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

                                    FORM 10-Q

(Mark One)

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      For the quarterly period ended March 31, 2006

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

                        Commission File Number: 001-14498

                                   ----------

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

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

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

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

                                   ----------

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

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

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

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

As of May 9, 2006, the issuer had outstanding 21,426,154 shares of Common Stock,
$.01 par value.

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<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
Part I . Financial Information

Item 1.  Financial Statements

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

         Condensed Statements of Operations for the three months ended
                  March 31, 2006 and 2005 (unaudited)                         4

         Condensed Statements of Cash Flows for the three months ended
                  March 31, 2006 and 2005 (unaudited)                         5

         Notes to Condensed Financial Statements (unaudited)                  6

Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                  10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          17

Item 4.  Controls and Procedures                                             17

Part II. Other Information                                                   18

Item 1.  Legal Proceedings                                                   18

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds         18

Item 6.  Exhibits                                                            18

Signature                                                                    19

<PAGE>

Part I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

                                  BLUEFLY, INC.

CONDENSED BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>
                                                                                                         MARCH 31,     DECEMBER 31,
                                                                                                            2006           2005
                                                                                                       -------------  -------------
                                               ASSETS
<S>                                                                                                    <C>            <C>
Current assets
    Cash and cash equivalents                                                                          $   4,429,000  $   9,408,000
    Inventories, net                                                                                      21,348,000     16,893,000
     Accounts receivable, net of allowance for doubtful accounts                                           2,948,000      1,717,000
     Prepaid inventory                                                                                       159,000        485,000
     Prepaid expenses                                                                                        281,000        915,000
     Other current assets                                                                                    385,000        419,000
                                                                                                       -------------  -------------
          Total current assets                                                                            29,550,000     29,837,000

Property and equipment, net                                                                                2,667,000      2,895,000

Other assets                                                                                                 298,000        313,000
                                                                                                       -------------  -------------
            Total assets                                                                               $  32,515,000  $  33,045,000
                                                                                                       =============  =============

Current liabilities
     Accounts payable                                                                                  $   7,725,000  $   5,662,000
     Allowance for sales returns                                                                           2,777,000      3,407,000
     Accrued expenses and other current liabilities                                                          898,000      1,083,000
     Deferred revenue                                                                                      2,456,000      1,784,000
                                                                                                       -------------  -------------
             Total current liabilities                                                                    13,856,000     11,936,000

Notes payable to related party shareholders                                                                4,000,000      4,000,000
Long-term interest payable to related party shareholders                                                   1,366,000      1,217,000
Long-term obligations under capital lease                                                                     13,000         27,000
                                                                                                       -------------  -------------
             Total liabilities                                                                            19,235,000     17,180,000
                                                                                                       -------------  -------------

Commitments and contingencies

Shareholders' equity
    Series A Preferred stock - $.01 par value; 500,000 shares authorized, 460,000 issued and
       outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation preference:           5,000          5,000
       $9.2 million plus accrued dividends of $6.2 million and $5.9 million as of  March 31, 2006
       and December 31, 2005, respectively)

    Series B Preferred stock - $.01 par value; 9,000,000 shares authorized, 8,889,414 shares issued
       and outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation                  89,000         89,000
       preference: $30 million plus accrued dividends of $10.1 million and $9.5 million as of March
       31, 2006 and December 31, 2005, respectively)

    Series C Preferred stock - $.01 par value; 3,500 shares authorized and 1,000 shares issued and
       outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation preference:              --             --
       $1 million plus accrued dividends of $311,000 and $286,000 as of March 31, 2006 and December
       31, 2005, respectively)

    Series D Preferred stock - $.01 par value; 7,150 shares authorized 5,386.745 and 6,313.43 issued
       and outstanding as of March 31, 2006 and December 31, 2005 (liquidation preference: $5.4                   --             --
       million plus  accrued dividends of $2.2 million and $6.3 million plus $2.4 million as of
       March 31, 2006 and December 31, 2005, respectively)

    Series E Preferred stock - $.01 par value; 1,000 shares authorized, issued and outstanding as of
       March 31, 2006 and December 31, 2005, respectively (liquidation preference: $1.0 million plus              --             --
       accrued dividends of $384,000 and $347,000 as of March 31, 2006 and December 31, 2005,
       respectively)

    Series F Preferred stock - $.01 par value; 7,000 shares authorized, 3,857.143 and 5,279.714
       issued and outstanding as of March 31, 2006 and December 31, 2005, respectively (liquidation               --             --
       preference: $3.9 million plus accrued dividends of $207,000 and $5.3 million plus $192,000 as
       of March 31, 2006 and December 31, 2005, respectively)

    Common stock - $.01 par value; 92,000,000 shares authorized and 21,426,154 and 19,059,166 shares
       issued and outstanding as of March 31, 2006 and December 31, 2005, respectively                       214,000        191,000
    Additional paid-in capital                                                                           116,183,000    115,527,000
    Accumulated deficit                                                                                 (103,211,000)   (99,947,000)
                                                                                                       -------------  -------------
           Total shareholders' equity                                                                     13,280,000     15,865,000
                                                                                                       -------------  -------------
           Total liabilities and shareholders' equity                                                  $  32,515,000  $  33,045,000
                                                                                                       =============  =============
</TABLE>

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

                                        3
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                   MARCH 31,
                                                          ------------------------------
                                                               2006            2005
                                                          -------------   -------------
<S>                                                       <C>             <C>
Net sales                                                 $  16,876,000   $  13,502,000
Cost of sales                                                10,037,000       8,617,000
                                                          -------------   -------------
     Gross profit                                             6,839,000       4,885,000

Selling, marketing and fulfillment expenses                   7,464,000       4,035,000
General and administrative expenses                           2,427,000       1,586,000
                                                          -------------   -------------
      Total operating expenses                                9,891,000       5,621,000

Operating loss                                               (3,052,000)       (736,000)

Interest and other income                                        45,000          40,000
Interest and other expense                                     (257,000)       (197,000)
                                                          -------------   -------------

Net loss                                                  $  (3,264,000)  $    (893,000)

Preferred stock dividends                                    (1,231,000)     (1,115,000)
                                                          -------------   -------------

Net loss available to common shareholders                 $  (4,495,000)  $  (2,008,000)
                                                          =============   =============

Basic and diluted loss per common share                   $       (0.22)  $       (0.13)
                                                          =============   =============

Weighted average common shares outstanding
(basic and diluted)                                          20,367,508      15,299,040
                                                          =============   =============
</TABLE>

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

                                        4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
                                                                                            MARCH 31,
                                                                                   -----------------------------
                                                                                        2006            2005
                                                                                   -------------   -------------
<S>                                                                                <C>             <C>
Cash flows from operating activities
   Net loss                                                                        $  (3,264,000)  $    (893,000)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                       353,000         290,000
     Stock options expense                                                               612,000          16,000
     Warrant issued to consultant                                                         67,000              --
     Provisions for returns                                                             (629,000)         27,000
     Allowance for doubtful accounts                                                      43,000          64,000
     Reserve for inventory obsolescence                                                  240,000         158,000
     Non-cash expense related to warrant issued to supplier                               92,000          67,000
     Changes in operating assets and liabilities:
      (Increase) decrease in
          Inventories                                                                 (4,787,000)       (858,000)
          Accounts receivable                                                         (1,274,000)       (754,000)
          Prepaid inventory                                                              326,000      (1,652,000)
          Prepaid expenses                                                               634,000          79,000
          Other current assets                                                            34,000         333,000
     Increase (decrease) in
        Accounts payable                                                               2,063,000       1,427,000
        Accrued expenses and other current liabilities                                  (186,000)       (273,000)
        Interest payable to related party shareholders                                   149,000         133,000
        Deferred revenue                                                                 672,000         203,000
                                                                                   -------------   -------------
    Net cash used in operating activities                                             (4,855,000)     (1,633,000)
                                                                                   =============   =============

Cash flows from investing activities
  Purchase of property and equipment                                                    (110,000)       (877,000)
                                                                                   -------------   -------------
Net cash used in investing activities                                                   (110,000)       (877,000)
                                                                                   -------------   -------------

Cash flows from financing activities
    Net proceeds from exercise of stock options                                               --          89,000
    Payments of capital lease obligation                                                 (14,000)       (114,000)
                                                                                   -------------   -------------
Net cash used in financing activities                                                    (14,000)        (25,000)
                                                                                   -------------   -------------

Net decrease in cash and cash equivalents                                             (4,979,000)     (2,535,000)
Cash and cash equivalents - beginning of period                                        9,408,000       6,685,000
                                                                                   -------------   -------------
Cash and cash equivalents - end of period                                          $   4,429,000   $   4,150,000
                                                                                   =============   =============

Supplemental schedule of non-cash investing and financing activities:
  Cash paid for interest                                                           $      49,000   $      40,000
                                                                                   =============   =============
  Warrant issued to consultant                                                     $      67,000   $          --
                                                                                   =============   =============
</TABLE>

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

                                        5
<PAGE>

                                  BLUEFLY, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
                                 MARCH 31, 2006

NOTE 1 - BASIS OF PRESENTATION

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

The Company has  sustained  net losses and negative  cash flows from  operations
since  the  formation  of  Bluefly.com.   The  Company's  ability  to  meet  its
obligations  in the  ordinary  course of business is dependent on its ability to
establish profitable operations and/or raise additional financing through public
or private debt or equity  financing,  or other sources to fund operations.  The
Company believes that its current funds,  together with working capital, and its
availability under its existing Credit Facility, will be sufficient to enable it
to meet its planned  expenditures  through  December  31,  2006.  The Company is
exploring  possible  additional  equity financing  opportunities to maximize the
growth of its  business  or for use if  anticipated  operating  results  are not
achieved.  If such  financings  are not  available  on terms  acceptable  to the
Company,  and/or the Company does not achieve its sales plan,  future operations
will need to be modified, scaled back or discontinued.

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

NOTE 2 - THE COMPANY

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

NOTE 3 - NOTES PAYABLE TO RELATED PARTY SHAREHOLDERS

In February  2006, the Company  extended the maturity  dates on the  Convertible
Promissory  Notes issued in July and October 2003 (the "Notes") to affiliates of
Soros Private Equity Partners, LLC (collectively, "Soros") that collectively own
a majority of the Company's  capital stock. The maturity dates of the Notes were
each extended for one year, from May 1, 2006 to May 1, 2007.

NOTE 4 - FINANCING AGREEMENT

The Company has a three year revolving  credit facility (the "Credit  Facility")
with Wells Fargo Retail  Finance,  LLC ("Wells  Fargo").  Under the terms of the
Credit  Facility,  Wells  Fargo  provides  the Company  with a revolving  credit
facility  and issues  letters of credit in favor of  suppliers  or factors.  The
Credit  Facility  is secured  by a lien on  substantially  all of the  Company's
assets,  as well as a  $2,000,000  letter of credit  issued by Soros in favor of
Wells  Fargo  (the  "Soros  LC").  Availability  under the  Credit  Facility  is
determined  by a formula  that takes into  account  the amount of the  Company's
inventory  and  accounts  receivable,  as  well as the  Soros  LC.  The  maximum
availability  is  currently  $7,500,000  ($6,650,000  after  giving  effect to a
required $850,000 availability  reserve), but can be increased to $12,500,000 at
the  Company's  request,  subject to certain  conditions.  As of March 31, 2006,
total  availability  under  the  Credit  Facility,  after  giving  effect to the
required $850,000 availability reserve, was approximately  $6,650,000,  of which
$2,821,000 was committed, leaving approximately $3,829,000 available for further
borrowings.

Interest  accrues  monthly on the average  daily  amount  outstanding  under the
Credit  Facility  during  the  preceding  month at a per annum rate equal to the
prime rate plus  0.75% or LIBOR  plus  2.75%.  The  Company  also pays a monthly
commitment fee on the unused portion of the facility (i.e.,  $7,500,000 less the
amount of loans outstanding) equal to 0.35%. The Company also

                                        6
<PAGE>

                                  BLUEFLY, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
                                 MARCH 31, 2006

pays Wells Fargo  certain  fees to open letters of credit and  guarantees  in an
amount equal to a certain  percentage of the face amount of the letter of credit
for each thirty (30) days such letter of credit,  or a portion thereof,  remains
open.  For  the  three  months  ended  March  31,  2006,  the  Company  incurred
approximately $48,000 in connection with these fees.

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

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

NOTE 5 - LOSS PER SHARE

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

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

<TABLE>
<CAPTION>
Security                 March 31, 2006      Exercise Prices   March 31, 2005      Exercise Prices
---------------------    --------------      ---------------   --------------      ---------------
<S>                          <C>              <C>                  <C>              <C>
Options                       8,117,316       $0.69 - $16.47        9,211,885       $0.69 - $16.47
Warrants                      1,945,893       $0.78 -  $3.96        1,704,945       $0.78 -  $9.08
Preferred Stock              42,683,619(1)                         43,323,430(1)
Convertible Notes(2)                 --                                    --
</TABLE>

     (1)  Excludes  dividends on preferred  stock,  which are payable in cash or
          common stock, at the Company's option, upon conversion,  redemption or
          liquidation.
     (2)  Excludes debt issue in connection with the July 2003 financing and the
          October 2003 financing, which is convertible into equity securities of
          the Company sold in any subsequent round of financing,  at the holders
          option,  at a price  that is  equal  to the  lowest  price  per  share
          accepted by any investor in such subsequent round of financing.  Until
          such financing occurs, such debt is not convertible into Common Stock.

NOTE 6 - STOCK BASED COMPENSATION

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

                                        7
<PAGE>

                                  BLUEFLY, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
                                 MARCH 31, 2006

aggregate of 15,700,000  shares  authorized for issuance.  As of March 31, 2006,
the Company has reserved an aggregate of  52,746,828  shares of Common Stock for
the  conversion  of  Preferred  Stock  and the  exercise  of Stock  Options  and
Warrants.

Before January 1, 2006, the Company accounted for stock-based compensation under
the  recognition  and  measurement  principles  of Accounting  Principles  Board
Opinion ("APB") No. 25,  "Accounting for Stock Issued to Employees"  ("APB 25"),
and related interpretations.  The Company did not recognize compensation expense
related to stock options  granted to employees and directors  where the exercise
price was at or above fair value at the date of grant.  Statement  of  Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation,"
established  accounting and  disclosure  requirements  using a  fair-value-based
method of accounting for stock-based  employee  compensation plans. As permitted
by  SFAS  No.   123,   the   Company   elected   to   continue   to  apply   the
intrinsic-value-based method of APB No. 25 described above, and adopted only the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting
For Stock-Based Compensation - Transition and Disclosure."

On January 1, 2006,  the start of the first quarter of fiscal 2006,  the Company
adopted the  provisions of Statement of Financial  Accounting  Standards No. 123
(revised  2004),  "Share-Based  Payment" ("SFAS No. 123(R)") which requires that
the costs resulting from all share-based  payment  transactions be recognized in
the  financial  statements  at their fair values.  The Company  adopted SFAS No.
123(R)  using  the  modified  prospective  application  method  under  which the
provisions  of SFAS No.  123(R)  apply to new  awards  and to  awards  modified,
repurchased,  or cancelled after the adoption date.  Additionally,  compensation
cost for the portion of the awards for which the requisite  service has not been
rendered  that are  outstanding  as of the adoption  date is  recognized  in the
Statement of  Operations  over the remaining  service  period after the adoption
date based on the award's  original  estimate  of fair value.  Results for prior
periods have not been restated.  Total share-based compensation expense recorded
in the  Statement  of  Operations  for the three  months ended March 31, 2006 is
$612,000.

On March 29, 2005, the SEC published Staff Accounting  Bulletin ("SAB") No. 107,
which provides the Staff's views on a variety of matters relating to stock-based
payments.  SAB No. 107 requires  stock-based  compensation  be classified in the
same expense line items as cash compensation. The application of SFAS No. 123(R)
had the following  effect on Q1 2006 reported  amounts  relative to amounts that
would  have been  reported  using the  intrinsic  value  method  under  previous
accounting:

As a result of adopting SFAS No.  123(R),  the Company's  operating loss and net
loss for the three months ended March 31, 2006 was $612,000  higher,  than if it
had continued to account for  share-based  compensation  under APB No. 25. Basic
and diluted  loss per share for the three months ended March 31, 2006 would have
been $0.03 per share lower if the Company had not adopted SFAS No.123(R).  There
was no effect on the Company's cash flows.

The  following  table  illustrates  the  effect on net income and net income per
common share applicable to common  stockholders for the three months ended March
31, 2005,  as if the Company had applied the fair value  recognition  provisions
for stock-based employee  compensation of SFAS No. 123, as amended. For purposes
of the pro forma  presentation,  option  forfeitures  are  accounted for as they
occurred  and no amounts of  compensation  expense  have been  capitalized  into
inventory or other assets,  but instead were  considered as period  expenses (in
thousands, except per share data):

                                                             THREE MONTHS ENDED
                                                               MARCH 31, 2005
                                                             ------------------
Net loss, as reported                                        $         (893,000)

Deduct: total stock based compensation
        expense determined under fair value
        based methods for all awards                                   (712,000)
Add:    Stock-based employee compensation
        Expense included in net loss                                     16,000
Pro forma net loss applicable to common shareholders                 (1,589,000)
Net Loss per share applicable to common shareholders
   Basic and diluted, as reported                            $            (0.13)
   Basic and diluted, pro forma                              $            (0.18)

                                        8
<PAGE>

                                  BLUEFLY, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
                                 MARCH 31, 2006

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

The table below  presents the  assumptions  used to calculate  the fair value of
options  granted  during  the  three  months  ended  March  31,  2006 and  2005,
respectively.

                                        THREE MONTHS ENDED    THREE MONTHS ENDED
                                          MARCH 31, 2006        MARCH 31, 2005
                                        ------------------    ------------------
Expected holding period (years)                6.0                   6.0
Risk-free interest rate                       4.79%                 4.42%
Dividend yield                                0.00%                 0.00%
Volatility                                     109%                  136%

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

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

Options granted                                   120,000    $         1.12
Options canceled                                  (41,212)   $         1.67
Options exercised                                       -    $         0.00
                                             ------------
Balance at March 31, 2006                       8,117,316    $         1.96

Eligible for exercise at December 31, 2005      4,969,929    $         2.15
Eligible for exercise at March 31, 2006         5,479,669    $         2.10

                                        9
<PAGE>

                                  BLUEFLY, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS - Unaudited
                                 MARCH 31, 2006

The stock options are exercisable in different periods through 2014.  Additional
information with respect to the outstanding  options as of March 31, 2006, is as
follows:

<TABLE>
<CAPTION>
                   --------------------------------------------------------   -------------------------
                                      OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                   --------------------------------------------------------   -------------------------
                                                   WEIGHTED        WEIGHTED                    WEIGHTED
   RANGE OF                                        AVERAGE          AVERAGE                     AVERAGE
   EXERCISE                                       REMAINING        EXERCISE     OPTIONS        EXERCISE
    PRICES           VESTED      UNVESTED      CONTRACTUAL LIFE      PRICE    EXERCISABLE        PRICE
---------------    ---------    ----------    ------------------   --------   -----------      --------
<S>                <C>           <C>                <C>            <C>          <C>            <C>
  $0.00 - $1.66    3,506,899     1,568,860          7.6 Years      $   1.23     3,506,899      $   1.19
  $1.66 - $3.32    1,655,490     1,020,667          7.3 Years      $   2.32     1,655,490      $   2.48
  $3.32 - $4.98       52,880        48,120          7.9 Years      $   3.92        52,880      $   3.92
  $4.98 - $6.64       22,250             -          2.7 Years      $   5.11        22,250      $   5.11
  $6.64 - $9.96       52,750             -          3.4 Years      $   9.17        52,750      $   9.17
 $9.96 - $11.62      104,250             -          3.7 Years      $  11.20       104,250      $  11.20
$11.62 - $14.94        6,250             -          3.7 Years      $  14.04         6,250      $  14.04
$14.94 - $16.60       78,900             -          2.8 Years      $  15.13        78,900      $  15.13
 $0.69 - $16.60    5,479,669     2,637,647          7.4 Years      $   1.96     5,479,669      $   2.10
</TABLE>

The total fair value of the 509,896  shares  that vested  during the quarter was
$785,000.  The  weighted  average fair value of the options  granted  during the
quarter was $0.98. At March 31, 2006, the aggregate intrinsic value of the fully
vested options was $378,000 and the weighted average remaining  contractual life
of the options was 6.6 years.  The Company has not capitalized any  compensation
cost,  or modified any of its stock option  grants  during the first  quarter of
2006.  No options  were  exercised  during the  quarter  and no cash was used to
settle  equity  instruments  granted under the Plans during the first quarter of
2006.

As of March 31, 2006, the total  compensation  cost related to non-vested awards
not yet recognized was $3.8 million.  Total  compensation cost is expected to be
recognized over 2 years on a weighted average basis.

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

OVERVIEW

Bluefly,  Inc.  is a leading  Internet  retailer  that  sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value.  We launched our Web site in September 1998. Over the past four
years,  our sales have grown at a  compounded  annual  growth  rate of more than
21.9%,  while our gross margin  percentage has increased from 22.5% in the first
quarter of 2003 to 40.5% in the first quarter of 2006.

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

Based on our improved  merchandise  strategy and recent  customer  research,  we
believe that there is an  opportunity  to accelerate  the growth of our business
while  continuing to provide our customers  with the great values that they have
become  accustomed  to. In an effort to take advantage of this  opportunity,  we
raised $7 million of equity financing in June 2005 and used  approximately  $3.2
million  of the  proceeds  to launch a  national  advertising  campaign.  We are
continuing  to use the proceeds to fund the  advertising  campaign for the first
half of 2006.  This campaign  launched in September  2005,  and during the first
quarter for 2006 we spent  approximately  $2.9 million in  connection  with this
campaign.

                                       10
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

In addition,  we secured a new $7.5  million  credit  facility  with Wells Fargo
Retail  Finance,  LLC ("Wells  Fargo") in July 2005.  This facility is primarily
being  used to help us  obtain  the  proper  merchandising  mix to  support  the
anticipated growth in demand from our national advertising campaign.

Our net sales  increased by 25% to $16,876,000  for the three months ended March
31, 2006 from  $13,502,000  for the three months ended March 31, 2005. Our gross
margin increased to 40.5% in 2006 from 36.2% in 2005, 34.0% in 2004 and 22.5% in
2003. Our gross profit increased by 40% to $6,839,000 for the three months ended
March 31, 2006 from  $4,885,000 for the three months ended March 31, 2005.  This
growth in gross  profit was  driven by the  increase  in net  sales,  and by the
increase in gross  margins.  Our  operating  loss  increased by almost 315%,  to
$3,052,000 in 2006,  from  $736,000 in 2005.  This was primarily a result of the
increased  marketing spend in the first quarter 2006 (approximately $2.9 million
higher in first  quarter  2006 than first  quarter  2005) and the  inclusion  of
approximately  $612,000 of stock option  expenses as a result of the adoption of
SFAS No. 123(R).

We increased our spending in marketing  (excluding  staff related costs) by 405%
to $3,648,000 for the first quarter of 2006, from $723,000 for the first quarter
2005. A large  portion of the  increased  marketing  expense was a result of the
costs associated with our national advertising  campaign,  which was launched in
September 2005. In general,  we intend to market our business more  aggressively
than we have in previous years.  This more aggressive growth strategy will cause
our marketing  expense as a percentage of revenue to increase in the short-term;
however,  we believe that it is a prudent  investment in our business given that
our margin  structure  and average  order size have  historically  resulted in a
relatively high positive  contribution to overhead and marketing on a customer's
first order.

On January 1, 2006,  we adopted SFAS No.  123(R),  which  requires  expensing of
stock options. As a result, we recorded total share-based  compensation expenses
of $612,000 for the three months ended March 31, 2006. Results for prior periods
have not been  restated  due to the adoption  based on the modified  prospective
approach. Had they been restated,  additional share-based  compensation expenses
of $696,000 would have been recorded for the three months ended March 31, 2005.

Our reserve for returns and credit card chargebacks  increased to 38.1% of gross
sales for the first  quarter  2006  compared to 36.3% in 2005.  The increase was
primarily  caused by an increase in average order size as well as a shift in our
merchandise  mix towards  certain  product  categories  that  historically  have
generated higher return rates.  However, we believe that this increase in return
rates has been more than offset by the higher  gross  margins and average  order
sizes that have been generated by this shift in merchandise mix.

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

At March 31, 2006, we had an accumulated deficit of $103,211,000. The net losses
and  accumulated  deficit  resulted  primarily  from the costs  associated  with
developing and marketing our Web site and building our  infrastructure,  as well
as non cash  beneficial  conversion  charges  resulting  from  decreases  in the
conversion  price of our Preferred  Stock.  In order to expand our business,  we
intend to invest in sales,  marketing,  merchandising,  operations,  information
systems,  site development and additional personnel to support these activities.
Therefore,  we may continue to incur substantial  operating losses.  Although we
have  experienced  revenue  growth  in  recent  years,  this  growth  may not be
sustainable  and  therefore  should  not  be  considered  indicative  of  future
performance.

CRITICAL ACCOUNTING POLICIES

Management Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported  amounts of assets and  liabilities  and the  disclosure  of
contingent  assets and liabilities at the dates of the financial  statements and
the reported amounts of revenues and expenses during the reporting periods.  The
most  significant  estimates  and  assumptions  relate  to the  adequacy  of the
allowances for sales returns,  recoverability  of  inventories,  useful lives of
property  and  equipment,  calculation  of  stock  based  compensation  and  the
realization of deferred tax assets.  Actual  amounts could differ  significantly
from these estimates.

                                       11
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

Revenue Recognition

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

     .    A customer executes an order.

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

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

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

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

Provision for Returns and Doubtful Accounts

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

Stock-Based Compensation

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

Inventory Valuation

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

Deferred Tax Valuation Allowance

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

RESULTS OF OPERATIONS

FOR THE THREE  MONTHS  ENDED MARCH 31, 2006  COMPARED TO THE THREE  MONTHS ENDED
MARCH 31, 2005

                                       12
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

The following  table sets forth our statement of operations  data, for the three
months ended March 31st. All data is in thousands, except as indicated below:

<TABLE>
<CAPTION>
                                                                   2006                     2005                     2004
                                                          ---------------------    ---------------------    ---------------------
                                                                      As a % of                As a % of                As a % of
                                                                      Net Sales                Net Sales                Net Sales
                                                                      ---------                ---------                ---------
<S>                                                       <C>             <C>      <C>             <C>      <C>             <C>
Net sales                                                 $  16,876       100.0%   $  13,502       100.0%   $  11,114       100.0%
Cost of sales                                                10,037        59.5%       8,617        63.8%       7,332        66.0%
                                                          ---------                ---------                ---------
         Gross profit                                         6,839        40.5%       4,885        36.2%       3,782        34.0%

Selling, marketing and fulfillment expenses                   7,464        44.2%       4,035        29.9%       3,449        31.0%
General and administrative expenses                           2,427        14.4%       1,586        11.7%       1,752        15.8%
                                                          ---------                ---------                ---------
         Total operating expenses                             9,891        58.6%       5,621        41.6%       5,201        46.8%

Operating loss                                               (3,052)      (18.1)%       (736)       (5.4)%     (1,419)      (12.8)%
Interest (expense) and other income, net                       (212)       (1.3)%       (157)       (1.2)%        289         2.6%
                                                          ---------                ---------                ---------
         Net loss                                            (3,264)      (19.4)%       (893)       (6.6)%     (1,130)      (10.2)%
</TABLE>

We also measure and evaluate  ourselves  against  certain other key  operational
metrics.  The following table sets forth our actual results based on these other
metrics for the three months ended March 31st, as indicated below:

<TABLE>
<CAPTION>
                                                             2006        2005         2004
                                                          ---------   ---------    ---------
<S>                                                       <C>         <C>          <C>
Average Order Size (including shipping & handling)        $  243.92   $  200.06    $  189.56
New Customers Added during the Period                        38,688      36,765       33,335
</TABLE>

Net sales:  Gross sales for the three months  ended March 31, 2006  increased by
over 28% to $27,245,000,  from  $21,211,000 for the three months ended March 31,
2005.  For the three months ended March 31,  2006,  we recorded a provision  for
returns and credit card  chargebacks  and other  discounts  of  $10,369,000,  or
approximately  38.1% of gross sales.  For the three months ended March 31, 2005,
the provision for returns and credit card  chargebacks  and other  discounts was
$7,709,000,  or  approximately  36.3%  of  gross  sales.  The  increase  in this
provision as a percentage of gross sales resulted from an increase in the return
rate. The increase was primarily  caused by an increase in average order size as
well as a shift in our merchandise  mix towards certain product  categories that
historically have generated higher return rates.  However,  we believe that this
increase in return rates has been more than offset by the higher  gross  margins
and average  order sizes that have been  generated by this shift in  merchandise
mix.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments  for  uncollected  sales  taxes,  our net sales for the three months
ended  March  31,  2006  were  $16,876,000.   This  represents  an  increase  of
approximately  25% compared to the three  months ended March 31, 2005,  in which
net sales  totaled  $13,502,000.  The growth in net sales  resulted from both an
increase  in the  number  of new  customers  acquired  (approximately  5% higher
compared  to  first  quarter  2005)  and  an  increase  in  average  order  size
(approximately  22% higher  compared to the first quarter  2005).  For the three
months  ended  March 31, 2006  revenue  from  shipping  and  handling  (which is
included in net sales) remained  relatively  unchanged.  Beginning in the fourth
quarter of 2005 we  outsourced  our  international  shipments  to a  third-party
provider  and  therefore   both  our  average  cost  and  average   revenue  per
international  shipment  is down,  which on a  blended  rate has  decreased  our
shipping and handling revenue per order.

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  March 31,  2006
totaled  $10,037,000  resulting in gross margin of approximately  40.5%. Cost of
sales for the three months ended March 31, 2005 totaled $8,617,000, resulting in
gross margin of 36.2%.  Gross profit  increased  by 40%, to  $6,839,000  for the
three months ended March 31, 2006

                                       13
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

compared to $4,885,000  for the three months ended March 31, 2005. The growth in
gross margin was primarily the result of increased  product  margins,  which was
driven by a  merchandising  strategy that focused on  negotiating  better prices
with vendors as well as selling more in-season  product.  In season  merchandise
has more value to our customers and therefore demands higher margins.

Selling, marketing and fulfillment expenses:  Selling, marketing and fulfillment
expenses  increased  by  approximately  85% in the  first  three  months of 2006
compared to the first three months of 2005.  Selling,  marketing and fulfillment
expenses were comprised of the following:

<TABLE>
<CAPTION>
                           Three Months Ended   Three Months Ended   Percentage Difference
                             March 31, 2006       March 31, 2005      increase (decrease)
                           ------------------   ------------------   ---------------------
<S>                        <C>                  <C>                                  <C>
Marketing                  $        4,031,000   $          894,000                   350.9%
Operating                           1,750,000            1,704,000                     2.7%
Technology                            971,000              895,000                     8.5%
E-Commerce                            712,000              542,000                    31.4%
                           ------------------   ------------------   ---------------------
                           $        7,464,000   $        4,035,000                    85.0%
</TABLE>

As a percentage of net sales,  our selling,  marketing and fulfillment  expenses
increased  to 44.2% for the three  months ended March 31, 2006 from 29.9% in the
three months ended March 31, 2005.  This increase was  primarily  related to the
increase in advertising spending from our advertising campaign and the recording
of stock option expenses as a result of our adoption of SFAS No. 123(R).

Marketing  expenses include  expenses  related to paid search,  online and print
advertising,  fees to  marketing  affiliates,  direct mail  campaigns as well as
staff related costs.  Marketing  expenses  increased by a higher percentage than
our  percentage  increase in revenue  because we focused  more of our  marketing
initiatives  on  our  national  advertising   campaign.   Of  the  $3.1  million
incremental  marketing  costs  in the  first  quarter  2006  compared  to  2005,
approximately $2.9 million related to the national advertising campaign.

While this more aggressive growth strategy will cause our marketing expense as a
percentage  of revenue to increase in the  short-term,  we believe  that it is a
prudent  investment in our business given that our improved margin structure and
average  order size have  historically  resulted in a relatively  high  positive
contribution to overhead on a customer's first order.

Operating   expenses   include  all  costs  related  to  inventory   management,
fulfillment,  customer service,  and credit card processing.  Operating expenses
increased in the first three months of 2006 by  approximately 3% compared to the
first three  months of 2005 as a result of variable  costs  associated  with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit card fees). These increases were partially offset by a decrease in credit
card fees attributed to a refund from one of our credit card  processors.  Costs
associated with our temporary  clearance  store decreased  compared to the prior
year,  as this  store is  operated  and  staffed  more  efficiently  than in the
previous year and we pay less rent for our New Jersey location.

Technology  expenses consist  primarily of staff related costs,  amortization of
capitalized  costs and Web site  hosting.  For the three  months ended March 31,
2006,  technology  expenses  increased by approximately 9% compared to the three
months ended March 31, 2005.  This increase  resulted from an increase in salary
related  expenses,  including  the  expensing of employee  stock  options in the
current  year,  as well as an increase in software  support.  This  increase was
offset slightly by a decrease in depreciation and web hosting expense.

E-Commerce  expenses  include  expenses  related  to  our  photo  studio,  image
processing,  and Web site  design.  For the three  months  ended March 31, 2006,
e-commerce  expenses  increased  by  approximately  31% as compared to the three
months  ended March 31,  2005,  primarily  due to an increase in salary  related
expenses as well as an increase in expenses associated with photo shoots and the
result of recording employee stock option expenses in the current period.

                                       14
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

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
March 31, 2006  increased  by  approximately  53% to  $2,427,000  as compared to
$1,586,000  for the three months  ended March 31, 2005.  The increase in general
and  administrative  expenses  was  primarily  the  result of the  recording  of
$481,000 of expense  related to employee  stock  options in the current  period,
increased consulting and professional fees of $81,000,  increased public company
expenses of $90,000 and increased depreciation expense of $101,000. In addition,
the Company  incurred  approximately  $90,000 in real estate  taxes in the first
quarter 2006.

As a percentage of net sales, general and administrative  expenses for the first
quarter of 2006 increased to approximately 14.4% from 11.7%.

Loss from  operations:  Operating loss increased by over 315% in the first three
months of 2006 to $3,052,000  from $736,000 in the first three months of 2005 as
the  increase  in net  sales  and gross  margin  were  more  than  offset by the
incremental  marketing  expenses and the recording of stock option expenses as a
result of the adoption of SFAS No. 123(R).

Interest  and other  income:  Other  income for the three months ended March 31,
2006  increased  to $45,000  from  $40,000 for the three  months ended March 31,
2005.  These  amounts  relate  primarily to interest  income  earned on our cash
balances.

Interest and other  expense:  Interest  expense for the three months ended March
31, 2006 totaled $257,000, compared to $197,000 for the three months ended March
31, 2005.  Interest  expense  relates to fees paid in  connection  with our Loan
Facility, as well as interest expense on the Convertible Notes.

LIQUIDITY AND CAPITAL RESOURCES

General

At March 31,  2006,  we had  approximately  $4.4 million in the form of cash and
cash  equivalents.  Working capital at March 31, 2006 and 2005 was $15.7 million
and $11.5 million,  respectively and at December 31, 2005 was $17.9 million (the
March 2005 amount  excludes the  approximately  $1.26 million of restricted cash
that we regained access to upon  refinancing our previous credit  facility).  In
addition,  as of March 31, 2006,  we had  approximately  $2.8 million  committed
under the Credit Facility,  leaving  approximately $3.8 million of availability,
compared to availability of $900,000 under our previous credit facility at March
31, 2005.

In February 2006,  Soros agreed to extend the maturity dates on the  Convertible
Promissory Notes issued to Soros in July and October 2003. The maturity dates of
the Notes, which were originally January and April 2004,  respectively,  subject
to interim extensions, were each further extended for one year, from May 1, 2006
to May 1, 2007.

We fund our operations through cash on hand, operating cash flow, as well as the
proceeds  of any equity or debt  financing.  Operating  cash flow is affected by
revenue and gross margin levels,  as well as return rates, and any deterioration
in our performance on these  financial  measures would have a negative impact on
our liquidity.  Total  availability under the Credit Facility is based primarily
upon our  inventory  levels.  In addition,  both  availability  under the Credit
Facility and our operating  cash flows are affected by the payment terms that we
receive from suppliers and service providers,  and the extent to which suppliers
require us to request  Wells Fargo to provide  credit  support  under the Credit
Facility. We believe that our suppliers' decision-making with respect to payment
terms and/or the type of credit  support  requested  is largely  driven by their
perception of our credit rating,  which is affected by  information  reported in
the industry and financial  press and  elsewhere as to our  financial  strength.
Accordingly,  negative  perceptions  as to our financial  strength  could have a
negative impact on our liquidity.  In addition,  newer vendors  generally do not
provide  us with  payment  terms  that  are as  favorable  as  those we get from
existing  relationships  and,  in  some  instances,   new  vendors  may  require
prepayments.  We  have  increased  our  prepayments  in  order  to  open  up new
relationships and gain access to inventory that was not previously  available to
us,  as  well  as in  connection  with  our  advertising  campaign,  as in  some
circumstances we need to pay in advance of production.  As of March 31, 2006, we
had approximately $159,000 of prepaid inventory on our balance sheet.

In addition,  our inventory levels as of March 31, 2006 were  approximately $7.8
million  higher than at March 31,  2005.  The  increase in  inventory  generally
reflects a ramp up in connection with our sales growth as well as  opportunistic
buying of fresh

                                       15
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

inventory that has not previously been available to us.  However,  the increased
inventory  level could adversely  affect our flexibility in taking  advantage of
other buying opportunities that may become available in the near term.

We believe  that our current  funds,  together  with  operating  cash flow,  and
availability  under our existing Credit Facility will be sufficient to enable us
to meet our planned expenditures through at least December 31, 2006. The Company
is exploring  possible equity financing  opportunities to maximize the growth of
our business or for use if anticipated  operating  results are not achieved.  If
such  financings  are not available on terms  acceptable to us, and/or we do not
achieve our sales plan, future  operations may need to be modified,  scaled back
or discontinued.

Credit Facility

In July 2005, we entered into a new three year  revolving  credit  facility with
Wells Fargo Retail Finance,  LLC.  Pursuant to the Credit Facility,  Wells Fargo
provides the Company with a revolving loan and issues letters of credit in favor
of suppliers or factors.  The Credit Facility is secured by a lien on all of the
Company's  assets,  as well as a $2,000,000  letter of credit issued by Soros in
favor of Wells Fargo (the "Soros LC"). Availability under the Credit Facility is
determined  by a formula  that takes into  account  the amount of the  Company's
inventory  and  accounts  receivable,  as  well as the  Soros  LC.  The  maximum
availability is currently $7,500,000, but can be increased to $12,500,000 at the
Company's request,  subject to certain  conditions.  As of March 31, 2006, total
availability  under the Credit  Facility,  after  giving  effect to the required
$850,000 availability reserve, was approximately  $6,650,000 of which $2,821,000
was  committed,   leaving   approximately   $3,829,000   available  for  further
borrowings.

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

Subject to certain conditions, if we default on any of our obligations under the
Credit Facility,  Wells Fargo has the right to draw upon the Soros LC to satisfy
any such  obligations.  If Wells  Fargo  draws on the Soros LC,  pursuant to the
terms of a  reimbursement  agreement  between  us and  Soros,  we would have the
obligation to, among other things,  reimburse  Soros for any amounts drawn under
the Soros LC plus interest accrued thereon. In addition,  we are required to pay
Soros Fund  Management  LLC an annual fee in  connection  with the  issuance and
maintenance  of the  Soros  LC in an  amount  equal  to the fee that we would be
required  to pay in order to have a similar  letter of credit  issued  under the
Credit Facility. For the year beginning on the date of the closing of the Credit
Facility this formula requires an annual fee of $55,000. We are also required to
reimburse  Soros for any costs and  expenses  associated  with the  issuance and
maintenance  of the Soros LC. In  connection  with the Soros LC we  granted  the
Soros Fund a subordinated lien on substantially all of our assets, including our
cash balances, in order to secure our reimbursement  obligations.  If we default
under the loan  facility,  our lender  and/or the Soros Fund would be  entitled,
among  other  things,  to  foreclose  on our  assets  in  order to  satisfy  our
obligations under the loan facility.

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

Commitments and Long Term Obligations

As of March 31, 2006, we had the following commitments and long term
obligations:

<TABLE>
<CAPTION>
                                                                                                                  More
                                                                              Less than      1-3        3-5      than 5
                                                                  Total         1 year      years      years     years
                                                               ------------   ---------   ---------   --------   ------
<S>                                                            <C>            <C>         <C>           <C>          <C>
Marketing and Advertising                                      $    277,000     277,000          --         --       --
Purchase Orders                                                $  5,799,000   5,799,000          --         --       --
Operating Leases                                               $  1,845,000     564,000   1,210,000     71,000       --
Capital Leases                                                 $     53,000      40,000      13,000         --       --
Employment Contracts                                           $  2,822,000   1,395,000   1,427,000         --       --
Notes payable to shareholders, including interest payable      $  5,366,000          --   5,366,000         --       --
                                                               ------------   ---------   ---------   --------   ------
     Grand total                                               $ 16,162,000   8,075,000   8,016,000     71,000       --
</TABLE>

                                       16
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

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

Off Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES.

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

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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

                                       17
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

uncertainties; uncertainties relating to the imposition of sales tax on Internet
sales;  and risks  associated  with the agreements  with Soros with respect to a
change of control and the liquidation preference of the Preferred Stock owned by
Soros.

PART II  - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

None.

ITEM 6.  EXHIBITS

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

       EXHIBIT NUMBER                          DESCRIPTION
       --------------    -------------------------------------------------------
       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

                                       18
<PAGE>

                                  BLUEFLY, INC.
                                 MARCH 31, 2006

                                   SIGNATURES

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

                                                   BLUEFLY, INC.

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

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

May 11, 2006

                                       19