly, Inc. stockholders                                    |  | $                  | (4,949,000
|                                                                                       |  |                    |           
|Basic and diluted net loss per common share attributable to Bluefly, Inc. stockholders |  | $                  | (0.17     
|                                                                                       |  |                    |           
|Weighted average common shares outstanding                                             |  |                    |           
|(basic and diluted)                                                                    |  |                    | 28,576,612



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





4







BLUEFLY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|                                                                                       |  | Six Months Ended |            
|-------------------------------------------------------------------------------------- |  | ---------------- | -----------
|                                                                                       |  | June 30,         |            
|                                                                                       |  | 2012             |            
|                                                                                       |  |                  |            
|Net sales                                                                              |  | $                | 46,481,000 
|Cost of sales                                                                          |  |                  | 38,307,000 
|Gross profit                                                                           |  |                  | 8,174,000  
|                                                                                       |  |                  |            
|Selling and fulfillment expenses                                                       |  |                  | 10,608,000 
|Marketing expenses                                                                     |  |                  | 4,809,000  
|General and administrative expenses                                                    |  |                  | 5,496,000  
|Total operating expenses                                                               |  |                  | 20,913,000 
|                                                                                       |  |                  |            
|Operating loss                                                                         |  |                  | (12,739,000
|                                                                                       |  |                  |            
|Other interest expense, net                                                            |  |                  | (185,000   
|                                                                                       |  |                  |            
|Net loss                                                                               |  |                  | (12,924,000
|                                                                                       |  |                  |            
|Less: net loss attributable to non-controlling interest in Eyefly LLC                  |  |                  | (105,000   
|                                                                                       |  |                  |            
|Net loss attributable to Bluefly, Inc. stockholders                                    |  | $                | (12,819,000
|                                                                                       |  |                  |            
|Basic and diluted net loss per common share attributable to Bluefly, Inc. stockholders |  | $                | (0.45      
|                                                                                       |  |                  |            
|Weighted average common shares outstanding                                             |  |                  |            
|(basic and diluted)                                                                    |  |                  | 28,549,924 



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





5







BLUEFLY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY

(Unaudited)



|                               |  | Bluefly,
    Inc. Stockholders Equity |            |  |                    |   |         |            | 
|------------------------------ |  | ------------------------------------- | ---------- |  | ------------------ | - | ------- | ---------- | 
|                               |  |                                       |            |  |                    |   |         |            | 
|                               |  | Common Stock                          |            |  |                    |   |         |            | 
|                               |  | $.01
    Par Value                    |            |  | Treasury
    Stock |   |         | Additional | 
|                               |  | Number of                             |            |  |                    |   |         | Number of  | 
|                               |  | Shares                                |            |  | Amount             |   |         | Shares     | 
|Balance at December 31, 2011   |  |                                       | 28,290,898 |  |                    | $ | 283,000 |            | 
|                               |  |                                       |            |  |                    |   |         |            | 
|Asset acquisition purchase     |  |                                       | 285,714    |  |                    |   | 3,000   |            | 
|                               |  |                                       |            |  |                    |   |         |            | 
|Stock based compensation       |  |                                       | -          |  |                    |   | -       |            | 
|                               |  |                                       |            |  |                    |   |         |            | 
|Warrants issued to third-party |  |                                       | -          |  |                    |   | -       |            | 
|                               |  |                                       |            |  |                    |   |         |            | 
|Net loss                       |  |                                       | -          |  |                    |   | -       |            | 
|                               |  |                                       |            |  |                    |   |         |            | 
|Balance at June 30, 2012       |  |                                       | 28,576,612 |  |                    | $ | 286,000 |            | 





6







BLUEFLY, INC.

CONSOLIDATED
STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                 |  | Six Months Ended |            
|---------------------------------------------------------------------------------------------------------------- |  | ---------------- | -----------
|                                                                                                                 |  | June 30,         |            
|                                                                                                                 |  | 2012             |            
|Cash flows from operating activities:                                                                            |  |                  |            
|Net loss                                                                                                         |  | $                | (12,924,000
|Adjustments to reconcile net loss to net cash used in operating activities:                                      |  |                  |            
|Depreciation and amortization expenses                                                                           |  |                  | 1,428,000  
|Stock-based compensation expenses                                                                                |  |                  | 1,262,000  
|Provisions for returns                                                                                           |  |                  | (326,000   
|Bad debt expense                                                                                                 |  |                  | 196,000    
|Reserve for inventory obsolescence                                                                               |  |                  | (562,000   
|Amortization expense related to warrants issued to third-party                                                   |  |                  | 200,000    
|Deferred rent expense                                                                                            |  |                  | 24,000     
|Change in operating assets and liabilities:                                                                      |  |                  |            
|(Increase) decrease in:                                                                                          |  |                  |            
|Accounts receivable                                                                                              |  |                  | 758,000    
|Inventories                                                                                                      |  |                  | 7,402,000  
|Prepaid inventory                                                                                                |  |                  | 1,340,000  
|Prepaid expenses                                                                                                 |  |                  | 176,000    
|Other assets                                                                                                     |  |                  | 283,000    
|Increase (decrease) in:                                                                                          |  |                  |            
|Accounts payable                                                                                                 |  |                  | 2,469,000  
|Accrued expenses and other current liabilities                                                                   |  |                  | (1,576,000 
|Deferred revenue                                                                                                 |  |                  | (763,000   
|                                                                                                                 |  |                  |            
|Net cash used in operating activities                                                                            |  |                  | (613,000   
|                                                                                                                 |  |                  |            
|Cash flows from investing activities:                                                                            |  |                  |            
|Purchases of property and equipment                                                                              |  |                  | (2,114,000 
|                                                                                                                 |  |                  |            
|Net cash used in investing activities                                                                            |  |                  | (2,114,000 
|                                                                                                                 |  |                  |            
|Cash flows from financing activities:                                                                            |  |                  |            
|Proceeds from capital contribution for the purchase of
    non-controlling interest in subsidiary by third-party |  |                  | --         
|Proceeds from exercise of stock options                                                                          |  |                  | --         
|                                                                                                                 |  |                  |            
|Net cash provided by financing activities                                                                        |  |                  | --         
|                                                                                                                 |  |                  |            
|Net decrease in cash and cash equivalents                                                                        |  |                  | (2,727,000 
|Cash and cash equivalents – beginning of period                                                                  |  |                  | 4,413,000  
|Cash and cash equivalents – end of period                                                                        |  | $                | 1,686,000  
|                                                                                                                 |  |                  |            
|Supplemental disclosure of cash flow information:                                                                |  |                  |            
|Cash paid for interest expense                                                                                   |  | $                | 86,000     
|Supplemental disclosure of non-cash financing disclosure of cash flow
    information:                           |  |                  |            
|Issuance of common stock for asset acquisition                                                                   |  | $                | 600,000    



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





7







BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012



NOTE 1 – THE COMPANY



Bluefly, Inc. (the “Company”)
is a leading Internet retailer that sells over 350 brands of designer apparel and accessories at discounts of up to 75% off of
retail value. The Company’s e-commerce web site, bluefly.com (“Bluefly.com” or “Web Site”), was launched
in September 1998. In December 2011, the Company expanded its portfolio of web sites by launching its belleandclive.com web site
(“Belle & Clive”), a members-only shopping destination that presents highly-curated selections of important brands
via limited-time sale events.



In 2011, the Company and A + D Labs LLC
(“A + D Labs” and, collectively with the Company, the “Members”) entered into a Limited Liability Company
Operating Agreement (the “Operating Agreement”) in connection with the formation of Eyefly LLC (“Eyefly”),
a Delaware limited liability company, which is currently owned 52% by the Company and 48% by A + D Labs. Eyefly was formed for
the purposes of developing and operating an e-commerce web site and related online and mobile applications focused on selling fashionable
prescription eyewear directly to consumers. Eyefly launched its e-commerce web site, eyefly.com (“Eyefly.com” and together
with Bluefly.com and Belle & Clive, the “Web Sites”), in June 2011.



Pursuant to the Operating Agreement, the
Members made an aggregate of $700,000 of initial capital contributions in cash ($364,000 from the Company and $336,000 from A +
D Labs) and agreed to make an additional $600,000 of capital contributions ($312,000 from the Company and $288,000 from A + D Labs)
as necessary. In October 2011, the Members made additional capital contributions in the aggregate of $200,000 in cash ($104,000
from the Company and $96,000 from A + D Labs) pursuant to the Operating Agreement. The Operating Agreement provides the Company
with an option (the “Call Option”) to purchase A + D Labs’ equity in Eyefly on or after the four year anniversary
of formation at a valuation based on a specified multiple of adjusted EBITDA. In the event the Company exercises the Call Option,
A + D Labs has the option to receive the purchase price for equity in cash or in shares of the Company’s Common Stock, provided
that the total number of shares issued to A + D Labs pursuant to such option cannot exceed 4,918,856 shares (which is less than
20% of the outstanding shares of the Company’s Common Stock as of the date of the Operating Agreement).



As of June 30, 2012, the total assets of
Eyefly represent 1.3% of the total consolidated assets of the Company. For the three and six months ended June 30, 2012, the total
net sales of Eyefly each represent less than 1% of the total consolidated net sales of the Company.



On January 3, 2012, the Company formed
a new wholly-owned subsidiary EVT Acquisition LLC, a New York limited liability company (“EVT”), in connection with
the Company’s acquisition of assets discussed further in Note 5 – Acquisition.



NOTE 2 – BASIS OF PRESENTATION



The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting mainly of normal recurring accruals) considered necessary
for a fair presentation have been included. The consolidated 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 consolidated financial statements and accompanying footnotes included in the Company's Form 10-K for the year ended December
31, 2011.



The Company has sustained cumulative net
losses and negative cash flows from operations since inception. As of June 30, 2012, the Company had an accumulated deficit of
$175,304,000. 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 sources to fund operations. The Company believes that its existing cash balance, proceeds
from the recent bridge financing further discussed in Note 8 – Subsequent Events, combined with working capital and the funds
available from the Company’s existing credit facility, will be sufficient to enable the Company to meet planned expenditures
through at least the next 12 months.





8









BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012



Should the Company experience unforeseen
increases in expenditures or should estimated revenues not materialize, these conditions could significantly impair its ability
to fund future operations. Should the Company experience unanticipated losses or expenditures that exceed current estimates, management
would implement a cost reduction plan, that includes a reduction in work force as well as reductions in overhead costs and capital
expenditures, and/or attempt to raise additional debt or equity financing. There can be no assurance that the Company will achieve
or sustain positive cash flows from operations or profitability. If the Company is unable to maintain adequate liquidity, future
operations will need to be scaled back or discontinued.



Summary of significant accounting
policies



Sales incentives



The Company frequently offers sales incentives
to customers to receive a reduction in the sales price of merchandise. Sales incentives include discounts, coupons, daily deal
programs and through our online marketing programs. For sales incentives issued to customers in conjunction with the sale of merchandise,
the Company recognizes the reduction in gross sales at the time of sale.



Intangible assets



Intangible assets are recorded at cost,
net of accumulated amortization and are amortized on a straight-line basis over their estimated useful lives. No significant residual
value is estimated for the intangible assets.



The Company evaluates the recoverability
of intangible assets at least annually for possible impairment or whenever events or circumstances indicate that the carrying value
of such assets may not be recoverable.



Concentration



For the three months ended June 30, 2012
and 2011, the Company, excluding Eyefly, acquired approximately 53% and 49%, respectively, of its inventory from its two largest
suppliers.



For the six months ended June 30, 2012
and 2011, the Company, excluding Eyefly, acquired approximately 58% and 50%, respectively, of its inventory from its three largest
suppliers.



Related-party transactions



For the three months ended June 30, 2012
and 2011, Eyefly did not purchase any inventory from A + D Labs.



For the six months ended June 30, 2012
and 2011, Eyefly purchased $98,000 and $170,000, respectively from A + D Labs pursuant to a management services agreement.



As of June 30, 2012 and December 31, 2011,
Eyefly had related party amounts of $222,000 and $105,000 due to A + D Labs, respectively, which is presented as part of Accounts
payable within the Consolidated Balance Sheets.



As of June 30, 2012 and December 31, 2011,
Eyefly had related party amounts of $245,000 and $227,000 due to the Company, respectively, which are eliminated in consolidation.



Recently issued, but not yet effective,
accounting pronouncements



The Company is not aware of any recently
issued, but not yet effective, accounting pronouncements that would have a significant impact on the Company’s consolidated
financial position or results of operations.





9







BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012



NOTE 3 – FAIR VALUE



The Company’s financial instruments consist of cash and
cash equivalents, accounts receivable, other assets, accounts payable and accrued expenses. The carrying amounts of these financial
instruments approximate fair value due to their short maturities.



NOTE 4 – COMMITMENTS AND CONTINGENCIES



Employment contracts



The Company has employment agreements with
certain of its executive officers and other employees, which expire on various dates through June 30, 2015. On June 12, 2012, the
Company entered into a new employment agreement with the Company’s Senior Vice President of Merchandising for a term continuing
through June 30, 2015.



As of June 30, 2012, the Company's aggregate
cash commitment for all future base salary under these employment contracts is as follows:



|2012 |  | $ | 982,000   | 
|---- |  | - | --------- | 
|2013 |  |   | 762,000   | 
|2014 |  |   | 488,000   | 
|2015 |  |   | 150,000   | 
|     |  | $ | 2,382,000 | 



NOTE 5 – ACQUISITION



On January 10, 2012, the Company, through
a newly-formed wholly-owned subsidiary, EVT, entered into an asset purchase agreement with Moda for Friends LLC (the “Seller”)
and purchased certain intangible assets that include a contractual-related agreement, purchased customer list, developed technologies
and trademarks (the “Acquired Intangible Assets”) owned by the Seller for a total purchase price of $611,000 (includes
transaction costs of $11,000), which the Company paid through the issuance of 285,714 shares of its Common Stock, with each share
being valued at $2.10 (the closing price of the Common Stock on the day prior to the consummation of the transaction). The Company
completed the asset acquisition because it would facilitate the launch and operation of its own flash sales business.



The Company has allocated the purchase
price of the acquisition among the assets, based on their relative fair values, as follows:



|                                        |  |   |         | 
|--------------------------------------- |  | - | ------- | 
|Contract-related intangible             |  | $ | 428,000 | 
|Developed technology-related intangible |  |   | 111,000 | 
|Customer-related intangible             |  |   | 62,000  | 
|Tradename                               |  |   | 10,000  | 
|Total purchase price                    |  | $ | 611,000 | 



The carrying values of the Acquired Intangible
Assets at June 30, 2012 were as follows:



|                                        |  | Weighted    |  |                |         |  |              |   |          |              | 
|--------------------------------------- |  | ----------- |  | -------------- | ------- |  | ------------ | - | -------- | ------------ | 
|                                        |  | Average     |  |                |         |  |              |   |          |              | 
|                                        |  | Useful Life |  | Gross Carrying |         |  | Accumulated  |   |          | Net Carrying | 
|                                        |  | (Years)     |  | Amount         |         |  | Amortization |   |          | Amount       | 
|Contract-related intangible             |  | 5           |  | $              | 428,000 |  |              | $ | (39,000  | )            | 
|Developed technology-related intangible |  | 1           |  |                | 111,000 |  |              |   | (51,000  | )            | 
|Customer-related intangible             |  | 2           |  |                | 62,000  |  |              |   | (14,000  | )            | 
|Tradename                               |  | 1           |  |                | 10,000  |  |              |   | (4,000   | )            | 
|                                        |  |             |  | $              | 611,000 |  |              | $ | (108,000 | )            | 





10









BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012



For the three and six months ended June
30, 2012, the Company recorded $59,000 and $108,000, respectively, in amortization expenses in the Consolidated Statements of Operations
related to the Acquired Intangible Assets.



The estimated amortization expense for
the unamortized Acquired Intangible Assets for the next five years and thereafter is as follows:



|2012 |  | $ | 120,000 | 
|---- |  | - | ------- | 
|2013 |  |   | 122,000 | 
|2014 |  |   | 87,000  | 
|2015 |  |   | 86,000  | 
|2016 |  |   | 85,000  | 
|2017 |  |   | 3,000   | 
|     |  | $ | 503,000 | 



NOTE 6 – STOCK-BASED COMPENSATION



Authoritative guidance relating to stock-based
compensation requires the Company to measure compensation cost for stock awards at fair value and recognize compensation over the
service period for awards expected to vest. Total stock-based compensation expense recorded in the Consolidated Statements of Operations
was $287,000 and $224,000 for the three months ended June 30, 2012 and 2011, respectively, and $1,262,000 and $435,000 for the
six months ended June 30, 2012 and 2011, respectively.



Stock Option Awards



The fair value of stock option awards 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 price of the Company's Common Stock. Management monitors stock option exercise and employee termination
patterns to estimate forfeiture rates within the valuation model. The expected holding period of stock options represents the period
of time that stock options granted are expected to be outstanding. The risk-free interest rate for periods within the expected
life of the stock option award is based on the interest rate of U.S. Treasury notes in effect on the date of the grant.



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



|                             |  |           |           |   | Weighted Average |  
|---------------------------- |  | --------- | --------- | - | ---------------- | -
|                             |  | Number of |           |   | Exercise Price   |  
|                             |  | Shares    |           |   | Per Share        |  
|Balance at December 31, 2011 |  |           | 2,795,182 |   |                  | $
|Options granted              |  |           | 1,146,513 |   |                  | $
|Options cancelled            |  |           | (103,902  | ) |                  | $
|Options expired              |  |           | (950      | ) |                  | $
|Options exercised            |  |           | --        |   |                  | $
|Balance at June 30, 2012     |  |           | 3,836,843 |   |                  | $
|                             |  |           |           |   |                  |  
|Vested at December 31, 2011  |  |           | 901,341   |   |                  | $
|                             |  |           |           |   |                  |  
|Vested at June 30, 2012      |  |           | 1,612,987 |   |                  | $



During the second quarter of 2012, 86,402
stock option awards were cancelled through normal employee attrition, of which 1,502 stock option awards were vested and 84,900
stock option awards were non-vested. During the second quarter of 2012, 182,232 stock option awards vested. The total fair value
of the stock options that vested during the second quarter of 2012 was approximately $309,000. There were 545,013 stock option
awards granted during the second quarter of 2012. At June 30, 2012, there was no aggregate intrinsic value of the fully vested
stock option awards and the weighted average remaining contractual life of the stock options was approximately seven years. The
Company did not capitalize any compensation cost, or modify any of its stock option awards during the second quarter of 2012. There
were no stock option exercises and no cash was used to settle equity instruments granted under the Company’s equity incentive
plans during the second quarter of 2012.





11









BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012



As of June 30, 2012, the total compensation
cost related to non-vested stock option awards not yet recognized was $3,081,000. Total compensation cost is expected to be recognized
over three years on a weighted average basis.



For the three months ended June 30, 2012
and 2011, the Company recognized expense of approximately $287,000 and $224,000, respectively, and $1,262,000 and $432,000 for
the six months ended June 30, 2012 and 2011, respectively, in connection with these awards.



Restricted Stock Awards



There were no restricted stock awards issued
during the three and six months ended June 30, 2012 or outstanding as of June 30, 2012 and, accordingly, the Company did not recognize
any expense related to restricted stock awards. There were no restricted stock awards issued during the three months ended June
30, 2011. For the six months ended June 30, 2011, the Company recognized approximately $3,000 in expense related to restricted
stock awards.



NOTE 7 – NET LOSS PER SHARE ATTRIBUTABLE TO BLUEFLY,
INC. STOCKHOLDERS



Basic net loss per common share attributable
to Bluefly, Inc. stockholders excludes dilution and is computed by dividing net loss attributable to Bluefly, Inc. stockholders
by the weighted average number of common shares outstanding for the period.



Diluted net loss per common share attributable
to Bluefly, Inc. stockholders is computed by dividing net loss attributable to Bluefly, Inc. stockholders by the weighted average
number of common shares outstanding for the period, adjusted to reflect potentially dilutive securities using the treasury stock
method for stock option awards, warrants, restricted stock awards and deferred stock unit awards. Due to the Company’s net
loss, (i) stock option awards and warrants to purchase shares of Common Stock and (ii) restricted stock awards that have not yet
vested were not included in the computation of diluted loss per common share attributable to Bluefly, Inc. stockholders, as the
effects would be anti-dilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for the following
periods presented:



|                                                     |  | Three Months Ended |           
|---------------------------------------------------- |  | ------------------ | ----------
|                                                     |  | June 30,           |           
|                                                     |  | 2012               |           
|                                                     |  |                    |           
|Net loss attributable to Bluefly, Inc. stockholders  |  | $                  | (4,949,000
|                                                     |  |                    |           
|Weighted average common shares outstanding (basic)   |  |                    | 28,576,612
|                                                     |  |                    |           
|Stock option awards and warrants(1)(2)               |  |                    | --        
|                                                     |  |                    |           
|Restricted stock awards(1)                           |  |                    | --        
|                                                     |  |                    |           
|Weighted average common shares outstanding (diluted) |  |                    | 28,576,612



| | (1) | For the three months ended June 30, 2012 and 2011, the
Company had weighted average shares of the following potentially dilutive securities that were excluded:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|Stock option awards and warrants |  |  | -- |  |  |  | 330,861 | 
|-------------------------------- |  |  | -- |  |  |  | ------- | 



| | (2) | Under the treasury-stock method, the Company excluded
all stock option awards and warrants from the computation of weighted average shares outstanding as a result of the exercise price
of the stock option awards and warrants being greater than the average market price of the Company’s Common Stock.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





12









BLUEFLY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012



|                                                     |  | Six Months Ended |            
|---------------------------------------------------- |  | ---------------- | -----------
|                                                     |  | June 30,         |            
|                                                     |  | 2012             |            
|                                                     |  |                  |            
|Net loss attributable to Bluefly, Inc. stockholders  |  | $                | (12,819,000
|                                                     |  |                  |            
|Weighted average common shares outstanding (basic)   |  |                  | 28,549,924 
|                                                     |  |                  |            
|Stock option
awards and warrants(1)(2)               |  |                  | --         
|                                                     |  |                  |            
|Restricted stock
awards(1)                           |  |                  | --         
|                                                     |  |                  |            
|Weighted average common shares outstanding (diluted) |  |                  | 28,549,924 



| | (1) | For the six months ended June 30, 2012 and 2011, the
Company had weighted average shares of the following potentially dilutive securities that were excluded:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|Stock option awards and warrants |  |  | 1,821 |  |  |  | 419,294 | 
|-------------------------------- |  |  | ----- |  |  |  | ------- | 



| | (2) | Under the treasury-stock method, the Company excluded
all stock option awards and warrants from the computation of weighted average shares outstanding as a result of the exercise price
of the stock option awards and warrants being greater than the average market price of the Company’s Common Stock.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 8 – SUBSEQUENT EVENT



On August 13, 2012 (the
“Closing Date”), the Company entered into a Note and Warrant Purchase Agreement (the “Purchase
Agreement”) with Rho Ventures VI, L.P. (“Rho”) and Prentice Consumer Partners, LP (“Prentice”,
and together with Rho, the “Purchasers”) pursuant to which the Company issued (i) $1,500,000 aggregate principal
amount of collateralized subordinated convertible promissory notes to Rho (the “Rho Notes”) and (ii) $1,500,000
aggregate principal amount of collateralized subordinated promissory notes to Prentice (the “Prentice Notes” and
together with the Rho Notes, the “Notes”).



The Rho Notes bear interest at 12% per
annum, compounded annually, and interest is payable upon maturity or conversion.  The Prentice Notes bear interest at 15%
per annum, compounded annually, and interest is payable quarterly.  Prentice received an origination fee on the Closing Date
equal to 2 percent of its loan amount. The Rho Notes are convertible, at the holder's option, (a) into equity securities that the
Company might issue in any subsequent round of financing that results in proceeds to the Company of at least $7,500,000 (a “Qualified
Financing”) at a price equal to the lowest price per share paid by any investor in such Qualified Financing or (b) into shares
of the Company’s common stock at a price per share equal to $1.05, which represents the fair market value on the Closing
Date.



The Notes have a one-year term but may
become due prior to the end of such term in the event of a change of control or a Qualified Financing.  The Notes are collateralized
by second priority liens on all assets of the Company.



In connection with the issuance of the
Notes, the Company also issued warrants, having a term of seven years, to purchase 476,190 shares of the Company’s common
stock (the “Warrants”) to each of Rho and Prentice at a price equal to $1.05 per share, which represents the fair market
value of the Common Stock on the Closing Date.  Prior to stockholder approval, which the Company has agreed to seek promptly,
the Rho Notes will be convertible and the Warrants will be exercisable only to the extent permitted by the applicable rules of
the Nasdaq Capital Market. Rho and Prentice have sufficient voting power to approve this matter without the vote of any other stockholder.



The terms of the Notes contain a
financial covenant in which the Company is to maintain current assets in excess of $20,000,000 including cash and cash
equivalents, accounts receivable, net and inventories, net (the “Financial Covenant”). In the event that the
Company does not maintain this Financial Covenant, the outstanding principal and accrued interest expense of the Notes shall
be accelerated and automatically become due and payable.





13







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 and accessories at discounts of up to 75% off of retail value. We launched bluefly.com
in September 1998 and expanded our portfolio of web sites in 2011 by launching Belle & Clive, a members-only shopping destination
that presents highly-curated selections of important brands via limited-time sale events, and launching Eyefly, an online retailer
of fashionable prescription glasses.



During the first quarter of 2012, we embarked
upon a new strategy that focuses on lowering our customer acquisition costs, increasing the lifetime value of our customers and
increasing our return on invested capital. To increase our return on invested capital, we have focused on improving our inventory turns
by being more competitive with our pricing. As we move forward, we plan to shift the inventory mix toward higher inventory margin
product and we plan to add more revenue streams that require minimal working capital and increasing the percentage of overall business
derived from contemporary inventory, which historically has higher gross margins. Management believes that these initiatives will
take several quarters to materialize. During the second quarter of 2012, this shift in strategy has negatively impacted gross margin
percentages as we were promotional and continued to deliberately reduce inventory purchases since the beginning of the year. However,
we expect gross margin percentages to improve over time as these initiatives take effect. Although it is not expected that our
gross margin percentages will be as low as they were during the first half of 2012, our gross margin percentages may continue to
be lower than they have been historically in future periods while we are implementing this new strategy.



We also expect to lower our customer acquisition
costs as we sign up more visitors to both Bluefly.com and Belle & Clive and convert subscribers to our email marketing program.
This in turn will enable us to more cost effectively market to our customers without spending significantly more marketing dollars,
which will lower our customer acquisition costs and increase the lifetime value of our customers. We have already seen improvements
in our member acquisition costs as we acquired 417,593 members at $4.87 per member for the three months ended June 30, 2012, compared
to 79,376 members at $22.14 per member for the three months ended June 30, 2011.



Our net sales decreased by approximately
8% to $22,215,000 for the three months ended June 30, 2012, from $24,037,000 for the three months ended June 30, 2011. Our gross
margin percentage decreased to 19.9% for the three months ended June 30, 2012, from 31.2% for the three months ended June 30, 2011.
Our gross profit decreased by approximately 41% to $4,429,000 for the three months ended June 30, 2012, from $7,493,000 for the
three months ended June 30, 2011. The decrease in both our gross profit and gross margin percentage was primarily attributable
to the deliberate shift in our strategy discussed above as we increase inventory turns by being more competitive with our pricing
and selling merchandise at lower gross margin percentages. We incurred an operating loss of $4,907,000 for the three months ended
June 30, 2012 as compared to an operating loss of $1,141,000 for the three months ended June 30, 2011. The increase in operating
loss for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily a result of a
decrease in gross profit and an increase in selling and fulfillment expenses and marketing expenses.



As a percentage of net sales, selling and
fulfillment expenses increased to 23.2% for the three months ended June 30, 2012, compared to 19.2% for the three months ended
June 30, 2011. General and administrative expenses increased to 8.8% for the three months ended June 30, 2012, compared to 8.0%
for the three months ended June 30, 2011.



Total marketing expenses (including staff
related costs) as a percentage of net sales increased to 10.0% for the three months ended June 30, 2012, compared to 8.7% for the
three months ended June 30, 2011. Total marketing expenses (excluding staff related costs) increased to $2,034,000 for the three
months ended June 30, 2012 from $1,757,000 for the three months ended June 30, 2011. Marketing expenses (excluding staff related
costs) increased primarily as a result of an increase in online marketing expenditures.



Our reserve for returns and credit card
chargebacks decreased to 36.2% of gross sales for the second quarter of 2012 compared to 37.5% for the second quarter of 2011.
The decrease was primarily caused by a reduction in our return rate, however, there can be no assurance that this trend will continue.



At June 30, 2012, we had an accumulated
deficit of $175,304,000. The net losses and accumulated deficit resulted primarily from operating losses including, but not limited
to, the costs associated with developing and marketing our Web Sites, and building our infrastructure, as well as non-cash effects
related to equity-linked instruments previously issued and payment of dividends to holders of our preferred stock.





14







Results Of Operations



For The Three Months Ended June 30,
2012 Compared To The Three Months Ended June 30, 2011.



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



|                                    |  | 2012 |        |   | 2011      | 
|----------------------------------- |  | ---- | ------ | - | --------- | 
|                                    |  |      |        |   | As a % of | 
|                                    |  |      |        |   | Net Sales | 
|                                    |  |      |        |   |           | 
|Net sales                           |  | $    | 22,215 |   |           | 
|Cost of sales                       |  |      | 17,786 |   |           | 
|Gross profit                        |  |      | 4,429  |   |           | 
|                                    |  |      |        |   |           | 
|                                    |  |      |        |   |           | 
|Selling and fulfillment expenses    |  |      | 5,150  |   |           | 
|Marketing expenses                  |  |      | 2,231  |   |           | 
|General and administrative expenses |  |      | 1,955  |   |           | 
|Total operating expenses            |  |      | 9,336  |   |           | 
|                                    |  |      |        |   |           | 
|                                    |  |      |        |   |           | 
|Operating loss                      |  |      | (4,907 | ) |           | 
|                                    |  |      |        |   |           | 
|Interest expense, net               |  |      | (113   | ) |           | 
|                                    |  |      |        |   |           | 
|Net loss                            |  | $    | (5,020 | ) |           | 



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



|                                                   |  | 2012 |         |  | 2011 |  
|-------------------------------------------------- |  | ---- | ------- |  | ---- | -
|                                                   |  |      |         |  |      |  
|Average order size (including shipping & handling) |  | $    | 282.99  |  |      | $
|New members added during the period*               |  |      | 417,593 |  |      |  



*Based on unique email addresses



In addition to the financial statement
items and metrics listed above, which are non-GAAP financial measurements, we also report gross sales, another non-GAAP financial
measure. We define gross sales as the total dollar amount of orders received by customers (including shipping and handling) net
of customer credits, but before any reserves are taken for returns or bad debt. We believe that the presentation of gross sales
is useful to investors because (a) it provides an alternative measure of the total demand for the products sold by us and (b) it
provides a basis upon which to measure the percentage of total demand that is reserved for both returns and bad debt. Management
uses the gross sales measure for these same reasons.



Net sales: Gross sales for the three
months ended June 30, 2012 decreased by approximately 9% to $34,840,000, from $38,435,000 for the three months ended June 30, 2011.
For the three months ended June 30, 2012, we recorded a provision for returns and credit card chargebacks of $12,625,000, or approximately
36.2% of gross sales. For the three months ended June 30, 2011, the provision for returns and credit card chargebacks was $14,398,000,
or approximately 37.5% of gross sales. The decrease in this provision as a percentage of gross sales resulted from a reduction
in our return rate, however, there can be no assurance that this trend will continue.



After the necessary provisions for returns,
credit card chargebacks, our net sales for the three months ended June 30, 2012 were $22,215,000. This represents a decrease of
approximately 8% compared to the three months ended June 30, 2011, in which net sales totaled $24,037,000. The decrease in net
sales resulted primarily from a 10% decrease in average order size, related to more promotional activity, which was partially offset
by an increase in customer orders, and, in part, a planned decrease in inventory purchases since the beginning of the year. In
addition, included in net sales for the second quarter of 2011 was an opportunistic sale of inventory to a third-party in the amount
of $1,331,000. For the three months ended June 30, 2012, revenue





15







from shipping and handling (which is included in net sales) decreased
approximately 23% to $885,000, from $1,157,000 for the three months ended June 30, 2011. Revenue from shipping and handling decreased
primarily as the result of an increase in promotional activity offered to customers compared to the second quarter of 2011.



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 three months ended June 30, 2012 was $17,786,000, resulting in a gross margin percentage of approximately
19.9%. Cost of sales for the three months ended June 30, 2011 was $16,544,000, resulting in a gross margin percentage of approximately
31.2%. Gross profit decreased by approximately 41% to $4,429,000 for the three months ended June 30, 2012, compared to $7,493,000
for the three months ended June 30, 2011. The decrease in both gross profit and gross margin percentage is attributable to the
deliberate shift in our strategy discussed above as we increase inventory turns by being more competitive with our pricing and
selling merchandise at lower gross margin percentages. While our gross profit and gross margin percentage have decreased during
the quarter, our inventory turns have improved by 32% for the three months ended June 30, 2012 compared to the three months ended
June 30, 2011.



Although it is not expected that our gross
margin percentages will be as low as they were during the first quarter of 2012, which was 15.4%, our gross margin percentages
may continue to be lower than they have been historically in future periods while we are implementing this new strategy.



Selling and fulfillment expenses:
Selling and fulfillment expenses increased by approximately 12% for the three months ended June 30, 2012 compared to the three
months ended June 30, 2011. Selling and fulfillment expenses, which include a total of $118,000 and $205,000 of costs related to
Eyefly for the three months ended June 30, 2012 and 2011, respectively, were comprised of the following:



|                                       |  | Three Months Ended June 30, |       |  | Percentage | 
|-------------------------------------- |  | --------------------------- | ----- |  | ---------- | 
|(All data in thousands)                |  | 2012                        |       |  | 2011       | 
|                                       |  |                             |       |  | As a % of  | 
|                                       |  |                             |       |  | Net Sales  | 
|                                       |  |                             |       |  |            | 
|Operating                              |  | $                           | 2,105 |  |            | 
|Technology                             |  |                             | 1,639 |  |            | 
|E-Commerce                             |  |                             | 1,406 |  |            | 
|Total selling and fulfillment expenses |  | $                           | 5,150 |  |            | 



As a percentage of net sales, our selling
and fulfillment expenses increased to 23.2% for the three months ended June 30, 2012, as compared to 19.2% for the three months
ended June 30, 2011.



Operating expenses include all costs related
to inventory management, fulfillment, customer service, and credit card processing. Operating expenses increased by 2.0% to $2,105,000
for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, primarily as a result of an increase
in variable fulfillment costs (e.g., picking and packing orders and processing returns) associated with an increase in customer
orders, which was partially offset by a decrease in credit card fees associated with a decrease in average order size and net sales.



Technology expenses consist primarily of
staff related costs, amortization of capitalized costs and web site hosting expenses. For the three months ended June 30, 2012,
technology expenses increased by 6.8% to $1,639,000, compared to the three months ended June 30, 2011. This increase was attributable
to an increase in consulting fees related to short-term staffing of $111,000, an increase in software support expenses of $65,000
and an increase in web site hosting expenses of $62,000, which were partially offset by a decrease in salary and salary related
expenses of $120,000.



E-Commerce
expenses include expenses related to our photo design studio, image processing, and Web Site design.
For the three months ended June 30, 2012, e-commerce expenses increased by approximately 39.1% to $1,406,000 as compared to the
three months ended June 30, 2011, primarily as a result of an increase in expenses related to photo shoots for Belle & Clive
of $150,000, an increase in salary and salary related expenses of $149,000.



Marketing expenses:Marketing expenses
(including staff related costs) increased by approximately 6% to $2,231,000 for the three months ended June 30, 2012, from $2,098,000
for the three months ended June 30, 2011.





16







Marketing expenses include expenses related
to (a) online marketing programs, which consist of social media programs, online integration partnerships, paid search, and fees
paid to marketing affiliates and comparison engines, (b) offline marketing programs, which consist of direct mail campaigns, television
advertising and production costs, as well as (c) staff related costs. As a percentage of net sales, our marketing expenses increased
to 10.0% for the three months ended June 30, 2012 from 8.7% for the three months ended June 30, 2011.



For the three months ended June 30, 2012,
total marketing expenses (excluding staff related costs) increased by 16% to $2,034,000 from $1,757,000 for the three months ended
June 30, 2011. The increase in total marketing expenses (excluding staff related costs) was attributable to an increase in online
marketing expenditures related to direct-email marketing programs resulting from an increase in our overall membership file and
fees paid to affiliate marketing programs.



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 three
months ended June 30, 2012 increased to $1,955,000, as compared to $1,927,000 for the three months ended June 30, 2011. The increase
in general and administrative expenses was primarily the result of an increase in stock-based compensation expenses related to
equity awards of $86,000, which were partially offset by a decrease in salary and salary related expenses of $88,000.



As a percentage of net sales, general and
administrative expenses for the three months ended June 30, 2012 increased to 8.8%, from 8.0% for the three months ended June 30,
2011.



Loss from operations: For the three
months ended June 30, 2012, we incurred an operating loss of $4,907,000, compared to an operating loss of $1,141,000 for the three
months ended June 30, 2011.



Other interest expense, net: Interest
expense for the three months ended June 30, 2012 increased to approximately $113,000, compared to $59,000 for the three months
ended June 30, 2011. Interest expense consists primarily of fees paid in connection with our credit facility.



Interest income for the three months ended
June 30, 2012 decreased to less than $1,000, from $4,000 for the three months ended June 30, 2011. These amounts related primarily
to interest income earned on our cash balances.



Net loss
per share attributable to Bluefly, Inc. stockholders:Net loss per share attributable
to Bluefly, Inc. stockholders increased to $0.17 per share for the three months ended June 30, 2012, compared to $0.04 per share
for the three months ended June 30, 2011. The increase in net loss per share attributable to Bluefly, Inc. stockholders is primarily
attributable to an increase in our operating loss, which was partially offset by an increase in our weighted average common shares
outstanding for the three months ended June 30, 2012 of 28,576,612, compared to 24,611,736 weighted average common shares outstanding
for the three months ended June 30, 2011, in connection with the private placement in September 2011 where we issued 3,666,665
shares of common stock to certain related-party stockholders.



For The Six Months Ended June 30, 2012 Compared To The Six
Months Ended June 30, 2011.



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



|                                    |  | 2012 |         |   | 2011      | 
|----------------------------------- |  | ---- | ------- | - | --------- | 
|                                    |  |      |         |   | As a % of | 
|                                    |  |      |         |   | Net Sales | 
|                                    |  |      |         |   |           | 
|Net sales                           |  | $    | 46,481  |   |           | 
|Cost of sales                       |  |      | 38,307  |   |           | 
|Gross profit                        |  |      | 8,174   |   |           | 
|                                    |  |      |         |   |           | 
|                                    |  |      |         |   |           | 
|Selling and fulfillment expenses    |  |      | 10,608  |   |           | 
|Marketing expenses                  |  |      | 4,809   |   |           | 
|General and administrative expenses |  |      | 5,496   |   |           | 
|Total operating expenses            |  |      | 20,913  |   |           | 
|                                    |  |      |         |   |           | 
|                                    |  |      |         |   |           | 
|Operating loss                      |  |      | (12,739 | ) |           | 
|                                    |  |      |         |   |           | 
|Other interest expense, net         |  |      | (185    | ) |           | 
|                                    |  |      |         |   |           | 
|Net loss                            |  | $    | (12,924 | ) |           | 





17







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



|                                                   |  | 2012 |         |  | 2011 |  
|-------------------------------------------------- |  | ---- | ------- |  | ---- | -
|                                                   |  |      |         |  |      |  
|Average order size (including shipping & handling) |  | $    | 260.49  |  |      | $
|New members added during the period*               |  |      | 906,774 |  |      |  



*Based on unique email addresses



Net sales: Gross sales for the six
months ended June 30, 2012 decreased by approximately 2% to $72,301,000 from $73,415,000 for the six months ended June 30, 2011.
For the six months ended June 30, 2012, we recorded a provision for returns and credit card chargebacks of $25,820,000 or approximately
35.7% of gross sales. For the six months ended June 30, 2011, the provision for returns and credit card chargebacks was $27,685,000,
or approximately 37.7% of gross sales. The decrease in this provision as a percentage of gross sales resulted from a reduction
in our return rate. There can be no assurance that this trend will continue.



After the necessary provisions for returns
and credit card chargebacks, our net sales for the six months ended June 30, 2012 was $46,481,000. This represents an increase
of approximately 2% compared to the six months ended June 30, 2011, in which net sales totaled $45,730,000. The increase in net
sales resulted primarily from an increase in customer orders and the reduction in return rates as discussed above. This increase
was partially offset by a decrease of approximately 15% in average order size, which resulted from sales incentives offered to
customers as part of our promotional activity. For the six months ended June 30, 2012, revenue from shipping and handling (which
is included in net sales) decreased approximately 9% to $2,074,000 from $2,275,000 for the six months ended June 30, 2011. Revenue
from shipping and handling decreased primarily as the result of an increase in promotional activity offered to customers compared
to the six months ended June 30, 2011.



Cost of sales: Cost of sales for
the six months ended June 30, 2012 totaled $38,307,000 resulting in a gross margin percentage of approximately 17.6%. Cost of sales
for the six months ended June 30, 2011 totaled $30,042,000, resulting in a gross margin percentage of 34.3%. Gross profit decreased
by approximately 48%, to $8,174,000 for the six months ended June 30, 2012 compared to $15,688,000 for the six months ended June
30, 2011. The decrease in both our gross profit and gross margin percentage was attributable to an increase in our promotional
activity and, in part, the deliberate shift in our strategy discussed above as we increase inventory turns by being more competitive
with our pricing and selling merchandise at lower gross margin percentages. While our gross profit and gross margin percentages
have decreased, our inventory turns have improved by 34% for the six months ended June 30, 2012 compared to the six months ended
June 30, 2011.



Selling and fulfillment expenses:
Selling and fulfillment expenses increased by approximately 19% for the six months ended June 30, 2012 compared to the six months
ended June 30, 2011. Selling and fulfillment expenses, which includes a total of $223,000 and $273,000 of costs related to Eyefly
for the six months ended June 30, 2012 and 2011, respectively, were comprised of the following:



|                                       |  | Six Months Ended June 30, |        |  | Percentage | 
|-------------------------------------- |  | ------------------------- | ------ |  | ---------- | 
|(All data in thousands)                |  | 2012                      |        |  | 2011       | 
|                                       |  |                           |        |  | As a % of  | 
|                                       |  |                           |        |  | Net Sales  | 
|                                       |  |                           |        |  |            | 
|Operating                              |  | $                         | 4,374  |  |            | 
|Technology                             |  |                           | 3,244  |  |            | 
|E-Commerce                             |  |                           | 2,990  |  |            | 
|Total selling and fulfillment expenses |  | $                         | 10,608 |  |            | 





18







As a percentage of net sales, our selling
and fulfillment expenses increased to 22.8% for the six months ended June 30, 2012, as compared to 19.6% for the six months ended
June 30, 2011.



Operating expenses increased for the six
months ended June 30, 2012 by approximately 7.9% to $4,374,000 compared to the six months ended June 30, 2011 as a result of increases
in variable fulfillment costs (e.g., picking and packing orders and processing returns) associated with an increase in customer
orders and fees associated with our customer service call center, which were partially offset by decreases in salary and salary
related expenses related to Eyefly personnel.



For the six months ended June 30, 2012,
technology expenses increased by approximately 10.3% to $3,244,000 compared to the six months ended June 30, 2011. This increase
was attributable to an increase in consulting fees related to short-term staffing of $213,000, an increase in software support
expenses of $146,000 and an increase in web site hosting expenses of $141,000. These increases were partially offset by a decrease
in salary and salary related expenses of approximately $183,000 (of which approximately $85,000 relates to capitalized salary and
salary related expenses in connection with web site development costs) and a decrease in depreciation expense, included in technology
expenses, of $65,000.



For the six months ended June 30, 2012,
e-commerce expenses increased by approximately 53.2% to $2,990,000 as compared to the six months ended June 30, 2011, primarily
as a result of increases in expenses related to photo shoots for Belle & Clive of $461,000, salary and salary related expenses
of $312,000, consulting fees of $84,000, short-term staffing expenses of $55,000 and expenses related to promotional photo shoots
of $63,000.



Marketing expenses: Marketing expenses
(including staff related costs) decreased by approximately 6% to $4,809,000 for the six months ended June 30, 2012, from $5,098,000
for the six months ended June 30, 2011.



As a percentage of net sales, total marketing
expenses (including staff related costs) decreased to 10.4% for the six months ended June 30, 2012, compared to 11.1% for the six
months ended June 30, 2011.



For the six months ended June 30, 2012,
total marketing expenses (excluding staff related costs) decreased by 2% to $4,307,000 from $4,375,000 for the six months ended
June 30, 2011. The decrease in total marketing expenses (excluding staff related costs) was primarily attributable to a reduction
in offline marketing expenditures related to television advertising, which was partially offset by an increase in online marketing
expenditures related to email marketing programs.



General and administrative expenses:
General and administrative expenses for the six months ended June 30, 2012 increased to $5,496,000, compared to $4,039,000 for
the six months ended June 30, 2011. The increase in general and administrative expenses was primarily the result of an increase
in stock-based compensation expenses related to equity awards of $834,000 and a net increase in salary and salary related expenses
of $571,000, which included $627,000 of severance payable to our former Chief Executive Officer.



As a percentage of net sales, general and
administrative expenses for the six months ended June 30, 2012 increased to approximately 11.8% from 8.8% for the six months ended
June 30, 2011.



Loss from operations: Operating
loss increased to $12,739,000 for the six months ended June 30, 2012, compared to $2,395,000 for the six months ended June 30,
2011.



Other interest expense, net: Interest
expense for the six months ended June 30, 2012 increased to $186,000 compared to $162,000 for the six months ended June 30, 2011.



Interest income for the six months ended
June 30, 2012 decreased to $1,000 from $11,000 for the six months ended June 30, 2011.



Net loss
per share attributable to Bluefly, Inc. stockholders:Net loss per share attributable
to Bluefly, Inc. stockholders increased to $0.45 per share for the six months ended June 30, 2012, compared to $0.09 per share
for the six months ended June 30, 2011. The increase in net loss per share attributable to Bluefly, Inc. stockholders is primarily
attributable to an increase in our operating loss, which was partially offset by an increase in our weighted average common shares
outstanding for the six months ended June 30, 2012 of 28,549,924, compared to 24,608,486 weighted average common shares outstanding
for the six months ended June 30, 2011, in connection with the private placement in September 2011 where we issued 3,666,665 share
of common stock to certain related-party stockholders.





19







Liquidity And Capital Resources



General



At June 30, 2012, we had approximately
$1.7 million in cash and cash equivalents compared to $4.4 million and $3.5 million at December 31, 2011 and June 30, 2011, respectively.
Working capital, which is computed as total current assets less total current liabilities and represents a measure of operating
liquidity, at June 30, 2012 and 2011 was $8.6 million and $24.7 million, respectively. Working capital at December 31, 2011 was
$20.7 million. As of June 30, 2012, we had an accumulated deficit of approximately $175.3 million. We have incurred negative cash
flows and cumulative net losses since inception.



During the first quarter of 2012, we embarked
upon a new strategy that focuses on lowering our customer acquisition costs, increasing the lifetime value of our customers and
increasing our return on invested capital. To increase our return on invested capital, we have focused on improving our inventory turns
by being more competitive with our pricing. As we move forward, we plan to shift the inventory mix toward higher inventory margin
product and we plan to add more revenue streams that require minimal working capital and increasing the percentage of overall business
derived from contemporary inventory, which historically has higher gross margins. Management believes that these initiatives will
take several quarters to materialize. During the second quarter of 2012, this shift in strategy has negatively impacted gross margin
percentages as we were promotional and continued to deliberately reduce inventory purchases since the beginning of the year. However,
we expect gross margin percentages to improve as these initiatives take effect. We believe that our existing cash balance, proceeds
from the recent bridge financing (as discussed further below), combined with working capital and the funds available from our credit
facility will be sufficient to enable us to meet planned expenditures through at least the next 12 months. There can be no assurance
that we will achieve or sustain positive cash flows from operations or profitability.



In addition, unforeseen increases in expenditures
or shortfalls in estimated revenues could significantly impair our ability to fund future operations. Should we experience unanticipated
losses, shortfalls in revenues or expenditures that exceed current estimates, management would implement a cost reduction plan,
that includes a reduction in work force as well as reductions in overhead costs and capital expenditures, and/or attempt to raise
additional debt or equity financing. There can be no assurance that we will achieve or sustain positive cash flows from operations
or profitability. If we are unable to maintain adequate liquidity, future operations will need to be scaled back or discontinued.



We have also committed to make additional
capital contributions of up to $208,000 in our majority-owned subsidiary, Eyefly, upon request.



We believe that in order to grow the business,
we will need to make significant investments in marketing, business and technology development, and inventory.  To that end,
in the normal course of business we have entered into agreements with suppliers and other business partners pursuant to which we
commit to significant expenditures or make payments if minimum levels of purchases are not made.  However, our budget and
our ability to make such expenditures are subject to a number of factors, including our results of operations.



Credit Facility



We have a credit facility with Wells Fargo
Retail Finance LLC (“Wells Fargo”) with a maturity date of June 17, 2014 (“Credit Facility”). Our Credit
Facility has standby and documentary letter of credit fees of 2.75% and 2.25%, respectively, and interest accrues on the average
daily amount under the Credit Facility during the preceding month to a per annum rate equal to the prime rate plus 2.50%, or, LIBOR
plus 2.75%.



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 substantially all
of our assets. Availability under the Credit Facility is determined by a formula that takes into account specified percentages
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 June 30, 2012, total availability under the Credit Facility was approximately
$5.9 million of which $4.5 million was committed for letters of credit in favor of suppliers, leaving approximately $1.4 million
available for further borrowings. The terms of the Credit Facility contain a material adverse change clause. In the event of a
material adverse change in our financial condition, we would not be able to obtain additional borrowings under the Credit Facility
and existing borrowings would become due and payable.



Both availability under our 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 provide credit support under our Credit Facility.





20







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. As of June 30, 2012, we had approximately $1,350,000 of prepaid inventory on our Consolidated Balance Sheet, compared
to $2,690,000 as of December 31, 2011.



2012 Financing Transaction



On August 13, 2012 (the “Closing
Date”), we entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Rho Ventures VI,
L.P. (“Rho”) and Prentice Consumer Partners, LP (“Prentice” and together with Rho, the “Purchasers”)
pursuant to which we issued (i) $1,500,000 aggregate principal amount of collateralized subordinated convertible promissory notes to Rho
(the “Rho Notes”) and (ii) $1,500,000 aggregate principal amount of collateralized subordinated promissory notes to Prentice
(the “Prentice Notes” and together with the Rho Notes, the “Notes”).  The Rho Notes bear interest
at 12% per annum, compounded annually, and interest is payable upon maturity or conversion.  The Prentice Notes bear interest
at 15% per annum, compounded annually, and interest is payable quarterly.  Prentice received an origination fee on the Closing
Date equal to 2 percent of its loan amount. The Rho Notes are convertible, at the holder's option, (a) into equity securities that
we might issue in any subsequent round of financing that results in proceeds to us of at least $7,500,000 (a “Qualified Financing”)
at a price equal to the lowest price per share paid by any investor in such Qualified Financing or (b) into shares of our common
stock at a price per share equal to $1.05, which represents the fair market value on the Closing Date.



The Notes have a one-year term but may
become due prior to the end of such term in the event of a change of control or a Qualified Financing.  The Notes are collateralized
by second priority liens on all our assets.



In connection with the issuance of the
Notes, we also issued warrants, having a term of seven years, to purchase 476,190 shares of our common stock (the “Warrants”)
to each of Rho and Prentice, respectively, at a price equal to $1.05 per share, which represents the fair market value of the Common
Stock on the Closing Date.  Prior to stockholder approval, which we have agreed to seek promptly, the Rho Notes will be convertible
and the Warrants will be exercisable only to the extent permitted by the applicable rules of the Nasdaq Capital Market. Rho and
Prentice have sufficient voting power to approve this matter without the vote of any other stockholder.



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 (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and 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 and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act were recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules
and forms, and were effective to ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, 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 the Company with the Securities and Exchange Commission, including Forms 8-K, 10-Q and 10-K.





21







These risks and uncertainties
include, but are not limited to, the following: the Company’s history of losses and anticipated future losses; the risk of
availability of additional capital, if required, to satisfy the Company’s needs for cash flow, inventory supply and growth
of the business; the Company’s ability to realize benefits from new initiatives such as its members-only web site Belle and
Clive; risks associated with the Company’s shift in strategy to emphasize inventory turns over product margin; the risks
that our reduction in spending on offline marketing in favor of online methods will continue to be successful; risks associated
with the continuing difficulties in the unfavorable general economic environment; risks associated with affiliates of Rho Ventures,
LP, affiliates of Soros Fund Management, private funds associated with Maverick Capital Ltd. and affiliates of Prentice Capital
Management, LP 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; risks associated with our dependence on certain concentration of suppliers for
a material portion of our inventory; the risk of default by us under our 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 related to the sale
of unauthentic or damaged goods and litigation risks related to sales in foreign countries; our potential exposure to product liability
claims in the event that products sold by us are defective; the dependence on third parties and certain relationships for certain
services, including our dependence on UPS and USPS (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; our ability to raise
additional capital, if needed, to support the growth of our business; 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 Sites;
rising return rates; dependence upon executive personnel who do not have long-term employment agreements; 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; uncertainties relating to the imposition of sales tax on Internet sales and our ability to utilize our net operating
losses.





22







Part II - OTHER INFORMATION



Item 5. Other Information



Financing Transaction



On August 13, 2012 (the “Closing
Date”), we entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Rho Ventures VI,
L.P. (“Rho”) and Prentice Consumer Partners, LP (“Prentice” and together with Rho, the “Purchasers”)
pursuant to which we issued (i) $1,500,000 aggregate principal amount of collateralized subordinated convertible promissory notes to Rho
(the “Rho Notes”) and (ii) $1,500,000 aggregate principal amount of collateralized subordinated promissory notes to Prentice
(the “Prentice Notes” and together with the Rho Notes, the “Notes”).  The Rho Notes bear interest
at 12% per annum, compounded annually, and interest is payable upon maturity or conversion.  The Prentice Notes bear interest
at 15% per annum, compounded annually, and interest is payable quarterly.  Prentice received an origination fee on the Closing
Date equal to 2 percent of its loan amount. The Rho Notes are convertible, at the holder's option, (a) into equity securities that
we might issue in any subsequent round of financing that results in proceeds to us of at least $7,500,000 (a “Qualified Financing”)
at a price equal to the lowest price per share paid by any investor in such Qualified Financing or (b) into shares of our common
stock at a price per share equal to $1.05, which represents the fair market value on the Closing Date.



The Notes have a one-year term but may
become due prior to the end of such term in the event of a change of control or a Qualified Financing.  The Notes are collateralized
by second priority liens on all our assets.



In connection with the issuance of the
Notes, we also issued warrants, having a term of seven years, to purchase 476,190 shares of our common stock (the “Warrants”)
to each of Rho and Prentice, respectively, at a price equal to $1.05 per share, which represents the fair market value of the Common
Stock on the Closing Date.  Prior to stockholder approval, which we have agreed to seek promptly, the Rho Notes will be convertible
and the Warrants will be exercisable only to the extent permitted by the applicable rules of the Nasdaq Capital Market. Rho and
Prentice have sufficient voting power to approve this matter without the vote of any other stockholder.



The issuance of the Notes and the Warrants
(the “Securities”) is deemed exempt from the registration provisions of the Securities Act of 1933, as amended (the
“Securities Act”), by reason of the provisions of Section 4(2) of the Securities Act. In determining that the issuance
of the Securities is exempt under Section 4(2) of the Securities Act, we relied, among other things, on representations and warranties
of the Purchasers to the effect that each is an accredited investor (as such term is defined under Rule 501 promulgated under the
Securities Act) and that each is acquiring the Securities for investment purposes and not with a current view to distribution thereof,
except as such distribution may be permissible under applicable law. The instruments representing the Securities shall contain
a legend to the effect that such Securities are not registered under the Securities Act and may not be transferred except pursuant
to an effective registration statement under the Securities Act or pursuant to an exemption from the registration requirements
under the Securities Act. In connection with the closing, the Company will file a Notice of Exempt Offering of Securities on Form
D in accordance with the requirements of Regulation D under the Securities Act.



In connection with these financing transactions,
we granted the Purchasers registration rights with respect to the shares of common stock issuable upon conversion of the Rho Notes
and the exercise of the Warrants (the “Shares”), substantially equivalent to those provided under an existing registration
rights agreement among the parties. Accordingly, we have agreed to file a shelf registration statement with respect to the resale
of the Shares by the Purchasers if Rho so requests.



The foregoing summaries of the Purchase
Agreement, the Rho Notes, the Prentice Notes and the Warrants are not complete and are qualified in their entirety by reference
to the agreements attached as exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 hereto, which are incorporated herein by reference.



Material Relationships Among the Parties



As of immediately prior to the Closing
Date, Rho beneficially owned approximately 41% of the Company’s outstanding common stock and Prentice beneficially owned
approximately 12% of the Company’s outstanding common stock.  Each of Rho and Prentice also have a representative on
the Company’s board of directors.





23







Item 6. Exhibits



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



|Exhibit Number | Description                                                                                                                                   
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                               
|10.1           | Note and Warrant Purchase Agreement, dated August 13, 2012, by and among the Company, Prentice Consumer Partners, LP and Rho Ventures VI, L.P.
|               |                                                                                                                                               
|10.2           | Secured Subordinated Promissory Note, dated August 13, 2012, by and between the Company and Prentice Consumer Partners, LP.                   
|               |                                                                                                                                               
|10.3           | Secured Subordinated Convertible Promissory Note, dated August 13, 2012, by and between the Company and Rho Ventures VI, L.P.                 
|               |                                                                                                                                               
|10.4           | Warrant No. 1, dated August 13, 2012, issued to Prentice Consumer Partners LP.                                                                
|               |                                                                                                                                               
|10.5           | Warrant No. 2, dated August 13, 2012, issued to Rho Ventures VI, L.P.                                                                         
|               |                                                                                                                                               
|10.6           | First Amendment to Amended and Restated Credit Agreement, dated April 18, 2012, by and between the Company and Wells Fargo.                   
|               |                                                                                                                                               
|10.7           | Employment Agreement, dated June 12, 2012, by and between the Company and Scott Erdman.                                                       
|               |                                                                                                                                               
|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.                       





24







SIGNATURES



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





| | BLUEFLY, INC.          
| | -----------------------
| |                        
| | By: /s/ Joseph C. Park 
| | Joseph C. Park         
| | Chief Executive Officer
| |                        
| |                        
| | By: /s/ Kara B. Jenny  
| | Kara B. Jenny          
| | Chief Financial Officer



August 14, 2012





25