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

                                    FORM 10-Q

(Mark One)

[ X ]           QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 2008

[   ]           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, 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. (Check one):

Large  accelerated  filer [ ] Accelerated  filer [ ]  Non-accelerated  filer [ ]
Smaller reporting company [X]

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

As of November 10, 2008, the issuer had outstanding  13,472,625 shares of Common
Stock, $.01 par value.
<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS
                               SEPTEMBER 30, 2008
<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                                                                                          <C>
PART I -         FINANCIAL INFORMATION

Item 1.          Financial Statements:

                 Condensed Balance Sheets as of September 30, 2008 (unaudited)
                          and December 31, 2007                                                 3

                 Condensed Statements of Operations for the nine months ended
                          September 30, 2008 and 2007 (unaudited)                               4

                 Condensed Statements of Operations for the three months ended
                          September 30, 2008 and 2007 (unaudited)                               5

                 Condensed Statements of Cash Flows for the nine months ended
                          September 30, 2008 and 2007 (unaudited)                               6

                 Condensed Notes to Financial Statements (unaudited)                          7 - 11

Item 2.          Management's Discussion and Analysis of Financial Condition
                          and Results of Operations                                          11 - 19

Item 3.          Quantitative and Qualitative Disclosures About Market Risk                     19

Item 4T.         Controls and Procedures                                                        20

PART II -        OTHER INFORMATION                                                              21

Item 6.          Exhibits                                                                       21

Signatures                                                                                      22
</TABLE>

                                        2
<PAGE>

Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements

                                  BLUEFLY, INC.

CONDENSED BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>
                                                                                        September 30,           December 31,
                                                                                            2008                   2007
                                                                                     -------------------   ----------------------
<S>                                                                                  <C>                   <C>
Assets
   Current Assets:
      Cash and cash equivalents                                                      $        1,920,000    $           6,730,000
      Accounts receivable - net of allowance for doubtful accounts                            3,157,000                2,102,000
      Inventories, net                                                                       28,341,000               28,492,000
      Prepaid inventory                                                                         982,000                  294,000
      Prepaid expenses                                                                        1,572,000                  777,000
      Other current assets                                                                      584,000                  416,000
                                                                                     -------------------   ----------------------
         Total current assets                                                                36,556,000               38,811,000

   Property and equipment, net                                                                6,831,000                6,019,000

   Other assets                                                                                 187,000                  189,000
                                                                                     -------------------   ----------------------
Total assets                                                                         $       43,574,000    $          45,019,000
                                                                                     ===================   ======================

Liabilities and Stockholders' Equity
   Current liabilities:
      Accounts payable                                                               $       10,459,000    $           8,460,000
      Allowance for sales returns                                                             4,416,000                4,204,000
      Accrued expenses and other current liabilities                                          2,559,000                2,052,000
      Deferred revenue                                                                        3,628,000                3,206,000
                                                                                     -------------------   ----------------------
         Total current liabilities                                                           21,062,000               17,922,000

   Notes payable to related party shareholders                                                3,050,000                       --
   Other long-term obligations                                                                       --                   60,000
                                                                                     -------------------   ----------------------
         Total liabilities                                                                   24,112,000               17,982,000
                                                                                     -------------------   ----------------------

   Commitments and contingencies

   Stockholders' equity:
      Series F Preferred  stock - $.01 par value;  7,000  shares  authorized  as of
         September  30, 2008 and  December  31, 2007;  571.43  shares  issued as of
         September  30,  2008 and  December  31,  2007;  262.06 and  571.43  shares
         outstanding  as of September 30, 2008 and December 31, 2007,  respectively
         (liquidation  preference:  $262,000 plus accrued  dividends of $65,000 and
         $571,000  plus accrued  dividends of $105,000 as of September 30, 2008 and
         December 31, 2007, respectively)                                                            --                       --
      Common  stock  -  $.01  par  value;   200,000,000  shares  authorized  as  of
         September  30, 2008 and  December  31,  2007;  13,545,534  and  13,426,803
         shares   issued  as  of   September   30,  2008  and  December  31,  2007,
         respectively,   13,388,979  and  13,275,730   shares   outstanding  as  of
         September 30, 2008 and December 31, 2007, respectively                               1,339,000                1,328,000
      Treasury stock                                                                         (1,452,000)              (1,430,000)
      Additional paid-in capital                                                            162,081,000              158,965,000
      Accumulated deficit                                                                  (142,506,000)            (131,826,000)
                                                                                     -------------------   ----------------------
         Total stockholders' equity                                                          19,462,000               27,037,000
                                                                                     -------------------   ----------------------
Total liabilities and stockholders' equity                                           $       43,574,000    $          45,019,000
                                                                                     ===================   ======================

                        The accompanying notes are an integral part of these condensed financial statements.
</TABLE>

                                        3
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                  Nine Months Ended
                                                                                                    September 30,
                                                                                      ----------------------------------------
                                                                                            2008                   2007
                                                                                      -----------------     ------------------
<S>                                                                                   <C>                   <C>
Net sales                                                                             $     68,381,000      $      61,795,000
Cost of sales                                                                               43,040,000             39,230,000
                                                                                      -----------------     ------------------
   Gross profit                                                                             25,341,000             22,565,000

Selling and fulfillment expenses                                                            14,525,000             13,528,000
Marketing expenses                                                                          10,620,000              9,130,000
General and administrative expenses                                                          9,858,000             10,450,000
                                                                                      -----------------     ------------------
   Total operating expenses                                                                 35,003,000             33,108,000

Operating loss                                                                              (9,662,000)           (10,543,000)

Interest income                                                                                 57,000                463,000
Interest expense                                                                              (362,000)              (193,000)
                                                                                      -----------------     ------------------

Net loss                                                                              $     (9,967,000)     $     (10,273,000)

Preferred stock dividends                                                                      (34,000)               (33,000)
Deemed dividend related to beneficial conversion feature on
   Series F Preferred Stock                                                                   (712,000)                    --
                                                                                      -----------------     ------------------

Net loss available to common shareholders                                             $    (10,713,000)     $     (10,306,000)
                                                                                      =================     ==================

Basic and diluted net loss per common share                                           $          (0.81)     $           (0.79)
                                                                                      =================     ==================

Weighted average common shares outstanding
(basic and diluted)                                                                         13,275,955             13,049,986
                                                                                      =================     ==================

                        The accompanying notes are an integral part of these condensed financial statements.
</TABLE>

                                        4
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                 Three Months Ended
                                                                                                    September 30,
                                                                                      ----------------------------------------
                                                                                            2008                   2007
                                                                                      -----------------     ------------------
<S>                                                                                   <C>                   <C>
Net sales                                                                             $     19,802,000      $      18,079,000
Cost of sales                                                                               12,495,000             12,351,000
                                                                                      -----------------     ------------------
   Gross profit                                                                              7,307,000              5,728,000

Selling and fulfillment expenses                                                             4,933,000              4,583,000
Marketing expenses                                                                           4,172,000              2,807,000
General and administrative expenses                                                          3,021,000              3,410,000
                                                                                      -----------------     ------------------
   Total operating expenses                                                                 12,126,000             10,800,000

Operating loss                                                                              (4,819,000)            (5,072,000)

Interest income                                                                                  8,000                 99,000
Interest expense                                                                              (182,000)               (55,000)
                                                                                      -----------------     ------------------

Net loss                                                                              $     (4,993,000)     $      (5,028,000)

Preferred stock dividends                                                                      (12,000)               (11,000)
Deemed dividend related to beneficial conversion feature on
   Series F Preferred Stock                                                                   (712,000)                    --
                                                                                      -----------------     ------------------

Net loss available to common shareholders                                             $     (5,717,000)     $      (5,039,000)
                                                                                      =================     ==================

Basic and diluted net loss per common share                                           $          (0.43)     $           (0.39)
                                                                                      =================     ==================
Weighted average common shares outstanding
(basic and diluted)                                                                         13,309,383             13,050,460
                                                                                      =================     ==================

                        The accompanying notes are an integral part of these condensed financial statements.
</TABLE>

                                        5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Nine Months Ended
                                                                                             September 30,
                                                                                ---------------------------------------
                                                                                     2008                      2007
                                                                                -----------------     -----------------
<S>                                                                             <C>                   <C>
Cash flows from operating activities:
   Net loss                                                                     $     (9,967,000)     $    (10,273,000)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                     1,622,000             1,292,000
     Stock based compensation                                                          2,241,000             4,735,000
     Provisions for returns                                                              211,000              (406,000)
     Bad debt expense                                                                    398,000               493,000
     Reserve for inventory obsolescence                                                  300,000             1,252,000
     Change in operating assets and liabilities:
       (Increase) decrease in:
          Accounts receivable                                                         (1,453,000)             (537,000)
          Inventories                                                                   (149,000)           (7,408,000)
          Prepaid inventory                                                             (688,000)              194,000
          Prepaid expenses                                                              (795,000)           (3,438,000)
          Other current assets                                                          (288,000)              (81,000)
          Other assets                                                                   138,000                    --
       Increase in:
          Accounts payable and other long-term liabilities                             1,989,000             3,465,000
          Accrued expenses and other current liabilities                                 530,000               256,000
          Deferred revenue                                                               422,000               644,000
                                                                                -----------------     -----------------
Net cash used in operating activities                                                 (5,489,000)           (9,812,000)
                                                                                -----------------     -----------------
Cash flows from investing activities:
   Purchases of property and equipment                                                (2,299,000)           (3,055,000)
                                                                                -----------------     -----------------
Net cash used in investing activities                                                 (2,299,000)           (3,055,000)
                                                                                -----------------     -----------------
Cash flows from financing activities:
   Proceeds from notes issued to related party shareholders                            3,000,000                    --
   Payments of capital lease obligation                                                       --               (14,000)
   Net proceeds from exercise of stock options                                                --                25,000
   Purchase of treasury stock                                                            (22,000)             (160,000)
                                                                                -----------------     -----------------
Net cash provided by (used in) financing activities                                    2,978,000              (149,000)
                                                                                -----------------     -----------------

Net decrease in cash and cash equivalents                                             (4,810,000)          (13,016,000)
Cash and cash equivalents - beginning of period                                        6,730,000            20,188,000
                                                                                -----------------     -----------------
Cash and cash equivalents - end of period                                       $      1,920,000      $      7,172,000
                                                                                =================     =================
Supplemental disclosure of cash flow information:
   Cash paid for interest                                                       $        193,000      $         86,000
                                                                                =================     =================
   Deemed dividend related to beneficial conversion feature on
         Series F Preferred Stock                                               $        712,000      $             --
                                                                                =================     =================
   Warrants issued to related party shareholders                                $        173,000      $             --
                                                                                =================     =================

                        The accompanying notes are an integral part of these condensed financial statements.
</TABLE>

                                        6
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

NOTE 1 - BASIS OF PRESENTATION

The accompanying condensed financial statements include the accounts of Bluefly,
Inc. (the "Company").  The condensed 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  statement  have  been
included.  The results of operations of any interim  period are not  necessarily
indicative  of the results of  operations to be expected for the fiscal year due
to seasonal and other factors. For further  information,  refer to the financial
statements and  accompanying  footnotes  included in the Company's Form 10-K for
the year ended December 31, 2007.

The Company has  sustained  net losses and negative  cash flows from  operations
since the launch of Bluefly.com.  The Company's  ability to meet its obligations
in the  ordinary  course of business is  dependent  on its ability to  establish
profitable  operations,  or find other sources to fund  operations.  The Company
believes that it has sufficient  liquidty  despite the disruption of the capital
markets and the continued decline in economic  conditions.  The Company believes
that  its  existing  cash  balance,  combined  with  working  capital,  and  its
availability under its existing Credit Facility (as hereinafter  defined),  will
be sufficient to enable it to meet its planned  expenditures under a streamlined
business plan through at least the next 12 months. The streamlined business plan
calls for,  among  other cost  measures,  reductions  in  marketing  and capital
expenditures,  delaying new hires and making selective inventory purchases.  The
Company may seek to raise additional equity capital should opportunities arise.

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 - REVERSE STOCK SPLIT

On March 13, 2008, the Company's Board of Directors  approved a 1-for-10 reverse
stock split of the Company's Common Stock. The record date for the reverse stock
split was April 3, 2008,  and the reverse  stock split was effective as of 11:59
P.M. EST on the same date.  Retroactive  restatement has been given to all share
numbers in this report, and accordingly, all amounts including per share amounts
are shown on a post-split basis.

NOTE 4 - NASDAQ COMPLIANCE

From August 2007 to April 2008, the Company was not in compliance with the $1.00
minimum  per share  requirement  for  continued  listing  as set forth in Nasdaq
Marketplace Rule 4310(c)(4).  Following the  implementation of the reverse stock
split described in Note 3, the Company's Common Stock closed at a price of $1.00
or more for ten consecutive trading days, and regained compliance with such rule
on April 17, 2008. In addition, on April 16, 2008, the Company received a letter
from the Nasdaq Listing  Qualifications  Staff (the "Staff") stating that it had
determined that the Company had failed to comply with the  shareholder  approval
rules  set  forth in  Nasdaq  Marketplace  Rule  4350(i)(1)(A)  because  certain
warrants issued to affiliates of Soros Fund Management LLC ("Soros") and private
funds  associated with Maverick  Capital,  Ltd.  ("Maverick")  (each of whom has
representation  on the Company's  Board of  Directors) in connection  with their
debt  financing  commitment  had  originally  been issued with an exercise price
based on the twenty-day  trailing  average trading price of the Company's Common
Stock,  which was lower than the market value of the  Company's  Common Stock on
the day  immediately  preceding the issuance of the warrants.  The Staff advised
the Company  that the  issuance of the warrants to Soros and Maverick at a price
less than the market  value  would be treated as equity  compensation  and would
require shareholder  approval pursuant to Nasdaq Marketplace Rule 4350(i)(1)(A),
unless  the  exercise  price of the  warrants  was  increased  to market  value.
Thereafter,  the Company,  Soros and  Maverick  agreed to amend the terms of the
warrants to increase the exercise  price of the warrants to a price equal to the
market value of the Company's Common Stock on the day immediately  preceding the
issuance of the warrants. As a result, the Staff determined that the Company had
regained  compliance  with such rule by amending  the  warrants to increase  the
exercise price.

                                        7
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

NOTE 5 - 2008 COMMITMENT FROM RELATED PARTY

In March 2008,  the Company  entered into an agreement (the  "Commitment")  with
affiliates of Soros Fund  Management LLC ("Soros") and private funds  associated
with  Maverick  Capital,  Ltd.  ("Maverick")  pursuant  to which they  agreed to
provide up to $3,000,000 of debt  financing to the Company,  on a standby basis,
available until March 2009, provided that the commitment amount would be reduced
by the gross proceeds of any equity financing  consummated  during the year. The
Company drew down the entire  $3,000,000 of debt in July 2008.  The draw down is
evidenced by subordinated convertible notes (the "Subordinated Notes") that have
a term  expiring  three years from the date of issuance and bear interest at the
rate of 8% per annum, compounded annually.  Interest is payable upon maturity or
conversion. The Subordinated Notes are convertible,  at the holder's option into
(a) equity  securities  that the Company might issue in any subsequent  round of
financing at a price equal to the lowest price per share paid by any investor in
such  subsequent  round of  financing  or (b) Common  Stock at a price per share
equal to $3.65, which represented the 20-day trailing average stock price on the
date of issuance of the Subordinated Notes.

As a result of the issuance of the  Subordinated  Notes, the conversion price of
the Company's Series F Convertible Preferred Stock, automatically decreased from
$8.20 to $3.65.  In  accordance  with FASB  Emerging  Issue Task Force Issue No.
00-27,  "Application  of  EITF  Issue  No.  98-5,  'Accounting  for  Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion Ratios',  to Certain Convertible  Instruments," this reduction in the
conversion  price  of the  Company's  Series F  Preferred  Stock  resulted  in a
beneficial  conversion  feature of  approximately  $712,000 as part of its third
quarter  financial  results.  This  non-cash  charge,  which is  analogous  to a
dividend,  resulted in a reduction in net loss available to common  shareholders
and, consequently an adjustment to the Company's computation of Loss Per Share.

In connection  with the  Commitment,  the Company  issued  warrants to Soros and
Maverick  to  purchase  an  aggregate  of 52,497  shares  of Common  Stock at an
exercise price equal to the trailing  20-day average stock price,  or $4.40.  As
described in Note 4, on April 8, 2008, the warrants were amended to increase the
exercise  price from $4.40 per share to $5.10 per share.  The exercise  price of
$5.10 per share equals the closing  price of the  Company's  Common Stock on the
day immediately preceding the issuance of the warrants.  There was no accounting
impact as a result of the modification.

The  Company  used  the  Black-Scholes   option  pricing  method   (assumptions:
volatility  79.6%,  risk free rate  2.96%,  a five year  expected  life and zero
dividend  yield)  to  calculate  the  value of the  52,497  warrants  issued  in
connection  with  the   Commitment.   Using  those   assumptions,   a  value  of
approximately $173,000 was assigned to the warrants. This amount was credited to
additional paid in capital and is being  accounted for as interest  expense over
the life of the Commitment which is one year.

NOTE 6 - FINANCING AGREEMENT

In March 2008, the Company  amended its credit  facility (the credit facility as
amended is  hereafter  referred  to as the "Credit  Facility")  with Wells Fargo
Retail  Finance,  LLC ("Wells Fargo") to (i) extend the term until July 26, 2011
from July 26,  2008;  (ii)  change  the rate at which  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 0.75% or LIBOR plus 3.25% on average
excess availability less than $3,000,000 and prime rate plus 0.50% or LIBOR plus
3% on average excess availability greater than $3.0 million;  (iii) increase the
monthly  commitment  fee on the unused  portion of the Credit  Facility to 0.50%
from 0.35%;  (iv) include a servicing fee of $3,333 per month;  (v) increase the
early termination fee to 1% of the revolving credit ceiling,  from 0.50% through
maturity;  and (vi) amend the standby and  documentary  letter of credit fees to
3.25%  and  2.75%,  respectively,  on  average  excess  availability  less  than
$3,000,000,  and 3.00% and 2.50%,  respectively,  on average excess availability
greater than $3,000,000.

In addition, the amendment provides that no revolving credit loans shall be made
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding.  In connection with this amendment,  the Company
paid Wells Fargo a $35,000 amendment fee. Under the terms of a Subordination and
Intercreditor  Agreement,  dated  as  of  March  26,  2008  (the  "Subordination
Agreement"),  Soros and Maverick have the right to purchase all of the Company's
obligations  from Wells Fargo at any time if the Company is in default under the
Credit Facility.

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.  Availability  under the Credit  Facility is  determined by a
formula  that  takes  into  account a certain  percentage  of the  amount of the
Company's   inventory  and  a  certain  percentage  of  the  Company's  accounts
receivable.  The  maximum  availability  is  currently  $7,500,000,  but  can be
increased  to  $12,500,000  at  the  Company's   request,   subject  to  certain
conditions.  As of  September  30,  2008,  total  availability  under the Credit
Facility  was  approximately  $7,500,000,  of which  $3,675,000  was  committed,
leaving approximately $3,825,000 available for further borrowings.

                                        8
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

For the nine months and three  months  ended  September  30,  2008,  the Company
incurred  approximately  $193,000 and $64,000 of fees,  respectively,  under the
Credit Facility.

NOTE 7 - 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.

Due to the  Company's net loss,  (i) options and warrants to purchase  shares of
Common Stock,  (ii)  Preferred  Stock  convertible  into shares of Common Stock,
(iii)  restricted  stock awards that have not yet vested and (iv) deferred stock
unit awards for shares that have not yet been delivered were not included in the
computation of diluted loss per share as the effects would be anti-dilutive  and
accordingly, basic and diluted weighted average shares outstanding are equal for
the periods presented:

<TABLE>
<CAPTION>
                                           As of                                              As of
Security                             September 30, 2008          Exercise Prices        September 30, 2007        Exercise Prices
--------                             ------------------          ---------------        ------------------        ---------------
<S>                                             <C>               <C>                            <C>               <C>
Options                                         358,851           $2.34 - $27.30                   350,126         $8.00 - $27.30
Restricted Stock Awards/DSUs                    852,977(2)                    --                 1,080,444(2)                  --
Warrants                                        113,574           $5.10 - $39.60                   121,425         $7.80 - $39.60
Preferred Stock                                  71,681(1),(3)                --                    69,634(1)                  --
Subordinated Notes                              821,918(4)                    --                        --                     --
</TABLE>

(1)  At September  30, 2008 and 2007,  there were 262 and 571 shares of Series F
     Convertible Preferred Stock outstanding, respectively, that are convertible
     into  approximately  71,681 and 69,634  shares of Common  Stock  (excluding
     dividends).

(2)  Includes Restricted Stock Awards and DSUs.

(3)  During the quarter ended  September 30, 2008,  approximately  309 shares of
     Series F Convertible Preferred Stock were converted, in accordance with the
     terms thereof,  into  approximately  112,000 shares (on a post-split basis,
     see Note 3) of Common Stock at the conversion price of $3.65 per share.

(4)  At  September  30,  2008,  there  were  $3,000,000  of  Subordinated  Notes
     outstanding  that are convertible into Common Stock at the conversion price
     of $3.65 per share.

NOTE 8 - STOCK-BASED COMPENSATION

The  Company  accounts  for  stock-based  compensation  in  accordance  with 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  Condensed
Statements of Operations  over the remaining  service  period after the adoption
date based on the award's  original  estimate of fair value.  Total  share-based
compensation  expense recorded in the Condensed Statements of Operations for the
nine months ended September 30, 2008 and 2007 was $2,241,000 and $4,735,000, and
for the  three  months  ended  September  30,  2008 and 2007  was  $594,000  and
$1,508,000, respectively.

Stock Options
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 Common 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 notes in effect on the
date of the grant.

                                        9
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

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

<TABLE>
<CAPTION>
                                                                            Number of       Weighted Average
                                                                             Shares              Price
                                                                         ---------------    ----------------
<S>                                                                             <C>         <C>
Balance at December 31, 2007                                                    342,879     $         10.51
   Options granted                                                               37,000                4.46
   Options cancelled                                                            (21,028)              10.44
   Options exercised                                                                 --                  --
                                                                         ---------------    ----------------
Balance at September 30, 2008                                                   358,851     $          9.89
                                                                         ===============    ================
Vested at December 31, 2007                                                     287,112     $         10.37
                                                                         ===============    ================
Vested at September 30, 2008                                                    312,501     $         10.38
                                                                         ===============    ================
</TABLE>

During the third quarter of 2008, 19,842 options vested. The total fair value of
the  options  that  vested  during the third  quarter of 2008 was  approximately
$205,960.  There were 2,000 stock  options  granted  during the third quarter of
2008. At September 30, 2008, the aggregate  intrinsic  value of the fully vested
options  was $0 and  the  weighted  average  remaining  contractual  life of the
options  was  approximately  5  years.  The  Company  has  not  capitalized  any
compensation  cost,  or modified any of its stock option  grants during the nine
months ended  September  30, 2008.  During the third quarter of 2008, no options
were exercised and no cash was used to settle equity  instruments  granted under
the Company's equity incentive plans.

As of September  30, 2008,  the total  compensation  cost related to  non-vested
stock option awards not yet recognized was $130,000.  Total compensation cost is
expected to be recognized over one year on a weighted average basis.

Restricted Stock Awards and Deferred Stock Unit Awards
The following table is a summary of activity  related to restricted stock swards
and deferred stock unit awards for employees at September 30, 2008:

<TABLE>
<CAPTION>
                                                                                Restricted             Deferred Stock
                                                                               Stock Awards             Unit Awards
<S>                                                                         <C>                     <C>
Balance at December 31, 2007                                                             39,653                  714,750
   Shares/Units granted                                                                   8,625                  250,000
   Shares/Units forfeited                                                                (1,875)                (118,523)
   Shares/Units restriction lapses                                                      (39,653)                      --
                                                                            --------------------    ---------------------
Balance at September 30, 2008                                                             6,750                  846,227
                                                                            ====================    =====================
Weighted average grant date fair value per share                            $              3.71     $               8.17
                                                                            ====================    =====================
Aggregate grant date fair value                                             $            25,043     $          6,913,675
                                                                            ====================    =====================

Weighted average vesting service period of shares granted                             12 Months             12-36 Months

Number of shares/units vested at September 30, 2008                                          --                  269,224
                                                                            ====================    =====================
Number of shares/units unvested at September 30, 2008                                     6,750                  577,003
                                                                            ====================    =====================
</TABLE>

For  the  third  quarter  of  2008,   the  Company   recognized  an  expense  of
approximately $518,000 in connection with these awards.

As of September  30, 2008,  the total  compensation  cost related to  non-vested
restricted  stock and deferred stock units not yet  recognized  was  $2,088,000.
Total compensation cost is expected to be recognized over a one year period on a
weighted average basis.

                                       10
<PAGE>

                                 BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

NOTE 9 - FAIR VALUE

Effective  January 1, 2008,  the  Company  implemented  Statement  of  Financial
Accounting  Standards  No. 157,  Fair Value  Measurement,  ("SFAS  157"),  which
defines fair value, establishes a framework for measuring fair value and expands
disclosure  about  fair  value  measurements.   The  fair  value  hierarchy  for
disclosure of fair value measurements under SFAS 157 is as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities

Level 2 - Quoted prices for similar assets and  liabilities in active markets or
inputs that are observable

Level 3 - Inputs that are  unobservable  (for example cash flow modeling  inputs
based on assumptions)

The  adoption  of FAS 157 did not  have an  impact  on the  Company's  financial
position or results of operations.

In February 2008, the FASB issued FASB Staff Position 157-2 ("FSP 157-2"), which
delayed the  implementation  of FAS 157 until January 1, 2009, for non-financial
assets and  liabilities  that are not required to be measured at fair value on a
recurring  basis.  Pursuant to FSP 157-2,  the Company did not adopt FAS 157 for
non-financial  assets and liabilities  and is currently  assessing the impact of
FAS 157 on its non-financial assets and liabilities.

NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS

In March  2008,  the FASB  issued SFAS No.  161,  Disclosures  about  Derivative
Instruments and Hedging  Activities,  ("SFAS 161").  SFAS 161 amends and expands
the disclosure  requirements of SFAS 133, "Accounting for Derivative Instruments
and  Hedging  Activities."  SFAS  161  requires  qualitative  disclosures  about
objectives and strategies for using derivatives,  quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about  credit-risk-related  contingent features in derivative  agreements.  This
statement  is effective  for  financial  statements  issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of SFAS 161 will
not affect the Company's financial condition and results of operations,  but may
require additional  disclosures if the Company enter into derivative and hedging
activities.

In April 2008, the FASB issued EITF 07-05, Determining Whether an Instrument (or
Embedded  Feature) Is Indexed to an Entity's  Own Stock,  ("EITF  07-05").  EITF
07-05  provides  guidance on  determining  what types of instruments or embedded
features in an instrument held by a reporting  entity can be considered  indexed
to its own stock for the purpose of evaluating  the first  criteria of the scope
exception in paragraph  11(a) of FAS 133.  EITF 07-05 is effective for financial
statements  issued for fiscal years  beginning after December 15, 2008 and early
application  is not permitted.  Management is evaluating  what effect EITF 07-05
will have on the Company's  financial position and operating results relating to
its convertible debt.

In May 2008,  the FASB  issued  Staff  Position  No.  APB 14-1,  Accounting  for
Convertible  Debt  Instruments  That  May Be  Settled  in Cash  upon  Conversion
(Including Partial Cash Settlement) ("FSP APB 14-1") that requires the liability
and equity  components of convertible  debt  instruments  that may be settled in
cash upon  conversion  (including  partial  cash  settlement)  to be  separately
accounted  for in a  manner  that  reflects  the  issuer's  nonconvertible  debt
borrowing  rate.  The resulting debt discount would be amortized over the period
during  which the debt is expected to be  outstanding  (i.e.,  through the first
optional  redemption date) as additional  non-cash interest expense.  The equity
component is determined by deducting the fair value of the liability  component.
FSP APB 14-1 will become effective beginning in our first quarter of 2009 and is
required to be applied  retrospectively to all presented periods, as applicable.
Management  is  evaluating  what effect FSP APB 14-1 will have on the  Company's
financial position and operating results relating to its convertible debt.

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.

Our net sales increased by approximately 10% to $19,802,000 for the three months
ended September 30, 2008 from

                                       11
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

$18,079,000  for the three months  ended  September  30, 2007.  Our gross margin
increased to 36.9% for the three months ended  September 30, 2008 from 31.7% for
the three months ended  September 30, 2007. Our gross profit  increased by 27.6%
to $7,307,000 for the three months ended  September 30, 2008 from $5,728,000 for
the three months ended  September  30, 2007.  Our  operating  loss  decreased to
$4,819,000 for the three months ended September 30, 2008 from $5,072,000 for the
three months ended  September 30, 2007.  This decrease was primarily a result of
an increase in net sales and gross profit  compared to the prior year as well as
a decrease in general and administrative expenses and was more than offset by an
increase in total  marketing  and selling and  fulfillment  expenses.  Marketing
expenses  (excluding  staff related costs) increased to $4,172,000 for the third
quarter of 2008 from  $2,807,000  for the third  quarter  2007,  primarily  as a
result  of our  growth  of  marketing  programs  as  well as the  timing  of our
integration of Project  Runway Season 5. In 2008,  Project Runway Season 5 aired
in the third quarter while last year Project Runway Season 4 aired in the fourth
quarter with the finale being aired in the first  quarter of 2008.  Expenditures
for  online  programs  increased  15% for the period and  spending  for  offline
programs increased 119% (largely due to timing).  The mix of marketing spend for
the quarter and the year will  continue  to shift  toward  online as the Company
believes that online marketing programs are more efficient.

Our reserve for returns and credit card chargebacks remain relatively  unchanged
at approximately  39.4% of gross sales for the third quarter of 2008 compared to
39.8% for the third  quarter of 2007.  The  decrease was  primarily  caused by a
slight  decrease  in our return rate which was,  in turn,  caused in part,  by a
shift in our merchandise mix.

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

We have  developed a new version of our Web site,  which was placed into service
in August 2008. We have capitalized a total of $5,282,000 in connection with the
development of the new Web site, resulting in increased capitalized expenses and
increased  depreciation  during the nine and three  months ended  September  30,
2008.

At September 30, 2008, we had an accumulated  deficit of  $142,506,000.  The net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our  infrastructure,  as well
as non-cash  beneficial  conversion  charges  resulting  from  decreases  in the
conversion price of our Preferred Stock and the payment of non-cash dividends to
holders of Preferred  Stock.  In order to expand our business,  we would need to
invest in sales, marketing, merchandising, operations, information systems, site
development and additional  personnel to support these  activities.  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 and we may continue to incur substantial operating losses.

Results Of Operations

For The Nine Months Ended  September  30, 2008 Compared To The Nine Months Ended
September 30, 2007.

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

<TABLE>
<CAPTION>
                                                    2008                         2007                        2006
                                            ----------------------      ----------------------       -----------------------
<S>                                         <C>          <C>            <C>          <C>             <C>           <C>
                                                         As a % of                   As a % of                     As a % of
                                                         Net Sales                   Net Sales                     Net Sales
Net sales                                   $ 68,381        100.0%      $ 61,795        100.0%       $ 49,991         100.0%
Cost of sales                                 43,040         62.9         39,230         63.5          29,995          60.0
                                            --------     ---------      --------     ---------       --------      ---------
    Gross profit                              25,341         37.1         22,565         36.5          19,996          40.0

Selling and fulfillment expenses              14,525         21.2         13,528         21.9          11,152          22.3
--------------------------------
</TABLE>

                                       12
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

<TABLE>
<S>                                         <C>          <C>            <C>            <C>             <C>           <C>
Marketing expenses                            10,620         15.5           9,130         14.7           9,256          18.5
General and administrative                     9,858         14.4          10,450         16.9           8,019          16.1
                                            --------     ---------      ----------     ---------       --------      ---------
    Total operating expenses                  35,003         51.2          33,108         53.5          28,427          56.9

Operating loss                                (9,662)       (14.1)        (10,543)       (17.0)         (8,431)        (16.9)

Interest income (expense) and
    other income                                (305)       (0.5)             270          0.4            (219)         (0.4)
                                            --------     ---------      ----------     ---------      ---------      ---------
Net loss                                    $ (9,967)      (14.6)%      $ (10,273)       (16.6)%      $ (8,650)        (17.3)%
                                            ========     =========      ==========     =========      =========      =========
</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 nine months ended September 30:

<TABLE>
<CAPTION>
                                                                 2008             2007            2006
<S>                                                            <C>              <C>             <C>
Average Order Size (including shipping & handling)             $ 282.73         $ 277.60        $ 250.65
New Customers Added during the Period*                          141,584          131,895         112,457
</TABLE>

*Based on unique email addresses

In addition to the condensed financial statement items and metrics listed above,
we also report gross sales,  which is a 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 the  Company  and (b) it
provides a basis upon with 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 nine months ended September 30, 2008 increased by
approximately  10% to $113,728,000  from  $103,703,000 for the nine months ended
September 30, 2007. For the nine months ended  September 30, 2008, we recorded a
provision  for  returns  and credit  card  chargebacks  and other  discounts  of
$45,347,000  or  approximately  39.9% of gross sales.  For the nine months ended
September 30, 2007,  the provision for returns and credit card  chargebacks  and
other discounts was  $41,908,000,  or  approximately  40.4% of gross sales.  The
decrease in this provision as a percentage of gross sales resulted from a slight
decrease  in the  return  rate,  which  was  primarily  caused by a shift in our
merchandise mix.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments  for sales taxes,  our net sales for the nine months ended September
30, 2008 was  $68,381,000.  This  represents  an increase of  approximately  11%
compared to the nine months ended September 30, 2007, in which net sales totaled
$61,795,000.  The growth in net sales resulted primarily from a 7.3% increase in
the number of new customers acquired as well as a 1.8% increase in average order
size.  For the nine months ended  September 30, 2008,  revenue from shipping and
handling  (which  is  included  in net  sales)  increased  approximately  18% to
$3,898,000  from  $3,315,000  for the nine  months  ended  September  30,  2007.
Shipping and handling revenue increased at a greater  percentage than revenue as
a whole as a result of an increased  number of customer  orders shipped  express
compared to the prior year.

Cost of sales:  Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound  shipping  costs,  inventory  reserves,  commissions  and
packing  materials.  Cost of sales for the nine months ended  September 30, 2008
totaled $43,040,000  resulting in a gross margin of approximately 37.1%. Cost of
sales  for the  nine  months  ended  September  30,  2007  totaled  $39,230,000,
resulting  in a gross  margin  of  36.5%.  The  increase  in  gross  margin  was
attributable  to  increased  merchandise  and product  margins and a decrease in
inventory  reserves  (as the prior  period  included  approximately  $550,000 of
additional  inventory  reserves  relating to our transition to a new fulfillment
center).  Gross profit increased by approximately  12.3%, to $25,341,000 for the
nine months ended September 30, 2008 compared to $22,565,000 for the nine months
ended September 30, 2007. The growth in gross profit was primarily the result of
growth in sales and was offset slightly by higher product margins.

                                       13
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

Selling and fulfillment expenses:  Selling and fulfillment expenses increased by
7.4% for the nine months ended  September  30, 2008  compared to the nine months
ended September 30, 2007. Selling and fulfillment expenses were comprised of the
following:

<TABLE>
<CAPTION>
                                                          Nine Months Ended September 30,
                                                --------------------------------------------------
(All data in thousands)                                  2008                         2007           Percentage
                                                ---------------------        ---------------------   Difference
                                                            As a % of                    As a % of    Increase
                                                            Net Sales                    Net Sales   (Decrease)
<S>                                             <C>         <C>              <C>         <C>         <C>
Operating                                       $  7,506        11.0%        $  7,219        11.7%         4.0%
Technology                                         4,263         6.2            3,543         5.7         20.3
E-Commerce                                         2,756         4.0            2,766         4.5         (0.4)
                                                --------    ---------        --------    ---------   ----------
   Total selling and fulfillment expenses       $ 14,525        21.2%        $ 13,528        21.9%         7.4%
                                                ========    =========        ========    =========   ==========
</TABLE>

As a percentage of net sales, our selling and fulfillment  expenses decreased to
21.2% for the nine  months  ended  September  30,  2008 from  21.9% for the nine
months ended September 30, 2007.

Operating   expenses   include  all  costs  related  to  inventory   management,
fulfillment,  customer service,  and credit card processing.  Operating expenses
increased  for the nine months ended  September 30, 2008 by  approximately  4.0%
compared to the nine  months  ended  September  30, 2007 as a result of variable
costs  associated  with the increased  sales volume  (e.g.,  picking and packing
orders and  processing  returns)  and price per order as well as an  increase in
customer  service and salary related  expenses.  These  increases were partially
offset by  approximately  $632,000  of  incremental  expenses  incurred  in 2007
relating to our transition of the fulfillment center.

Technology  expenses consist  primarily of staff related costs,  amortization of
capitalized costs and Web site hosting.  For the nine months ended September 30,
2008,  technology expenses increased by approximately 20.3% compared to the nine
months ended  September  30, 2007.  This  increase  resulted from an increase in
software  support,  depreciation  and web hosting  expenses  and salary  related
expenses. Consulting expenses incurred in the third quarter 2008 were related to
the  development of our new Web site and capitalized  accordingly.  For the nine
months  ended  September  30,  2008,  approximately  $1,650,000  of expenses was
capitalized in connection with the development of our new Web site. Depreciation
expenses  relating  to the new Web site  were  approximately  $293,000,  and are
included in technology expenses.

E-Commerce  expenses include expenses related to our photo design studio,  image
processing,  and Web site design.  For the nine months ended September 30, 2008,
e-commerce expenses remained relatively unchanged as compared to the nine months
ended September 30, 2007, as increases in expenses  associated with photo shoots
were offset by a decrease in salary related expenses.

Marketing expenses: Marketing expenses increased by 16.3% to $10,620,000 for the
nine months ended September 30, 2008 from $9,130,000 for the nine months ended
September 30, 2007.

Marketing  expenses include  expenses  related to paid search,  online and print
advertising,  television, fees to marketing affiliates, direct mail campaigns as
well as staff  related  costs.  As a  percentage  of net  sales,  our  marketing
expenses  increased to 15.5% for the nine months ended  September  30, 2008 from
14.7% for the nine months ended  September 30, 2007.  Total expenses  related to
the national print and television advertising campaign for the nine months ended
September 30, 2008 totaled $4,400,000 compared to $3,500,000 for the nine months
ended  September 30, 2007. This increase was related to a shift in the timing of
the airing of  Project  Runway  Season 5 from the fourth  quarter of 2007 to the
third quarter of 2008. In addition,  expenses  related to direct mail  campaigns
and billboards decreased by $205,000 and $104,000, respectively. These decreases
were  offset by  expenses  related to online  marketing,  which  resulted in the
following  increases:  $255,000  related  to paid  search,  $266,000  related to
comparison engines,  $365,000 related to other online  advertisements,  $103,000
paid for consulting and public relations and $92,000 in affiliate expenses.

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

                                       14
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

and  administrative  expenses  for the nine  months  ended  September  30,  2008
decreased by approximately 5.7% to $9,858,000 as compared to $10,450,000 for the
nine months ended September 30, 2007. The decrease in general and administrative
expenses was  primarily  the result of a decrease in equity  based  compensation
related to equity awards of $2,214,000. These amounts were offset by an increase
in salary related  expenses of $965,000,  which  includes  $280,000 of severance
payable  to our  former  Chief  Financial  Officer,  as well as an  increase  in
consulting and professional fees of $185,000.

As a percentage of net sales,  general and administrative  expenses for the nine
months ended September 30, 2008 decreased to approximately  14.4% from 16.9% for
the nine months ended September 30 2007.

Loss  from  operations:  Operating  loss  decreased  in the  nine  months  ended
September  30, 2008 to  $9,662,000  from  $10,543,000  in the nine months  ended
September 30, 2007.

Interest  income:  Other  income for the nine months  ended  September  30, 2008
decreased to $57,000 from $463,000 for the nine months ended September 30, 2007.
These amounts related primarily to interest income earned on our cash balances.

Interest expense:  Interest expense for the nine months ended September 30, 2008
totaled  $362,000,  compared to $193,000 for the nine months ended September 30,
2007.  Interest  expense  consists  of fees paid in  connection  with our Credit
Facility,  interest  expense  relating  to the  Subordinated  Notes  issued  and
amortization of warrants issued to certain related parties.

For The Three  Months  Ended  September  30, 2008  Compared To The Three  Months
September 30, 2007.

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

<TABLE>
<CAPTION>
                                                    2008                         2007                        2006
                                            ----------------------      ----------------------       -----------------------
                                                         As a % of                   As a % of                     As a % of
                                                         Net Sales                   Net Sales                     Net Sales
<S>                                         <C>          <C>            <C>          <C>             <C>           <C>
Net sales                                   $ 19,802        100.0%      $ 18,079        100.0%       $ 16,322         100.0%
Cost of sales                                 12,495         63.1         12,351         68.3          10,211          62.6
                                            --------     ---------      --------     ---------       --------      ---------
   Gross profit                                7,307         36.9          5,728         31.7           6,111          37.4

Selling and fulfillment expenses               4,933         24.9          4,583         25.3           3,871          23.7
Marketing expenses                             4,172         21.1          2,807         15.5           3,496          21.4
General and administrative expenses            3,021         15.2          3,410         18.9           2,369          14.5
                                            --------     ---------      --------     ---------       --------      ---------
   Total operating expenses                   12,126         61.2         10,800         59.7           9,736          59.6

Operating loss                                (4,819)       (24.3)        (5,072)       (28.0)         (3,625)        (22.2)

Interest and other income                       (174)        (0.9)            44          0.2             140           0.9
                                            --------     ---------      --------     ---------       --------      ---------
Net loss                                    $ (4,993)       (25.2)%     $ (5,028)       (27.8)%      $ (3,485)        (21.3)%
                                            ========     =========      ========     =========       ========      =========
</TABLE>

The  following  table  sets  forth  our  actual  results  based on the other key
operational  metrics discussed above for the three months ended September 30, as
indicated below:

<TABLE>
<CAPTION>
                                                                 2008             2007            2006
<S>                                                            <C>              <C>             <C>
Average Order Size (including shipping & handling)             $292.03          $280.22         $260.58
New Customers Added during the Period*                          39,055           37,408          35,970
</TABLE>

*Based on unique email addresses

                                       15
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

Net sales:  Gross sales for the three months ended  September 30, 2008 increased
by  approximately  9% to $32,649,000 from $30,009,000 for the three months ended
September 30, 2007. For the three months ended September 30, 2008, we recorded a
provision  for  returns  and credit  card  chargebacks  and other  discounts  of
$12,847,000,  or approximately  39.4% of gross sales. For the three months ended
September 30, 2007,  the provision for returns and credit card  chargebacks  and
other discounts was  $11,930,000,  or  approximately  39.8% of gross sales.  The
decrease in this provision as a percentage of gross sales resulted from a slight
decrease  in the  return  rate,  which  was  primarily  caused by a shift in our
merchandise mix.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments for sales taxes,  our net sales for the three months ended September
30, 2008 was  $19,802,000.  This  represents  an increase of  approximately  10%
compared  to the three  months  ended  September  30,  2007,  in which net sales
totaled  $18,079,000.  The growth in net sales  resulted  primarily  from a 4.4%
increase in the number of new  customers  acquired as well as a 4.2% increase in
average order size and a decrease in the return rate. For the three months ended
September 30, 2008, revenue from shipping and handling (which is included in net
sales) increased  approximately  19.5% to $1,104,000 from $924,000 for the three
months ended September 30, 2007.  Shipping and handling  revenue  increased at a
greater percentage than revenue as a whole as a result of an increased number of
customers selecting express and international shipping.

Cost of sales:  Cost of sales for the three  months  ended  September  30,  2008
totaled $12,495,000, resulting in a gross margin of approximately 36.9%. Cost of
sales for the  three  months  ended  September  30,  2007  totaled  $12,351,000,
resulting in a gross margin of 31.7%.  Gross profit  increased by  approximately
27.6%,  to $7,307,000 for the three months ended  September 30, 2008 compared to
$5,728,000 for the three months ended  September 30, 2007. The increase in gross
profit and gross margin is a result of increased merchandise and product margins
as well as a  decrease  in  inventory  reserves  (as the prior  period  included
approximately   $550,000  of  additional  inventory  reserves  relating  to  our
transition to the fulfillment center).

Selling and fulfillment expenses:  Selling and fulfillment expenses increased by
7.6% for the three months ended  September 30, 2008 compared to the three months
ended September 30, 2007. Selling and fulfillment expenses were comprised of the
following:

<TABLE>
<CAPTION>
                                                          Three Months Ended September 30,
                                                --------------------------------------------------
(All data in thousands)                                  2008                         2007           Percentage
                                                ---------------------        ---------------------   Difference
                                                            As a % of                    As a % of    Increase
                                                            Net Sales                    Net Sales   (Decrease)
<S>                                             <C>         <C>              <C>         <C>         <C>
Operating                                       $ 2,105          10.6%       $ 2,486         13.7%     (15.3)%
Technology                                        1,768           8.9          1,144          6.3       54.5
E-Commerce                                        1,060           5.4            953          5.3       11.2
                                                --------    ---------        --------    ---------   ----------
   Total selling and fulfillment expenses       $ 4,933          24.9%       $ 4,583         25.3%       7.6 %
                                                ========    =========        ========    =========   ==========
</TABLE>

As a percentage of net sales, our selling and fulfillment  expenses decreased to
24.9% for the three  months  ended  September  30, 2008 from 25.3% for the three
months ended September 30, 2007.

Operating  expenses  decreased  $381,000  or 15.3% to  $2,105,000  for the three
months ended  September  30, 2008  compared to  $2,486,000  for the three months
ended  September  30,  2007.  This  decrease is  primarily  related to decreased
incremental expenses of approximately $462,000 relating to the transition of the
fulfillment  center that were incurred in the third  quarter of 2007,  which was
partially  offset by increases in fulfillment  expenses for the third quarter of
2008 as a result of both increased volume and increased fees per order.

For the three months ended September 30, 2008,  technology expenses increased by
approximately  54.5% compared to the three months ended September 30, 2007. This
increase  resulted from an increase in  consulting,  depreciation,  web hosting,
software

                                       16
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

support and salary related expenses.  Consulting  expenses incurred in the third
quarter  of 2008  were  related  to the  development  of our new  Web  site  and
capitalized  accordingly.  For  the  three  months  ended  September  30,  2008,
approximately  $509,000 of  expenses  was  capitalized  in  connection  with the
development  of our new Web site.  Our new Web site was placed  into  service in
August  2008,   depreciation   expenses   relating  to  the  new  Web  site  was
approximately $293,000, which is included in technology expenses.

For the three months ended  September 30, 2008,  e-commerce  expenses  increased
11.2% to  $1,060,000  as compared to the three months ended  September 30, 2007,
primarily due to an increase in salary related expenses and expenses  associated
with  consulting  and photo shoots,  which was partially  offset by decreases in
expenses relating to supplies and research tools.

Marketing expenses:  Marketing expenses increased by 48.6% to $4,172,000 for the
three months ended September 30, 2008 from $2,807,000 for the three months ended
September 30, 2007.

As a percentage of net sales, our marketing  expenses increased to 21.1% for the
three months  ended  September  30, 2008  compared to 15.5% for the three months
ended  September  30, 2007.  Total  expenses  related to the national  print and
television  advertising  campaign for the three months ended  September 30, 2008
were  $2,100,000  compared to $693,000 for the three months ended  September 30,
2007.  This  increase  was  related  to a shift in the  timing of the  airing of
Project  Runway Season 5 from the fourth quarter of 2007 to the third quarter of
2008. In addition,  expenses related to online marketing increased as we believe
that these  programs are the most  efficient  way to grow our  business.  Online
integration,  online marketing  consultants and comparison  engines increased by
$305,000,  $46,000 and $84,000,  respectively.  These  increases  were partially
offset by the following  decreases:  $143,000 of direct mail campaigns,  $31,000
related to billboard advertising and $119,000 for paid search.

General and administrative expenses: General and administrative expenses for the
three months  ended  September  30, 2008  decreased  by  approximately  11.4% to
$3,021,000  as compared to $3,410,000  for the three months ended  September 30,
2007.  The decrease in general and  administrative  expenses was  primarily  the
result of a decrease  in  equity-based  compensation  expense  of  approximately
$850,000,  which was  partially  offset by an increase  in salaries  and related
expenses of  $347,000.  In addition,  there were  increases  in  consulting  and
professional  fees,  recruiting  and  rent  by  $22,000,  $23,000  and  $53,000,
respectively.

As a percentage of net sales, general and administrative  expenses for the three
months ended September 30, 2008 decreased to approximately  15.2% from 18.9% for
the three months ended September 30, 2007.

Loss from  operations:  Operating loss decreased in the third quarter of 2008 to
$4,819,000 from $5,072,000 in the third quarter of 2007.

Interest  income:  Other income for the three months  ended  September  30, 2008
decreased to $8,000 from $99,000 for the three months ended  September 30, 2007.
These amounts related primarily to interest income earned on our cash balances.

Interest expense: Interest expense for the three months ended September 30, 2008
totaled  $182,000,  compared to $55,000 for the three months ended September 30,
2007.  Interest  expense  consists  of fees paid in  connection  with our Credit
Facility,  interest  expense  relating  to the  Subordinated  Notes  issued  and
amortization of warrants issued to certain related parties.

Liquidity And Capital Resources

General

At  September  30,  2008,  we had  approximately  $1,920,000  in cash  and  cash
equivalents.  Working capital at September 30, 2008 and 2007 was $15,494,000 and
$7,200,000,  respectively. Working capital at December 31, 2007 was $20,889,000.
In addition, as of September 30, 2008, we had approximately $3,675,000 committed
under the  Credit  Facility,  leaving  approximately  $3,825,000  available  for
further borrowings.

We fund  our  operations  through  cash on  hand,  operating  cash  flow and 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  with  respect  to 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

                                       17
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

require  us to  provide  credit  support  under  the  Credit  Facility.  In some
instances, new vendors may require prepayments. We may make prepayments in order
to open up these new  relationships,  or to gain access to inventory  that would
not  otherwise be  available to us. In addition,  from time to time we sometimes
make  prepayments  in  connection  with  our  advertising  campaign,  as in some
circumstances we need to pay in advance of production. As of September 30, 2008,
we had approximately $982,000 of prepaid inventory and approximately  $1,152,000
of prepaid  marketing on our Condensed  Balance  Sheet  compared to $422,000 and
$3,395,000 in the third quarter of 2007.

Standby Financing Commitment

In March 2008,  Soros and Maverick  agreed to provide up to  $3,000,000  of debt
financing to us, on a standby basis,  available until March 2009,  provided that
the  commitment  amount  would be  reduced by the gross  proceeds  of any equity
financing  consummated  during the year. In July 2008,  the Company drew down on
the  full  amount  of  the  Commitment.  The  draw  down  is  evidenced  by  the
Subordinated Notes. The Subordinated Notes have a term expiring three years from
the date of issuance and bear  interest at the rate of 8% per annum,  compounded
annually.  Interest is payable upon  maturity or  conversion.  The  Subordinated
Notes are  convertible,  at the holder's option into (a) equity  securities that
the Company might issue in any subsequent round of financing at a price equal to
the lowest  price per share paid by any  investor  in such  subsequent  round of
financing  or (b)  Common  Stock at a price  per  share  equal to  $3.65,  which
represents  the 20-day  trailing  average stock price on the date of issuance of
the Subordinated Notes.

Credit Facility

Pursuant to the Credit  Facility,  Wells Fargo provides us with a revolving loan
and  issues  letters  of credit in favor of  suppliers  or  factors.  The Credit
Facility  is  secured  by a lien on all of our  assets.  Availability  under the
Credit  Facility is  determined  by a formula  that takes into account a certain
percentage of our inventory and a certain percentage of our accounts receivable.
The maximum  availability  is  currently  $7,500,000,  but can be  increased  to
$12,500,000 at our request,  subject to certain conditions.  As of September 30,
2008, total availability under the Credit Facility was approximately  $7,500,000
of which $3,675,000 was committed,  leaving  approximately  $3,825,000 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 3.25% on average  excess  availability  less
than  $3,000,000  and prime rate plus  0.50% or LIBOR plus 3% on average  excess
availability  greater than $3,000,000.  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 0.50% and a servicing fee of $3,333 per month. 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 of such letter of credit, or a portion thereof,
remains  open. No revolving  credit loans may be made under the Credit  Facility
unless the full amount available pursuant to the Commitment has been advanced to
the Company and is outstanding.

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

We believe  that our current  funds,  together  with  operating  cash flow,  and
availability under our existing Credit Facility will be sufficient,  without any
new  equity  infusion,  to enable us to meet our  planned  expenditures  under a
streamlined  business plan through the next 12 months. The streamlined  business
plan  calls for,  among  other  things,  reductions  in  marketing  and  capital
expenditures,  delaying  new hires and  making  selective  inventory  purchases.
However,  in order to optimize the growth of our business,  we will need to seek
to raise  additional  equity capital.  However there can be no assurance that we
will be able to  identify a source for such  financing,  or that such  financing
will be available on terms acceptable to the Company.

                                       18
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

Commitments and Long Term Obligations

As of  September  30,  2008,  we had the  following  commitments  and long  term
obligations:

<TABLE>
<CAPTION>
                                                                        Less Than                                         More Than
                                                          Total           1 Year          1-3 Years      3-5 Years         5 Years
<S>                                                   <C>               <C>              <C>              <C>             <C>
Marketing and Advertising                             $  1,772,000      $ 1,772,000      $        --      $     --        $      --
Purchase Orders                                         11,138,000       11,138,000               --            --               --
Operating Leases                                         1,782,000          684,000        1,098,000            --               --
Employment Contracts                                     4,453,000        1,004,000        3,406,000        43,000               --
                                                      ------------      -----------      -----------      --------        ---------
   Total commitments and long-term obligations        $ 19,145,000      $14,598,000      $ 4,504,000      $ 43,000        $      --
                                                      ============      ===========      ===========      ========        =========
</TABLE>

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

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.

                                       19
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

Item 4T. 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 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, 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  Commission's  rules and forms and are  effective  to
ensure that  information  required to be  disclosed by us in the reports that we
file or submit under the Exchange Act is  accumulated  and  communicated  to our
management,  including our principal executive and principal financial officers,
to allow timely  decisions  regarding  required  disclosure.  There have been no
changes in our internal  control over financial  reporting that occurred  during
the Company's most recent fiscal quarter that have materially  affected,  or are
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

Special Note Regarding Forward Looking Statements

This report may include statements that constitute "forward-looking" statements,
usually  containing  the  words  "believe",   "project",  "expect",  or  similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently  involve risks and  uncertainties  that could cause actual results to
differ   materially  from  the   forward-looking   statements.   The  risks  and
uncertainties  are  detailed  from time to time in reports  filed by us with the
Securities and Exchange  Commission,  including  Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and  uncertainties  include,  but are not limited to, the following:
our  history of losses  and  anticipated  future  losses;  our  ability to raise
additional capital to support the growth of our business;  risks associated with
the economic  downturn;  risks  associated with the integration of the Company's
new  technology  platform;  the  success  of  our  advertising  campaign;  risks
associated with Soros,  Maverick and private funds  associated with and 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;  the risk of default by us under the Credit Facility and the
consequences that might arise from us having granted a lien on substantially all
of our assets under that agreement;  risks of litigation for sale of unauthentic
or damaged goods and litigation risks related to sales in foreign countries; the
dependence  on third  parties and certain  relationships  for certain  services,
including our  dependence on UPS, DHL 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; risks
related to brand  owners'  efforts to limit our  ability  to  purchase  products
indirectly;  management  of  potential  growth;  the  competitive  nature of our
business and the potential for competitors  with greater  resources to enter the
business;  the availability of merchandise;  the need to further establish brand
name recognition;  risks associated with our ability to handle increased traffic
and/or continued  improvements to our Web site; rising return rates;  dependence
upon executive personnel;  the successful hiring and retaining of new personnel;
risks associated with expanding our operations;  risks associated with potential
infringement  of other's  intellectual  property;  the  potential  inability  to
protect   our   intellectual   property;   government   regulation   and   legal
uncertainties;  and  uncertainties  relating to the  imposition  of sales tax on
Internet sales.

                                       20
<PAGE>

                                  BLUEFLY, INC.
               CONDENSED NOTES TO FINANCIAL STATEMENTS (unaudited)
                               SEPTEMBER 30, 2008

Part II - OTHER INFORMATION

Item 6. Exhibits

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

    Exhibit Number                                      Description
    ---------------------------------------------------------------
     10.1                    Note Purchase Agreement, dated as of July 23, 2008,
                             by and  among  Bluefly,  Inc.,  Quantum  Industrial
                             Partners   LDC,  SFM  Domestic   Investments   LLC,
                             Maverick Fund USA, Ltd.,  Maverick Fund, L.D.C. and
                             Maverick Fund II, Ltd.  (incorporated  by reference
                             to Exhibit 10.1 of Form 8-K filed on July 24, 2008)

     10.2                    Convertible Promissory Note, dated  as of  July 23,
                             2008,  issued by Bluefly,  Inc. in favor of Quantum
                             Industrial  Partners LDC (incorporated by reference
                             to Exhibit 10.2 of Form 8-K filed on July 24, 2008)

     10.3                    Convertible Promissory Note, dated  as of July  23,
                             2008,  issued  by  Bluefly,  Inc.  in  favor of SFM
                             Domestic Investments LLC (incorporated by reference
                             to Exhibit 10.3 of Form 8-K filed on July 24, 2008)

     10.4                    Convertible Promissory Note, dated as of  July  23,
                             2008, issued by Bluefly,  Inc. in favor of Maverick
                             Fund  USA,  Ltd.   (incorporated  by  reference  to
                             Exhibit 10.4 of Form 8-K filed on July 24, 2008)

     10.5                    Convertible Promissory Note, dated as  of  July 23,
                             2008, issued by Bluefly,  Inc. in favor of Maverick
                             Fund, L.D.C.  (incorporated by reference to Exhibit
                             10.5 of Form 8-K filed on July 24, 2008)

     10.6                    Convertible Promissory Note, dated as of  July  23,
                             2008, issued by Bluefly,  Inc. in favor of Maverick
                             Fund II, Ltd. (incorporated by reference to Exhibit
                             10.6 of Form 8-K filed on July 24, 2008)

     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

                                       21
<PAGE>

                                   SIGNATURES

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

                                                   BLUEFLY, INC.

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


                                                   By: /s/ Kara B. Jenny
                                                       -----------------
                                                   Kara B. Jenny
                                                   Chief Financial Officer

November 12, 2008

                                       22