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

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

                                    FORM 10-Q

(Mark One)

[X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       For the quarterly period ended June 30, 2007

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

                        Commission File Number: 001-14498

                                   ----------

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

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

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

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

                                   ----------

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

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

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

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

As of August 6, 2007, the issuer had  outstanding  130,917,544  shares of Common
Stock, $.01 par value.

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

<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Part I . Financial Information

Item 1.  Financial Statements

         Condensed Balance Sheets as of June 30, 2007
               and December 31, 2006 (unaudited)                             3

         Condensed Statements of Operations for the six months ended
               June 30, 2007 and 2006 (unaudited)                            4

         Condensed Statements of Operations for the three months ended
               June 30, 2007 and 2006 (unaudited)                            5

         Condensed Statements of Changes in Shareholders' Equity for the
               six months ended June 30, 2007 (unaudited)                    6

         Condensed Statements of Cash Flows for the six months ended
               June 30, 2007 and 2006 (unaudited)                            7

         Condensed Notes to Financial Statements (unaudited)                 8

Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                     12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          18

Item 4.  Controls and Procedures                                             19

Part II. Other Information                                                   19

Item 1.  Legal Proceedings                                                   19

Item 4.  Submission of Matters to a Vote of Security Holders                 20

Item 6.  Exhibits                                                            21

Signatures                                                                   22

                                       2
<PAGE>

Part I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS

                                  BLUEFLY, INC.

CONDENSED BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>
                                                                                       JUNE 30,         DECEMBER 31,
                                                                                         2007              2006
                                                                                   ---------------    ---------------
<S>                                                                                <C>                <C>
                                     ASSETS
Current assets
  Cash and cash equivalents                                                        $    14,626,000    $    20,188,000
  Inventories, net                                                                      23,081,000         24,189,000
  Accounts receivable, net of allowance for doubtful accounts                            2,350,000          2,719,000
  Prepaid inventory                                                                        569,000            616,000
  Prepaid expenses                                                                         846,000            341,000
  Other current assets                                                                     586,000            553,000
                                                                                   ---------------    ---------------
        Total current assets                                                            42,058,000         48,606,000

Property and equipment, net                                                              4,939,000          3,573,000

Other assets                                                                               220,000            251,000
                                                                                   ---------------    ---------------
       Total assets                                                                $    47,217,000    $    52,430,000
                                                                                   ===============    ===============
Current liabilities
  Accounts payable                                                                 $     4,308,000    $     4,822,000
  Allowance for sales returns                                                            3,251,000          5,043,000
  Accrued expenses and other current liabilities                                         1,324,000          1,908,000
  Deferred revenue                                                                       2,532,000          2,830,000
                                                                                   ---------------    ---------------
       Total current liabilities                                                        11,415,000         14,603,000

Other long-term liabilities                                                                131,000                 --

       Total liabilities                                                           $    11,546,000    $    14,603,000
                                                                                   ---------------    ---------------
Commitments and contingencies

Shareholders' equity
  Series F Preferred stock - $.01 par value; 7,000 shares authorized, 571.43
    issued and outstanding as of June 30, 2007 and December 31, 2006
    (liquidation preference: $571,000 plus accrued dividends of $84,000, and
    $62,000 as of June 30, 2007 and December 31, 2006, respectively)                            --                 --
  Common stock - $.01 par value; 200,000,000 and 152,000,000 shares authorized
    as of June 30, 2007 and December 31, 2006, respectively, 131,041,942 and
    130,484,854, issued as of June 30, 2007 and December 31, 2006, respectively,
    130,915,039 and 130,484,854 shares outstanding as of June 30, 2007 and
    December 31, 2006, respectively                                                      1,309,000          1,305,000
  Treasury Stock                                                                          (160,000)                --
  Additional paid-in capital                                                           155,764,000        152,519,000
  Accumulated deficit                                                                 (121,242,000)      (115,997,000)
                                                                                   ---------------    ---------------
     Total shareholders' equity                                                         35,671,000         37,827,000
                                                                                   ---------------    ---------------
     Total liabilities and shareholders' equity                                    $    47,217,000    $    52,430,000
                                                                                   ===============    ===============
</TABLE>

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

                                       3
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                                            JUNE 30,
                                                               ----------------------------------
                                                                     2007              2006
                                                               ---------------    ---------------
<S>                                                            <C>                <C>
Net sales                                                      $    43,716,000    $    33,669,000
Cost of sales                                                       26,879,000         19,784,000
                                                               ---------------    ---------------
  Gross profit                                                      16,837,000         13,885,000

Selling and fulfillment expenses                                     8,945,000          7,281,000
Marketing expenses                                                   6,323,000          5,760,000
General and administrative expenses                                  7,040,000          5,650,000
                                                               ---------------    ---------------
  Total operating expenses                                          22,308,000         18,691,000

Operating loss                                                      (5,471,000)        (4,806,000)

Interest income                                                        364,000            112,000
Interest and other expense                                            (138,000)          (471,000)
                                                               ---------------    ---------------

Net loss                                                       $    (5,245,000)   $    (5,165,000)

Preferred stock dividends                                              (22,000)        (2,221,000)

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

Net loss available to common shareholders                      $    (5,267,000)   $   (11,243,000)
                                                               ===============    ===============

Basic and diluted loss per common share                        $         (0.04)   $         (0.37)
                                                               ===============    ===============
Weighted average common shares outstanding
(basic and diluted)                                                130,499,858         30,372,393
                                                               ===============    ===============
</TABLE>

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

                                       4
<PAGE>

                                  BLUEFLY, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                                            JUNE 30,
                                                               ----------------------------------
                                                                     2007              2006
                                                               ---------------    ---------------
<S>                                                            <C>                <C>
Net sales                                                      $    21,608,000    $    16,793,000
Cost of sales                                                       13,145,000          9,747,000
                                                               ---------------    ---------------
  Gross profit                                                       8,463,000          7,046,000

Selling and fulfillment expenses                                     4,546,000          3,848,000
Marketing expenses                                                   2,712,000          1,729,000
General and administrative expenses                                  3,454,000          3,223,000
                                                               ---------------    ---------------
  Total operating expenses                                          10,712,000          8,800,000

Operating loss                                                      (2,249,000)        (1,754,000)

Interest income                                                        169,000             67,000
Interest and other expense                                             (62,000)          (214,000)
                                                               ---------------    ---------------

Net loss                                                       $    (2,142,000)   $    (1,901,000)

Preferred stock dividends                                              (11,000)          (990,000)

Deemed dividends related to beneficial conversion feature on
 Series F Preferred Stock                                                   --         (3,857,000)
                                                               ---------------    ---------------
Net loss available to common shareholders                      $    (2,153,000)   $    (6,748,000)
                                                               ===============    ===============

Basic and diluted loss per common share                        $         (0.02)   $         (0.17)
                                                               ===============    ===============
Weighted average common shares outstanding
(basic and diluted)                                                130,508,897         40,267,334
                                                               ===============    ===============
</TABLE>

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

                                       5
<PAGE>

             CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
         YEAR ENDED DECEMBER 31, 2005, 2006 AND FOR THE SIX MONTHS ENDED
                            JUNE 30, 2007 (Unaudited)

<TABLE>
<CAPTION>
                                                         PREFERRED STOCK              COMMON STOCK
                                                         $.01 PAR VALUE              $.01 PAR VALUE             TREASURY STOCK
                                                     ----------------------    --------------------------   ----------------------
                                                     NUMBER OF                  NUMBER OF                   NUMBER OF
                                                       SHARES       AMOUNT       SHARES          AMOUNT       SHARES      AMOUNT
                                                     ----------    --------    -----------    -----------   ---------   ----------
<S>                                                  <C>           <C>         <C>            <C>             <C>       <C>
Balance at January 1, 2005                            9,358,550    $ 94,000     15,241,756    $   152,000          --   $       --
                                                     ----------    --------    -----------    -----------   ---------   ----------
Sale of Series F Preferred Stock ($1,000 per
  share net of expenses of $249,000)                      7,000          --             --             --          --           --

Shares Of Series D Preferred Stock
  Converted into Common Stock                              (823)   $     --      1,454,645         15,000          --           --

Shares Of Series F Preferred Stock
  Converted into Common Stock                            (1,720)   $     --        765,481          8,000          --           --

Expense recognized in connection with
   Issuance of Options                                       --          --             --             --          --           --

Exercise of Employee Options                                 --          --      1,597,284         16,000          --           --

Net Loss                                                     --          --             --             --          --           --
                                                     ----------    --------    -----------    -----------   ---------   ----------
Balance at December 31, 2005                          9,363,007      94,000     19,059,166    $   191,000          --           --
                                                     ----------    --------    -----------    -----------   ---------   ----------
Conversion of Preferred Stock                        (9,362,436)    (94,000)    48,545,527        485,000          --           --

Stock based compensation                                     --          --             --             --          --           --

Sale of Common Stock, net of issuance expenses
  of approximately $2.0 million                              --          --     60,975,610        610,000          --           --

Issuance of Common Stock to Placement Agent                  --          --      1,000,000         10,000          --           --

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

Dividends Paid to Related Party Shareholders                 --          --             --             --          --           --

Deemed Dividends related to beneficial conversion
  on Series F Preferred Stock                                --          --             --             --          --           --

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

Issuance of Restricted Stock                                 --          --        861,221          9,000          --           --

Net Loss                                                     --          --             --             --          --           --
                                                     ----------    --------    -----------    -----------   ---------   ----------
Balance at December 31, 2006                                571    $     --    130,484,854    $ 1,305,000          --   $       --
                                                     ----------    --------    -----------    -----------   ---------   ----------
Stock based compensation                                     --          --        (12,173)            --          --           --

Issuance of Restricted Stock                                 --          --        414,942          4,000          --           --

Purchase of Treasury Stock                                   --          --             --             --     126,903     (160,000)

Exercise of Employee Options                                 --          --         25,556             --          --           --

Exercise of Related Party Warrant                            --          --          1,860             --          --           --

Net Loss                                                     --          --             --             --          --           --
                                                     ----------    --------    -----------    -----------   ---------   ----------
Balance at June 30, 2007                                    571    $     --    130,915,039    $ 1,309,000     126,903   $ (160,000)
                                                     ----------    --------    -----------    -----------   ---------   ----------

<CAPTION>
                                                       ADDITIONAL                           TOTAL
                                                        PAID-IN        ACCUMULATED      SHAREHOLDERS'
                                                        CAPITAL          DEFICIT           EQUITY
                                                     -------------    --------------    -------------
<S>                                                  <C>              <C>               <C>
Balance at January 1, 2005                           $ 107,270,000    $  (96,127,000)   $  11,389,000
                                                     -------------    --------------    -------------
Sale of Series F Preferred Stock ($1,000 per
  share net of expenses of $249,000)                     6,751,000                --        6,751,000

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

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

Expense recognized in connection with
   Issuance of Options                                      41,000                --           41,000

Exercise of Employee Options                             1,488,000                --        1,504,000

Net Loss                                                        --        (3,820,000)      (3,820,000)
                                                     -------------    --------------    -------------
Balance at December 31, 2005                         $ 115,527,000    $  (99,947,000)   $  15,865,000
                                                     -------------    --------------    -------------
Conversion of Preferred Stock                             (391,000)               --               --

Stock based compensation                                 4,454,000                --        4,454,000

Sale of Common Stock, net of issuance expenses
  of approximately $2.0 million                         47,420,000                --       48,030,000

Issuance of Common Stock to Placement Agent              1,070,000                --        1,080,000

Warrants Issued to Third-Party                              67,000                --           67,000

Dividends Paid to Related Party Shareholders           (19,512,000)               --      (19,512,000)

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

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

Issuance of Restricted Stock                                (9,000)               --               --

Net Loss                                                        --       (12,193,000)     (12,193,000)
                                                     -------------    --------------    -------------
Balance at December 31, 2006                         $ 152,519,000    $ (115,997,000)   $  37,827,000
                                                     -------------    --------------    -------------
Stock based compensation                                 3,227,000                --        3,227,000

Issuance of Restricted Stock                                (4,000)               --               --

Purchase of Treasury Stock                                      --                --         (160,000)

Exercise of Employee Options                                22,000                --           22,000

Exercise of Related Party Warrant                               --                --               --

Net Loss                                                        --        (5,245,000)      (5,245,000)
                                                     -------------    --------------    -------------
Balance at June 30, 2007                             $ 155,764,000    $ (121,242,000)   $  35,671,000
                                                     -------------    --------------    -------------
</TABLE>

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

                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED
                                                                         JUNE 30,
                                                               ------------------------------
                                                                   2007             2006
                                                               -------------    -------------
<S>                                                            <C>              <C>
Cash flows from operating activities
  Net loss                                                     $  (5,245,000)   $  (5,165,000)
  Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation and amortization                                   836,000          729,000
     Stock based compensation                                      3,227,000        1,223,000
     Warrant issued to consultant                                         --           67,000
     Provisions for returns                                       (1,791,000)        (482,000)
     Bad debt expense                                                298,000          448,000
     Reserve for inventory obsolescence                              402,000          615,000
     Warrant issued to supplier                                           --          133,000
    Changes in operating assets and liabilities:
     (Increase) decrease in
       Inventories                                                   706,000       (4,985,000)
       Accounts receivable                                            71,000         (850,000)
       Prepaid expenses                                             (458,000)         321,000
       Other current assets                                         (193,000)        (109,000)
     Increase (decrease) in
       Accounts payable                                             (383,000)      (2,131,000)
       Accrued expenses                                             (411,000)       1,641,000
       Interest payable to related party shareholders                     --          271,000
       Deferred revenue                                             (298,000)         480,000
                                                               -------------    -------------
Net cash (used in) provided by operating activities               (3,239,000)      (7,794,000)
                                                               -------------    -------------
Cash flows from investing activities

 Purchase of property and equipment                               (2,171,000)        (592,000)
                                                               -------------    -------------
 Net cash (used in) provided by investing activities              (2,171,000)        (592,000)
                                                               -------------    -------------
Cash flows from financing activities
  Payments of capital lease obligation                               (14,000)         (27,000)
  Net proceeds from exercise of stock options                         22,000               --
  Purchase of Treasury Stock                                        (160,000)              --
  Net proceeds from June 2006 Financing                                   --       48,002,000
  Repayment of related party Notes Payable and interest                   --       (5,488,000)
  Dividends paid to related party shareholders                            --      (19,512,000)
                                                               -------------    -------------
  Net cash (used in) provided by financing activities               (152,000)      22,975,000
                                                               -------------    -------------

Net (decrease) increase  in cash and cash equivalents             (5,562,000)      14,589,000
Cash and cash equivalents - beginning of period                   20,188,000        9,408,000
                                                               -------------    -------------
Cash and cash equivalents - end of period                      $  14,626,000    $  23,997,000
                                                               =============    =============

Supplemental schedule of non-cash investing and
 financing activities:
 Cash paid for interest                                        $      61,000    $      92,000
                                                               =============    =============
 Cash paid for interest - to related shareholder                          --    $   1,488,000
                                                               =============    =============
 Warrant issued to consultant                                             --    $      67,000
                                                               =============    =============
 Deemed dividend related to beneficial conversion
  feature on Series F Preferred Stock                                     --    $   3,857,000
                                                               =============    =============
</TABLE>

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

                                       7
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

NOTE 1 - BASIS OF PRESENTATION

The accompanying financial statements include the accounts of Bluefly, Inc. (the
"Company").  The financial  statements  have been  prepared in  accordance  with
generally accepted accounting  principles for interim financial  information and
with  the   instructions  to  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly, they do not include all of the information and footnote disclosures
required by  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,
2006.

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

NOTE 2 - THE COMPANY

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

NOTE 3 - OFFER TO EXCHANGE

In January 2007, the Company  commenced an exchange offer (the "Exchange Offer")
pursuant to which it offered eligible  employees and non-employee  directors the
opportunity  to  exchange,  on a  grant-by-grant  basis:  (a) their  outstanding
eligible  stock  options  that were vested as of August 31, 2006 for  restricted
stock awards  consisting of the right to receive  restricted common stock of the
Company (the  "Restricted  Stock Awards");  and (b) their  outstanding  eligible
stock options that were not vested as of August 31, 2006 for deferred restricted
stock unit awards consisting of rights to receive common stock of the Company on
specified  dates  subsequent to vesting (the "Deferred  Stock Unit Awards," and,
together with the Restricted Stock Awards, the "Replacement Awards").

In order to be eligible to participate in the Exchange  Offer,  an option holder
was  required  to (a) have been an  employee  or  non-employee  director  of the
Company on the date of the  Exchange  Offer,  (b) have  neither  ceased to be an
employee or  non-employee  director,  nor have submitted or received a notice of
termination  of  employment  or  resignation,  prior  to the  expiration  of the
Exchange Offer and (c) owned eligible options.  Options eligible for exchange in
the Exchange Offer were  outstanding  options  granted under the Company's three
stock based employee compensation plans (collectively the "Plans") that, in each
case, had an exercise price per share that was greater than $1.50.

The number of Replacement Awards an eligible participant was eligible to receive
in exchange for an eligible  option was determined by a specific  exchange ratio
applicable to that option,  as set forth in the Offer to Exchange included as an
exhibit to the Schedule TO filed by the Company with the Securities and Exchange
Commission in connection with the Exchange Offer (the "Offer to Exchange").

Restricted  Stock Awards granted  pursuant to the Exchange Offer vest and become
free  from  restriction  one year from the date of the  exchange,  except if the
grantee made an election  under  Section  83(b) of the Internal  Revenue Code of
1986, as amended,  in which case the restrictions on such Restricted Stock Award
lapsed  only  with  respect  to the  number  of shares  needed  to  satisfy  any
applicable  tax  withholding  as of the date  that  the  Company  received  such
election,  as more fully described in the Offer to Exchange.  The minimum period
for full  vesting of  Deferred  Stock Unit  Awards is two years from the date of
exchange.  The length of the vesting schedule  applicable to each Deferred Stock
Unit Award was based on the final  vesting date of the eligible  stock option as
follows:

                                       8
<PAGE>

                   DEFERRED STOCK UNIT AWARDS VESTING SCHEDULE

<TABLE>
<CAPTION>
FINAL VESTING DATE OF ELIGIBLE
      STOCK OPTION AS OF         TOTAL VESTING PERIOD OF DEFERRED   PERCENTAGE OF DEFERRED STOCK
     DATE OF CANCELLATION                STOCK UNIT AWARDS          UNIT AWARDS VESTED QUARTERLY*
------------------------------   --------------------------------   -----------------------------
 <S>                                          <C>                              <C>
   Prior to August 31, 2007                   2 years                          12 1/2%

 On or after August 31, 2007                  3 years                           8 1/3%
</TABLE>

*Deferred Stock Unit Awards vest in substantially  equal quarterly  installments
over the  applicable  vesting  period,  subject to the  participant's  continued
employment with (or service on the Board of Directors of) the Company.

The shares of common  stock  underlying  the  Deferred  Stock Unit Award will be
delivered  on the  Delivery  Date.  The  Delivery  Date is the date on which the
earliest of the following occurs:

                                    DELIVERY DATE
          ----------------------------------------------------------------------
          o    2 years from the date of grant (with  respect to  Deferred  Stock
               Units Awards  exchanged for eligible stock options with a vesting
               date prior to August 31, 2007)

               OR

               3 years from the date of grant (with  respect to  Deferred  Stock
               Units Awards  exchanged for eligible stock options with a vesting
               date on or after August 31, 2007)

          o    Death

          o    The date on which the employee becomes disabled

Melissa  Payner-Gregor,  the Company's chief executive  officer,  and Patrick C.
Barry, the Company's chief financial  officer,  were not eligible to participate
in the Exchange  Offer,  but previously  participated in an exchange in November
2006  through  each of their  employment  agreements,  which is described in the
Offer to Exchange.

Pursuant to the  Exchange  Offer,  options to purchase an aggregate of 1,562,000
shares of Common  Stock were  exchanged  in return for an  aggregate  of 472,471
Restricted  Stock Awards and an aggregate of 394,405 Deferred Stock Unit Awards.
In connection  with the Exchange Offer,  the Company will recognize  $916,000 of
expense  over the next  three  years.  For the six months  ended  June 30,  2007
approximately $301,000 of this amount has been expensed.

NOTE 4 - FINANCING AGREEMENT

The Company has a three year revolving  credit facility (the "Credit  Facility")
with Wells Fargo Retail  Finance,  LLC ("Wells  Fargo").  Under the terms of the
Credit  Facility,  Wells  Fargo  provides  the Company  with a revolving  credit
facility  and issues  letters of credit in favor of  suppliers  or factors.  The
Credit  Facility  is secured  by a lien on  substantially  all of the  Company's
assets. Historically,  the Credit Facility had also been secured by a $2,000,000
letter of credit issued by an affiliate of Soros Fund  Management  LLC ("Soros")
in favor of Wells Fargo (the "Soros LC"). In August 2006,  Wells Fargo agreed to
release  the  Soros  LC,  and that it would no longer  require  an  availability
reserve  (although  it has the right  under the  Credit  Facility  to  establish
reserves in the future, as it deems appropriate).  In return, the Company agreed
to maintain a minimum cash balance of $5,000,000.  Availability under the Credit
Facility is  determined  by a formula  that takes into account the amount of the
Company's  inventory  and  accounts  receivable.  The  maximum  availability  is
currently  $7,500,000,  but can be increased  to  $12,500,000  at the  Company's
request, subject to certain conditions.  As of June 30, 2007, total availability
under the Credit Facility was approximately  $6,800,000, of which $3,200,000 was
committed, leaving approximately $3,600,000 available for further borrowings.

Interest  accrues  monthly on the average  daily  amount  outstanding  under the
Credit  Facility  during  the  preceding  month at a per annum rate equal to the
prime rate plus  0.75% or LIBOR  plus  2.75%.  The  Company  also pays a monthly
commitment fee on the unused portion of the facility (i.e.,  $7,500,000 less the
amount of loans  outstanding)  equal to 0.35%. The Company also pays Wells Fargo
certain  fees to open letters of credit and  guarantees  in an amount equal to a
certain  percentage  of the face  amount of the letter of credit for each thirty
(30) days such letter of credit, or a portion thereof, remains open. For the six
months ended June 30, 2007 and 2006, the Company incurred  approximately $61,000
and $ 92,000, respectively, in connection with these fees.

                                       9
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

NOTE 5 - LOSS PER SHARE

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

Diluted  loss per  share is  computed  by  dividing  loss  available  to  common
shareholders by the weighted average number of common shares outstanding for the
period,  adjusted to reflect potentially  dilutive  securities.  Due to the loss
from continuing  operations,  the following (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  ("DSUs") for shares that have not yet been delivered were not
included in the  computation of diluted loss per share because the result of the
exercise of such inclusion would be antidilutive:

<TABLE>
<CAPTION>
Security                       June 30, 2007      Exercise Prices   June 30, 2006   Exercise Prices
----------------------------   -------------      ---------------   -------------   ---------------
<S>                               <C>             <C>                   <C>          <C>
Options                            3,541,908      $0.80 - $14.38        8,103,028    $0.69 - $16.47
Restricted Stock Awards/DSUs      10,800,688 (2)              --               --                --
Warrants                           1,214,249       $0.78 - $3.96        1,945,893    $0.78 - $ 3.96
Preferred Stock                      696,341 (1)              --               --                --
</TABLE>


(1)  At June 30, 2007,  there were 571 shares of Series F Convertible  Preferred
     Stock outstanding that are convertible into approximately 696,341 shares of
     Common Stock (excluding dividends).

(2)  Includes both Restricted Stock Awards and DSUs.

NOTE 6 - 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. Effective January 1, 2006 the Company
adopted SFAS No. 123(R) using the modified prospective  application method under
which  the  provisions  of SFAS No.  123(R)  apply to new  awards  and to awards
modified,  repurchased,  or  cancelled  after the adoption  date.  Additionally,
compensation  cost for the portion of the awards for which the requisite service
has not been rendered that are outstanding as of the adoption date is recognized
in the  Statement of  Operations  over the  remaining  service  period after the
adoption date based on the award's original estimate of fair value.  Results for
prior periods have not been restated.  Total  share-based  compensation  expense
recorded in the Statement of  Operations  for the six months ended June 30, 2007
was $3,227,000, compared to $1,223,000 for the six months ended June 30, 2006.

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.

                                       10
<PAGE>

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

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

                                          NUMBER           WEIGHTED
                                            OF             AVERAGE
                                          SHARES        EXERCISE PRICE
                                      --------------    --------------
Balance at December 31, 2006               5,417,116    $         1.68
                                      --------------
Options granted                               30,000    $         1.05
Options canceled                          (1,879,652)   $         2.87
Options exercised                            (25,556)   $         0.89
                                      --------------
Balance at June 30, 2007                   3,541,908    $         1.06

Vested at December 31, 2006                3,682,877    $         1.83
Vested at June 30, 2007                    2,672,684    $         1.03

During the second  quarter of 2007,  311,063  options  vested.  Of these options
220,900  were  canceled or expired.  The total fair value of the options  vested
(including   those  canceled)  during  the  quarter  ended  June  30,  2007  was
approximately $292,000. During the quarter, 30,000 options were granted. At June
30, 2007, the aggregate intrinsic value of the fully vested options was $131,000
and the  weighted  average  remaining  contractual  life of the  options was 6.2
years. The Company has not capitalized any compensation cost, or modified any of
its  stock  option  grants  during  the  first  half of 2007,  except  for those
described in connection with the Offer to Exchange. Approximately 18,056 options
with an intrinsic value of approximately $3,600 were exercised during the second
quarter of 2007. No cash was used to settle equity instruments granted under the
Plans during the second quarter of 2007.

As of June 30, 2007, the total  compensation  cost related to non-vested  awards
not yet  recognized  was  $699,000.  Total  compensation  cost is expected to be
recognized over 2 years 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 Awards
and Deferred Stock Unit Awards for employees at June 30, 2007:

<TABLE>
<CAPTION>
                                                      RESTRICTED        DEFERRED STOCK
                                                      STOCK AWARDS        UNIT AWARDS
                                                   ----------------    ---------------
<S>                                                <C>                 <C>
Balance at January 1, 2007                                  861,221          9,862,267
Shares/Units Granted                                        414,942            544,405
Shares/Units Forfeited                                      (12,173)            (8,753)
Shares/Units Restriction Lapses                             861,221                 --
Balance at June 30, 2007                                    402,769         10,397,919

Weighted Average Grant Date Fair Value Per share   $           1.27    $          0.95
Aggregate Grant Date Fair Value                    $        511,517    $     9,878,023

Vesting Service Period of Shares Granted                  12 months       12-36 months
Number of shares/units vested at June 30, 2007                   --                 --
Number of shares/units unvested at June 30, 2007            402,769         10,397,919
</TABLE>

For the  quarter  ended June 30,  2007,  the  Company  recognized  an expense of
approximately $1.4 million in connection with these awards.

As of  June  30,  2007,  the  total  compensation  cost  related  to  non-vested
restricted  stock and deferred  stock units not yet recognized was $8.9 million.
Total compensation cost is expected to be recognized over a two year period.

                                       11
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS

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

The implementation of FIN 48 had no impact on the Company's  financial statement
as the Company has no uncertain tax positions.  The Company is primarily subject
to US federal and New York State income tax. Tax years subsequent to 2004 remain
open to review by US federal and state tax authorities.

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

OVERVIEW

Bluefly,  Inc.  is a leading  Internet  retailer  that  sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value.  We launched our Web site in September 1998. Over the past five
years, our sales have grown at a compounded  annual growth rate of approximately
30%.  During that same time, our gross margin levels have increased from a range
between  21.3% and 38.6% during 2003 to a range  between  37.4% and 42.0% during
2006 and 2007.

The  increase  in our  margin  and sales  over the past few years is the  direct
result of the merchandise strategy that we began to implement in spring 2004. As
part of that strategy, we are bringing the latest fashion trends to our customer
for great value and more current  season  merchandise.  While there will be some
fluctuation in our gross margin percentage from quarter to quarter as we further
develop our merchandising and marketing strategy (for example,  our gross margin
percentage  decreased  for the second  quarter of 2007 as compared to the second
quarter of 2006), we believe that we will be able to maintain margins in the 38%
to 40% range.

We believe that there is an opportunity to accelerate the growth of our business
while  continuing to provide our customers  with the great values that they have
become  accustomed  to. In an effort to take advantage of this  opportunity,  we
have invested much more aggressively in marketing during the past 21 months.

Our net sales increased by approximately 29% to $21,608,000 for the three months
ended June 30, 2007 from  $16,793,000  for the three months ended June 30, 2006.
Our gross  margin  decreased  to 39.2% for the three  months ended June 30, 2007
from 42.0% for the three months ended June 30, 2006. Our gross profit  increased
by approximately 20% to $8,463,000 for the three months ended June 30, 2007 from
$7,046,000  for the  three  months  ended  June 30,  2006.  Our  operating  loss
increased to $2,249,000 for the three months ended June 30, 2007 from $1,754,000
for the three months ended June 30, 2006.  This  increase was primarily a result
of an increase in stock-based  compensation as a result of equity awards granted
in the  fourth  quarter  of  2006 as well as  incremental  expense  recorded  in
accordance  with SFAS No.  123(R)  in  connection  with the  Offer to  Exchange.
Increased  marketing expenses  (excluding staff related costs) of $2,389,000 for
the second  quarter of 2007 from  $1,309,000  for the second  quarter  2006 also
contributed to the increase in the operating loss.

Our reserve for returns and credit card chargebacks  increased to 42.1% of gross
sales for the second quarter of 2007 compared to 41.8% for the second quarter of
2006.  The  increase  was  primarily  caused by a shift in our  merchandise  mix
towards  higher end products.  However,  we believe that this increase in return
rates has been more than offset by the higher gross  margin  dollars and average
order sizes that have been  generated by this shift in our  merchandise  mix. In
addition, gross margin dollars per order continues to increase.

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 to appropriate mark-downs. In recent years, we have
increased the amount of inventory purchased on a pack and hold basis in order to
take advantage of opportunities in the market.

At June 30, 2007, we had an accumulated deficit of $121,242,000.  The net losses
and  accumulated  deficit  resulted  primarily  from the costs  associated  with
developing and marketing our Web site and building our  infrastructure,  as well
as non-cash  beneficial  conversion  charges  resulting  from  decreases  in the
conversion  price of our Preferred Stock and the payment of dividends to holders
of  Preferred  Stock.  In order to expand our  business,  we intend to invest in
sales, marketing,

                                       12
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

merchandising,  operations, information systems, site development and additional
personnel  to support  these  activities.  Therefore,  we may  continue to incur
substantial  operating  losses.  Although we have experienced  revenue growth in
recent years,  this growth may not be  sustainable  and therefore  should not be
considered indicative of future performance.

RESULTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2006

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

<TABLE>
<CAPTION>
                                                2007                         2006                         2005
                                      ------------------------     ------------------------     ------------------------
                                                    As a % of                    As a % of                    As a % of
                                                    Net Sales                    Net Sales                    Net Sales
                                                    ----------                   ----------                   ----------
<S>                                   <C>                <C>       <C>                <C>       <C>                <C>
Net sales                             $   43,716         100.0%    $   33,669         100.0%    $   25,531         100.0%
Cost of sales                             26,879          61.5%        19,784          58.8%        15,995          62.6%
                                      ----------                   ----------                   ----------
        Gross profit                      16,837          38.5%        13,885          41.2%         9,536          37.4%

Selling and fulfillment expenses           8,945          20.4%         7,281          21.6%         6,168          24.1%
Marketing expenses                         6,323          14.5%         5,760          17.1%         1,935           7.6%
General and administrative expenses        7,040          16.1%         5,650          16.8%         3,188          12.5%
                                      ----------                   ----------                   ----------
        Total operating expenses          22,308          51.0%        18,691          55.5%        11,291          44.2%

Operating loss                            (5,471)        (12.5)%       (4,806)        (14.3)%       (1,755)         (6.8)%
Interest (expense) and other income          226           0.5%          (359)         (1.1)%         (307)         (1.2)%
                                      ----------                   ----------                   ----------
         Net loss                         (5,245)        (12.0)%       (5,165)        (15.4)%       (2,062)         (8.0)%
</TABLE>

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

<TABLE>
<CAPTION>
                                                       2007           2006          2005
                                                    ----------     ----------    ----------
<S>                                                 <C>            <C>           <C>
Average Order Size (including shipping & handling)  $   276.49     $   246.13    $   207.54
New Customers Added during the Period                   94,487         76,487        66,326
</TABLE>

NET SALES:  Gross  sales for the six months  ended June 30,  2007  increased  by
approximately  31% to $73,694,000 from $56,117,000 for the six months ended June
30, 2006.  For the six months ended June 30, 2007,  we recorded a provision  for
returns and credit card  chargebacks  and other  discounts  of  $29,978,000,  or
approximately  41% of gross sales.  For the six months ended June 30, 2006,  the
provision  for returns  and credit  card  chargebacks  and other  discounts  was
$22,448,000, or approximately 40% of gross sales. The increase in this provision
as a percentage of gross sales resulted from an increase in the return rate. The
increase in return  rate was  primarily  caused by an increase in average  order
size as well as a shift in our  merchandise  mix  towards  higher end  products.
However, we believe that this increase in return rates has been more than offset
by the higher gross profit and average  order sizes that have been  generated by
this shift in  merchandise  mix.  Gross  margin  dollars  per order  continue to
increase,  growing to $64.68 for the six months  ended June 30, 2007 from $61.92
for the six months ended June 30, 2006.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments for uncollected  sales taxes, our net sales for the six months ended
June 30, 2007 were  $43,716,000.  This  represents an increase of  approximately
29.8% compared to the six months ended June 30, 2006, in which net sales totaled
$33,669,000.  The  growth in net sales  resulted  from both an  increase  in the
number of new customers acquired (approximately 24% higher compared to the first
half 2006) and an  increase in average  order size (over 12% higher  compared to
the first half  2006).  For the six  months  ended June 30,  2007  revenue  from
shipping and handling (which is included in net sales)  increased  approximately
21% in 2007 to $2,391,000 from $1,970,000 in 2006.

                                       13
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

COST OF SALES:  Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound  shipping  costs,  inventory  reserves,  commissions  and
packing materials.  Cost of sales for the six months ended June 30, 2007 totaled
$26,879,000, resulting in gross margin of approximately 38.5%. Cost of sales for
the six months  ended June 30,  2006  totaled  $19,784,000,  resulting  in gross
margin of 41.2%.  Gross  profit  increased  by 21%, to  $16,837,000  for the six
months ended June 30, 2007 compared to $13,885,000 for the six months ended June
30,  2006.  The growth in gross profit was the result of  increased  sales.  The
growth in the high-end designer business has a significant impact on the overall
mix of the  business  which  continues  to  negatively  impact the gross  margin
percentage.  The  combination  of the high demand for this  merchandise  and the
decline of the dollar  versus  the Euro had a  negative  impact on the  designer
accessory  and shoe gross  margins,  however the gross margin  dollars per order
continue to grow.

MARKETING  EXPENSES:  Marketing  expenses  increased  by  approximately  10%  to
$6,323,000 for the six months ended June 30, 2007 compared to $5,760,000 for the
six months ended June 30, 2006.  While net sales for the six months increased by
almost 30%, our  marketing  expenses as a percentage  of net sales  decreased to
14.5% for the six months ended June 30, 2007 from 17.1% for the six months ended
June 30, 2006.

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.  Total  expenses  related to the national print and
television  advertising  campaign for the six months ended June 30, 2007 totaled
$2.8  million  compared to $3.1  million for the six months ended June 30, 2006.
The increase in marketing  expenses  was  attributable  to an increase in online
marketing expenses including affiliates, email and sweepstakes.  These increases
were  partially  offset by a  decrease  of  $332,000  in  connection  with costs
associated with our national advertising campaign.

SELLING AND FULFILLMENT EXPENSES:  Selling and fulfillment expenses increased by
approximately  23% in the first six  months  of 2007  compared  to the first six
months  of  2006.  Selling  and  fulfillment  expenses  were  comprised  of  the
following:

<TABLE>
<CAPTION>
                Six Months Ended    As a % of    Six Months Ended    As a % of    Percentage Difference
                 June 30, 2007      Net Sales     June 30, 2006      Net Sales     increase (decrease)
                ----------------    ---------    ----------------    ---------    ---------------------
<S>             <C>                      <C>     <C>                      <C>              <C>
Operating              4,732,000         10.8%          3,699,000         11.0%            28%
Technology             2,399,000          5.5%          1,989,000          5.9%            21%
E-Commerce             1,814,000          4.2%          1,593,000          4.7%            14%
                ----------------    ---------    ----------------    ---------
                $      8,945,000         20.5%   $      7,281,000         21.6%            23%
</TABLE>

As a percentage of net sales, our selling and fulfillment  expenses decreased to
20.5% for the six months ended June 30, 2007 from 21.6% for the six months ended
June 30, 2006.

Operating   expenses   include  all  costs  related  to  inventory   management,
fulfillment,  customer service,  and credit card processing.  Operating expenses
increased in the first six months of 2007 by  approximately  28% compared to the
first six  months  of 2006 as a result of  variable  costs  associated  with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit  card  fees) and an  increase  in  salary  related  expenses,  as well as
incremental one time costs of approximately $170,000 incurred in connection with
our move to a new third party fulfillment center. Included in operating expenses
for 2006,  was a refund from one of our credit card  processors  due to the fact
that it had charged us at incorrect rates during previous periods.

Technology  expenses consist  primarily of staff related costs,  amortization of
capitalized costs and Web site hosting.  For the six months ended June 30, 2007,
technology  expenses  increased by approximately  21% compared to the six months
ended June 30, 2006.  This increase  resulted from an increase in salary related
expenses,  as well as an increase in software support, web hosting and training.
This increase was partially offset by a decrease in consulting  expenses as most
of the  consulting  expenses  incurred in the first half of 2007 were related to
the development of our new Web site and capitalized  accordingly.  For the first
six months of 2007  approximately  $1,219,000 was capitalized in connection with
the development of our new Web site.

E-Commerce  expenses  include  expenses  related  to  our  photo  studio,  image
processing,  and Web site  design.  For the six  months  ended  June  30,  2007,
e-commerce expenses increased by approximately 14% as compared to the six months
ended June 30, 2006,  primarily due to an increase in salary related expenses as
well as an increase in expenses  associated with photo shoots. In

                                       14
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

addition,  for the six months  ended June 30, 2007,  equity  based  compensation
increased  compared to the six months  ended June 30,  2006,  as a result of the
Exchange Offer and new equity awards.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses include
merchandising,   finance  and  administrative  salaries  and  related  expenses,
insurance  costs,  accounting  and legal  fees,  depreciation  and other  office
related expenses.  General and administrative  expenses for the six months ended
June 30,  2007  increased  by  approximately  25% to  $7,040,000  as compared to
$5,650,000  for the six months ended June 30, 2006.  The increase in general and
administrative  expenses was primarily the result of the recording of $2,844,000
of  expense  related  to  employee  stock  options  in the six month  period and
increased  consulting and  professional  fees of $141,000.  These increases were
partially offset by a decrease in salary and salary related expenses of $291,000
and a decrease in public company expenses of $142,000.

As a percentage of net sales, general and administrative  expenses for the first
half of 2007 decreased slightly to 16.1% from 16.8% for the first half of 2006.

LOSS FROM OPERATIONS: Operating loss increased by approximately 14% in the first
six  months of 2007 to  $5,471,000  from  $4,806,000  in the first six months of
2006, as the increase in net sales and gross margin were more than offset by the
incremental  marketing  expenses and an increase in expenses related to employee
stock options.

INTEREST  INCOME:  Other income for the six months ended June 30, 2007 increased
to $364,000 from $112,000 for the six months ended June 30, 2006.  These amounts
relate primarily to interest income earned on our cash balances.

INTEREST AND OTHER EXPENSE:  Interest  expense for the six months ended June 30,
2007  totaled  $138,000,  compared to $471,000 for the six months ended June 30,
2006.  Interest  expense  relates  to fees paid in  connection  with our  Credit
Facility,  as well as  interest  expense on the Notes  that were  repaid in June
2006.

FOR THE THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 2006.

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

<TABLE>
<CAPTION>
                                                2007                         2006                         2005
                                      ------------------------     ------------------------     ------------------------
                                                    As a % of                    As a % of                    As a % of
                                                    Net Sales                    Net Sales                    Net Sales
                                                    ----------                   ----------                   ----------
<S>                                   <C>                <C>       <C>                <C>       <C>                <C>
Net sales                             $   21,608         100.0%    $   16,793         100.0%    $   12,029         100.0%
Cost of sales                             13,145          60.8%         9,747          58.0%         7,378          61.3%
                                      ----------                   ----------                   ----------
        Gross profit                       8,463          39.2%         7,046          42.0%         4,651          38.7%

Selling and fulfillment expenses           4,546          21.0%         3,848          22.9%         3,027          25.1%
Marketing expenses                         2,712          12.6%         1,729          10.3%         1,041           8.7%
General and administrative expenses        3,454          16.0%         3,223          19.2%         1,602          13.3%
                                      ----------                   ----------                   ----------
        Total operating expenses          10,712          49.6%         8,800          52.4%         5,670          47.1%

Operating loss                            (2,249)        (10.4)%       (1,754)        (10.4)%       (1,019)         (8.4)%
Interest (expense) and other income          107           0.5%          (147)         (0.9)%         (150)         (1.2)%
                                      ----------                   ----------                   ----------
        Net loss                          (2,142)         (9.9)%       (1,901)        (11.3)%       (1,169)         (9.6)%
</TABLE>

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

<TABLE>
<CAPTION>
                                                       2007           2006         2005
                                                    ----------     ----------    ----------
<S>                                                 <C>            <C>           <C>
Average Order Size (including shipping & handling)  $   284.01     $   248.32    $   216.09
New Customers Added during the Period                   45,102         37,779        29,561
</TABLE>

                                       15
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

NET SALES: Gross sales for the three months ended June 30, 2007 increased by 29%
to $37,327,000  from  $28,872,000  for the three months ended June 30, 2006. For
the three months ended June 30,  2007,  we recorded a provision  for returns and
credit card  chargebacks and other discounts of  $15,719,000,  or  approximately
42.1% of gross sales.  For the three months ended June 30, 2006,  the  provision
for returns and credit card chargebacks and other discounts was $12,079,000,  or
approximately  41.8% of gross  sales.  The  increase  in the return rate in this
provision as a percentage of gross sales resulted from an increase in the return
rate.  The  increase  was  primarily  caused by a shift in our  merchandise  mix
towards  higher end products.  However,  we believe that this increase in return
rates has been more than offset by the higher  gross  margins and average  order
sizes that have been  generated by this shift in  merchandise  mix. Gross margin
dollars per order  continue to increase,  growing to $66.53 for the three months
ended June 30, 2007 from $61.85 for the three months ended June 30, 2006

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments  for  uncollected  sales  taxes,  our net sales for the three months
ended  June  30,  2007  were   $21,608,000.   This  represents  an  increase  of
approximately 29% compared to the three months ended June 30, 2006, in which net
sales  totaled  $16,793,000.  The  growth  in net  sales  resulted  from both an
increase in the number of new customers  acquired  (over 19% higher  compared to
the three  months  ended June 30,  2006) and an increase  in average  order size
(over 14% higher  compared to the three  months  ended June 30,  2006).  For the
three months ended June 30, 2007,  revenue from shipping and handling  (which is
included in net sales) increased approximately 18% to $1,190,000 from $1,005,000
for the three months ended June 30, 2006.

COST OF SALES:  Cost of sales for the three  months  ended June 30, 2007 totaled
$13,145,000, resulting in gross margin of approximately 39.2%. Cost of sales for
the three  months  ended June 30, 2006  totaled  $9,747,000,  resulting in gross
margin of 42.0%.  Gross profit increased by approximately 20%, to $8,463,000 for
the three months ended June 30, 2007 compared to $7,046,000 for the three months
ended  June 30,  2006.  The growth in gross  profit was the result of  increased
average  order size and growth in sales.  The  growth in the  high-end  designer
business  has a  significant  impact on the  overall mix of the  business  which
continues to negatively impact the gross margin  percentage.  The combination of
the high demand for this  merchandise  and the decline of the dollar  versus the
Euro had a negative  impact on the designer  accessory  and shoe gross  margins.
however the gross margin dollars per order continue to grow.

MARKETING  EXPENSES:  Marketing  expenses increased by 57% to $2,712,000 for the
three months ended June 30, 2007 from $1,729,000 for the three months ended June
30, 2006. As a percentage  of net sales,  our  marketing  expenses  increased to
12.6% for the three  months  ended June 30, 2007 from 10.3% for the three months
ended June 30, 2006.  Some of the increase in the period is due to the timing of
the launch of national campaign between the first and second quarter of 2007.

Total expenses related to the national print and television advertising campaign
for the three months ended June 30, 2007 totaled  $929,000  compared to $279,000
for the three  months  ended  June 30,  2006.  The  increase  in  marketing  was
attributable to an increase of $650,000 in connection with costs associated with
our  national  ad  campaign,  as  well as  increases  related  to  paid  search,
affiliates, sweepstakes and email.

SELLING AND FULFILLMENT EXPENSES:  Selling and fulfillment expenses increased by
18% for the three  months  ended  June 30,  2007  compared  to the three  months
offended June 30, 2006.  Selling and fulfillment  expenses were comprised of the
following:

<TABLE>
<CAPTION>
                  Three Months                     Three Months
                     Ended          As a % of         Ended          As a % of    Percentage Difference
                 June 30, 2007      Net Sales      June 30, 2006     Net Sales     increase (decrease)
                ----------------    ---------    ----------------    ---------    ---------------------
<S>             <C>                      <C>     <C>                      <C>             <C>
Operating              2,467,000         11.4%          1,949,000         11.6%           27%
Technology             1,231,000          5.7%          1,017,000          6.0%           21%
E-Commerce               848,000          3.9%            882,000          5.3%           (4)%
                ----------------    ---------    ----------------    ---------    ---------------------
                $      4,546,000         21.0%   $      3,848,000         22.9%           18%
</TABLE>

As a percentage of net sales, our selling and fulfillment  expenses decreased to
21% for the three  months  ended June 30,  2007 from  approximately  23% for the
three months ended June 30, 2006.

Operating  expenses  increased  in the  three  months  ended  June  30,  2007 by
approximately  27%  compared to the three months ended June 30, 2006 as a result
of variable costs associated with the increased sales volume (e.g.,  picking and
packing orders

                                       16
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

and processing  returns) and an increase in customer  service and salary related
expenses.  In  addition,  during  the  quarter we started to move to a new third
party  fulfillment  center  and  incurred  an  incremental  one time  expense of
approximately  $170,000.  Start-up issues  associated with the transition to the
new  fulfillment  center  resulted in certain  cancelled  orders and  associated
expenses  during July 2007. We expect to incur an  additional  $350,000 in costs
directly related to the move (trucking, labor, insurance, etc.) during the third
quarter.  In the long term, the move to the new fulfillment  center is expected,
however,  to improve  customer  service and to result in  efficiencies  and cost
savings.

For the three  months  ended June 30,  2007,  technology  expenses  increased by
approximately  21%  compared  to the three  months  ended  June 30,  2006.  This
increase  resulted from an increase in salary  related  expenses,  as well as an
increase in software support,  depreciation,  training and web hosting expenses.
The increase was partially  offset by a decrease in consulting  expenses as most
of the consulting  expenses  incurred in the second quarter 2007 were related to
the development of our new Web site and capitalized  accordingly.  For the three
months ended June 30, 2007,  approximately  $685,000 of expenses was capitalized
in connection with the development of our new Web site.

For the three  months  ended June 30,  2007,  e-commerce  expenses  decreased by
approximately 4% as compared to the three months ended June 30, 2006,  primarily
due to a decrease in salary related expenses. This decrease was partially offset
by increases  associated  with photo  shoots,  supplies and research  tools.  In
addition,  for the three months ended June 30, 2007,  equity based  compensation
increased  compared to the three months ended June 30, 2006,  as a result of the
Exchange Offer and new equity awards.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
three months ended June 30, 2007 increased by  approximately 7% to $3,454,000 as
compared to $3,223,000 for the three months ended June 30, 2006. The increase in
general and administrative expenses was primarily the result of the recording of
an  additional  $888,000 of equity based  compensation  related to equity awards
granted during the fourth quarter of 2006 (stock based compensation  expense was
approximately  $1.3 million in the second  quarter 2007  compared to $475,000 in
the second quarter 2006) as well as increased  consulting and professional  fees
of $65,000,  increased  recruiting  fees of $30,000 and  increased  depreciation
expense of $9,000. These increases were partially offset by a decrease in public
company  expenses of $97,000 and decreased salary and salary related expenses of
$419,000.

As a percentage of net sales, general and administrative  expenses for the three
months ended June 30, 2007 decreased to  approximately  16.0% from 19.2% for the
three months ended June 30, 2006.

LOSS FROM  OPERATIONS:  Operating  loss increased in the three months ended June
30, 2007 to $2,249,000 from $1,754,000 in the three months ended June 30, 2006.

INTEREST INCOME: Other income for the three months ended June 30, 2007 increased
to $169,000 from $67,000 for the three months ended June 30, 2006. These amounts
related primarily to interest income earned on our cash balances.

INTEREST AND OTHER EXPENSE: Interest expense for the three months ended June 30,
2007 totaled  $62,000,  compared to $214,000 for the three months ended June 30,
2006.  Interest  expense for the three months ended June 30, 2006  included fees
paid in connection with our Credit Facility,  as well as interest expense on our
then outstanding promissory notes.

LIQUIDITY AND CAPITAL RESOURCES

General

At  June  30,  2007,  we had  approximately  $14.6  million  in  cash  and  cash
equivalents.  Working  capital at June 30,  2007 and 2006 was $30.6  million and
$37.4  million,  respectively.  Working  capital at December  31, 2006 was $34.0
million.  In addition,  as of June 30, 2007, we had  approximately  $3.2 million
committed  under the Credit  Facility,  leaving  approximately  $3.6  million of
availability.

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.
                                  JUNE 30, 2007

require us to request  Wells Fargo to provide  credit  support  under the Credit
Facility.  In some instances,  new vendors may require prepayments.  We may make
prepayments  in order to open up these new  relationships,  or to gain access to
inventory that would not otherwise be available to us. In addition, we sometimes
make  prepayments  in  connection  with  our  advertising  campaign,  as in some
circumstances  we need to pay in advance of production.  As of June 30, 2007, we
had approximately $569,000 of prepaid inventory on our balance sheet.

Our inventory levels as of June 30, 2007 were  approximately $2.0 million higher
than at June 30, 2006. The increase in inventory generally reflects a ramp up in
connection with our sales growth.  However,  the increased inventory level could
adversely   affect  our   flexibility  in  taking   advantage  of  other  buying
opportunities  that may become  available in the near term.  We believe that our
current funds,  together with operating  cash flow, and  availability  under our
existing  Credit  Facility  will be  sufficient to enable us to meet our planned
expenditures through at least the next 12 months.

Credit Facility

In July 2005, we entered into a new three year  revolving  credit  facility with
Wells Fargo.  Pursuant to the Credit  Facility,  Wells Fargo  provides us with a
revolving  loan and issues  letters of credit in favor of  suppliers or factors.
The Credit Facility is secured by a lien on all of our assets. Historically, the
Credit  Facility had also been  secured by the Soros LC. In August  2006,  Wells
Fargo  agreed to release  the Soros LC,  and that it would no longer  require an
availability  reserve  (although  it has the right under the Credit  Facility to
establish reserves in the future, as it deems appropriate). In return, we agreed
to maintain a minimum cash balance of $5,000,000.  Availability under the Credit
Facility is  determined  by a formula  that takes into account the amount of our
inventory  and  accounts  receivable.  The  maximum  availability  is  currently
$7,500,000,  but can be increased  to  $12,500,000  at our  request,  subject to
certain  conditions.  As of June 30, 2007, total  availability  under the Credit
Facility was approximately $6,800,000 of which $3,200,000 was committed, leaving
approximately $3,600,000 available for further borrowings.

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

Commitments and Long Term Obligations

As of June 30, 2007, we had the following commitments and long term obligations:

<TABLE>
<CAPTION>
                                            Less than      1-3        3-5    More than 5
                                Total        1 year       years      years      years
                            ------------    ---------   ---------   ------   -----------
<S>                         <C>            <C>          <C>             <C>           <C>
Marketing and Advertising   $  3,413,000    1,673,000   1,740,000       --            --
Purchase Orders             $ 19,953,000   19,953,000          --       --            --
Operating Leases            $  1,185,000      490,000     695,000       --            --
Employment Contracts        $  3,062,000    1,126,000   1,936,000       --            --
                            ------------    ---------   ---------   ------   -----------
  Grand total               $ 27,613,000   23,242,000   4,371,000       --            --
</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.

                                       18
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this Form 10-Q (the  "Evaluation  Date"),
we carried out an evaluation,  under the supervision and with the  participation
of our management,  including our Chief  Executive  Officer 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;  the  success  of our
advertising campaign; risks associated with Soros, private funds associated with
Maverick  Capital Ltd. 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 DHL. (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; the Company's dependence on one supplier for
a material  portion of its inventory;  risks  associated with the acquisition of
inventory from foreign  markets,  including  currency  fluctuations;  government
regulation and legal uncertainties; and uncertainties relating to the imposition
of sales tax on Internet sales.

PART II  - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In June 2007, we received a Civil Investigative Demand (the "Discovery Request")
from the Federal Trade  Commission  (the "FTC") that requested the production of
certain documents and other  information  regarding the labeling and advertising
of apparel  containing  products  that contain fur or faux fur  components.  The
Discovery  Request was issued in connection  with a petition filed by the Humane
Society of the United States with the FTC regarding the labeling and advertising
of fur products by a number of national retailers and apparel manufacturers. The
Company is cooperating fully with the Discovery Request.

In  addition,  we  currently  and from time to time are  involved in  litigation
incidental to the conduct of our business. However, we are not party to any such
litigation  that in the  opinion  of  management  is likely  to have a  material
adverse effect on us.

                                       19
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

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

On May 17, 2007, we held our annual meeting of stockholders. At the meeting, our
stockholders  voted  for  nine  directors,   electing  David  Wassong,   Melissa
Payner-Gregor,  Barry Erdos, Michael Gross, Ann Jackson,  Christopher G. McCann,
Martin  Miller,  Neal  Moszkowski  and Alex  Rafal as  members  of our  board of
directors.  In  addition,  our  stockholders  voted in  favor  of the  following
proposals: (1) a proposal to approve amendments to our 2005 Stock Incentive Plan
(the "Incentive  Plan") to (A) increase the aggregate number of shares of common
stock that may be the  subject of  stock-based  awards  granted  pursuant to the
Incentive Plan; (B) increase the aggregate number of shares of common stock that
may be the subject of stock-based  awards granted pursuant to the Incentive Plan
to a  participant  in a fiscal year,  and (C) replace the formula grant of stock
options to  non-employee  directors  currently  provided for under the Incentive
Plan with a formula of restricted  stock; (2) a proposal to approve an amendment
to our certificate of incorporation to increase the number of authorized  shares
of  common  stock  and;  (3) a  proposal  to  amend  our  amended  and  restated
certificate of  incorporation to effect a reverse stock split of our outstanding
common  stock at any ratio from 2:1 to 15:1 at anytime  prior to the date of our
2008 annual meeting of stockholders, with the board of directors having the sole
discretion  to determine  whether or not to effect such reverse stock split and,
if so, at what ratio within the approved  range.  The results of the voting were
as follows:

          PROPOSAL                           VOTES FOR     VOTES WITHHELD
----------------------------------------    ------------   --------------
Election of David Wassong                   114,729,044      1,023,323

Election of Melissa Payner-Gregor           114,719,377      1,032,990

Election of Barry Erdos                     114,603,059      1,149,308

Election of Christopher G. McCann           114,740,957      1,011,260

Election of Michael Gross                   114,348,228      1,404,139

Election of Ann Jackson                     114,741,107      1,011,260

Election of Martin Miller                   114,242,432      1,509,935

Election of Neal Moszkowski                 114,223,761      1,528,606

Election of Alex Rafal                      114,343,298      1,409,069


<TABLE>
<CAPTION>
                                                                             ABSTENTIONS AND
                                                VOTES FOR    VOTES AGAINST   BROKER NON-VOTES
                                               -----------   -------------   ----------------
<S>                                            <C>               <C>            <C>
Approval of Amendments to 2005
Stock Incentive Plan                           103,125,017       1,157,743      11,469,607

Approval of Amendment to
Company's amended and restated
certificate of incorporation
("Certificate of Incorporation")               113,934,701       1,783,718          33,947

Approval of an Amendment to the
Certificate of Incorporation to effect
a Reverse Stock Split                          102,539,953       1,727,433      11,484,981
</TABLE>

                                       20
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

ITEM 6.  EXHIBITS

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

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

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

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

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


                                       21
<PAGE>

                                  BLUEFLY, INC.
                                  JUNE 30, 2007

                                   SIGNATURES

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

                                              BLUEFLY, INC.


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


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


August 8, 2007

                                       22