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

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

                                    FORM 10-Q

(Mark One)

[X]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        For the quarterly period ended September 30, 2004

[ ]     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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 5, 2004, the issuer had outstanding 14,788,675 shares of
Common Stock, $.01 par value.

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<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Part I . Financial Information

Item 1.  Financial Statements

         Consolidated Condensed Balance Sheets as of September 30, 2004
           and December 31, 2003 (unaudited)                                  3

         Consolidated Condensed Statements of Operations for the
           nine months ended  September 30, 2004 and 2003 (unaudited)         4

         Consolidated Condensed Statements of Operations for the
           three months ended September 30, 2004 and 2003 (unaudited)         5

         Consolidated Condensed Statements of Cash Flows for the
           nine months ended September 30, 2004 and 2003 (unaudited)          6

         Notes to Consolidated Condensed Financial Statements                 7

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          18

Item 4.  Controls and Disclosures                                            18

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 and Reports on Form 8-K                                    20

Signature                                                                    21

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

                                  BLUEFLY, INC.
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                SEPTEMBER 30,      DECEMBER 31,
                                                                                     2004              2003
                                                                               ---------------   ---------------
<S>                                                                            <C>               <C>
                                     ASSETS
Current assets
  Cash and cash equivalents                                                    $     7,370,000   $     7,721,000
  Restricted cash                                                                    1,256,000                --
  Inventories, net                                                                  10,666,000        11,340,000
  Accounts receivable, net of allowance for doubtful accounts                        1,174,000         1,157,000
  Prepaid expenses                                                                     292,000           253,000
  Other current assets                                                                 573,000           453,000
                                                                               ---------------   ---------------
      Total current assets                                                          21,331,000        20,924,000

Property and equipment, net                                                          1,596,000         1,659,000

Other assets                                                                           404,000           415,000
                                                                               ---------------   ---------------
    Total assets                                                               $    23,331,000   $    22,998,000
                                                                               ===============   ===============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable                                                             $     3,175,000   $     3,122,000
  Accrued expenses and other current liabilities                                     2,846,000         3,869,000
  Deferred revenue                                                                   1,677,000         1,252,000
  Notes payable to related party shareholders, includes
   interest payable of  $574,000 as of September 30, 2004 and $34,000
   as of December 31, 2003                                                           4,756,000           216,000
                                                                               ---------------   ---------------
     Total current liabilities                                                      12,454,000         8,459,000

Note payable to related party shareholders                                                  --         4,000,000
Long-term interest payable to related party shareholders                                    --           159,000
Long-term capital lease liability                                                       68,000           101,000
                                                                               ---------------   ---------------
    Total liabilities                                                               12,522,000        12,719,000
                                                                               ---------------   ---------------

Commitments and contingencies

Shareholders' equity
  Series A Preferred stock - $.01 par value; 500,000 shares authorized,
   460,000 issued and outstanding (liquidation preference: $9.2 million
   plus accrued dividends of $4.7 million and $4.0 million as of
   September 30, 2004 and December 31, 2003, respectively)                               5,000             5,000
  Series B Preferred stock - $.01 par value; 9,000,000 shares authorized,
   8,889,414 shares issued and outstanding (liquidation preference:
   $30 million plus accrued dividends of $6.8 million and $5.2 million as of
   September 30, 2004 and December 31, 2003, respectively)                              89,000            89,000
  Series C Preferred stock - $.01 par value; 3,500 shares authorized and
   1,000 shares issued and outstanding (liquidation preference:
   $1 million plus accrued dividends of $167,000 and $102,000 as of
   September 30, 2004 and December 31, 2003, respectively)                                  --                --
  Series D Preferred stock - $.01 par value; 7,150 shares authorized,
   7,136.548 issued and outstanding (liquidation preference: $7.1 million
   plus accrued dividends of $1.4 million and $678,000 as of
   September 30, 2004 and December 31, 2003, respectively)                                  --                --
  Series E Preferred stock - $.01 par value; 1,000 shares authorized,
   issued and outstanding (liquidation preference: $1.0 million plus
   accrued dividends of $169,000 and $74,000 as of September 30, 2004
   and December 31, 2003, respectively)                                                     --                --
  Common stock - $.01 par value; 92,000,000 shares authorized and 14,662,590
   and 12,894,166 shares issued and outstanding as of September 30, 2004
   and December 31, 2003, respectively                                                 147,000           129,000
  Additional paid-in capital                                                       106,702,000       102,392,000
  Accumulated deficit                                                              (96,134,000)      (92,336,000)
                                                                               ---------------   ---------------
    Total shareholders' equity                                                      10,809,000        10,279,000
                                                                               ---------------   ---------------
    Total liabilities and shareholders' equity                                 $    23,331,000   $    22,998,000
                                                                               ===============   ===============
</TABLE>

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

                                        3
<PAGE>

                                  BLUEFLY, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                       NINE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                               ---------------------------------
                                                                                    2004               2003
                                                                               ---------------   ---------------
<S>                                                                            <C>               <C>
Net sales                                                                      $    29,284,000   $    23,935,000
Cost of sales                                                                       18,729,000        18,015,000
                                                                               ---------------   ---------------
  Gross profit                                                                      10,555,000         5,920,000

Selling, marketing and fulfillment expenses                                          9,718,000         8,277,000
General and administrative expenses                                                  4,896,000         3,883,000
                                                                               ---------------   ---------------
  Total operating expenses                                                          14,614,000        12,160,000

Operating loss                                                                      (4,059,000)       (6,240,000)
Interest and other income                                                              815,000            28,000
Interest expense                                                                      (554,000)         (268,000)
                                                                               ---------------   ---------------

Net loss                                                                       $    (3,798,000)  $    (6,480,000)

Deemed dividend related to beneficial conversion feature on
 Series C Preferred Stock                                                                   --          (225,000)
Preferred stock dividends                                                           (3,176,000)       (2,354,000)
                                                                               ---------------   ---------------
Net loss available to common shareholders                                      $    (6,974,000)  $    (9,059,000)
                                                                               ===============   ===============
Basic and diluted loss per common share                                        $         (0.48)  $         (0.82)
                                                                               ===============   ===============
Weighted average common shares outstanding (basic and diluted)                      14,508,692        11,021,829
                                                                               ===============   ===============
</TABLE>

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

                                        4
<PAGE>

                                  BLUEFLY, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                       THREE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                               ---------------------------------
                                                                                     2004             2003
                                                                               ---------------   ---------------
<S>                                                                            <C>               <C>
Net sales                                                                      $     8,675,000   $     8,210,000
Cost of sales                                                                        5,709,000         6,462,000
                                                                               ---------------   ---------------
  Gross profit                                                                       2,966,000         1,748,000

Selling, marketing and fulfillment expenses                                          3,059,000         2,883,000
General and administrative expenses                                                  1,743,000         1,274,000
                                                                               ---------------   ---------------
  Total operating expenses                                                           4,802,000         4,157,000

Operating loss                                                                      (1,836,000)       (2,409,000)
Interest and other income                                                               30,000             6,000
Interest expense                                                                      (154,000)         (114,000)
                                                                               ---------------   ---------------
Net loss                                                                       $    (1,960,000)  $    (2,517,000)
Preferred stock dividends                                                           (1,090,000)         (871,000)
                                                                               ---------------   ---------------
Net loss available to common shareholders                                      $    (3,050,000)  $    (3,388,000)
                                                                               ===============   ===============
Basic and diluted loss per common share                                        $         (0.21)  $         (0.31)
                                                                               ===============   ===============
Weighted average common shares outstanding (basic and diluted)                      14,634,625        11,057,700
                                                                               ===============   ===============
</TABLE>

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

                                        5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       NINE MONTHS ENDED
                                                                                         SEPTEMBER 30,
                                                                               ---------------------------------
                                                                                     2004             2003
                                                                               ---------------   ---------------
<S>                                                                            <C>               <C>
Cash flows from operating activities
  Net loss                                                                     $    (3,798,000)  $    (6,480,000)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                    1,119,000         1,390,000
    Non-cash expense related to warrants issued to supplier                            194,000                --
    Provisions for returns                                                            (968,000)          (11,000)
    Allowance for doubtful accounts                                                    162,000           105,000
    Reserve for inventory obsolescence                                                 100,000           559,000
    Change in value of warrants                                                       (564,000)               --
    Stock option expense                                                               123,000                --
    Changes in operating assets and liabilities:
    (Increase) decrease in
      Inventories                                                                      380,000        (2,155,000)
      Accounts receivable                                                             (179,000)         (643,000)
      Prepaid expenses                                                                 (39,000)           51,000
      Other current assets                                                            (120,000)         (107,000)
    Increase (decrease) in
      Accounts payable                                                                  53,000         2,529,000
      Accrued expenses and other current liabilities                                    17,000          (510,000)
      Interest payable to related party                                                381,000            63,000
      Deferred revenue                                                                 425,000           527,000
                                                                               ---------------   ---------------
    Net cash used in operating activities                                           (2,714,000)       (4,682,000)
                                                                               ---------------   ---------------
Cash flows from investing activities
  Cash collateral in connection with Rosenthal Pledge Agreement                     (1,256,000)               --
  Purchase of property and equipment                                                  (891,000)         (391,000)
                                                                               ---------------   ---------------
Net cash used in investing activities                                               (2,147,000)         (391,000)
                                                                               ---------------   ---------------
Cash flows from financing activities
  Net proceeds from January 2004 Financing                                           4,577,000                --
  Net proceeds from exercise of stock options                                          192,000            77,000
  Proceeds from sale of Series D Preferred Stock                                            --         2,000,000
  Proceeds from issuance of Notes Payable (July 2003 Financing)                             --         2,000,000
  Proceeds from issuance of Notes Payable (January 2003 Financing)                          --         1,000,000
  Proceeds from sale of Series E Preferred Stock                                            --         1,000,000
  Payments of capital lease obligation                                                (259,000)         (186,000)
                                                                               ---------------   ---------------
Net cash provided by financing activities                                            4,510,000         5,891,000
                                                                               ---------------   ---------------

Net increase in cash and cash equivalents                                             (351,000)          818,000
Cash and cash equivalents - beginning of period                                      7,721,000         1,749,000
                                                                               ---------------   ---------------
Cash and cash equivalents - end of period                                      $     7,370,000   $     2,567,000
                                                                               ===============   ===============
Supplemental schedule of non-cash investing and financing activities:
 Equipment acquired under capital lease                                        $       153,000   $       224,000
                                                                               ===============   ===============
Exchange of note for equity                                                                 --   $     2,027,000
                                                                               ===============   ===============
Conversion of debt to equity                                                                --   $     1,009,000
                                                                               ===============   ===============
Deemed dividend related to beneficial conversion feature on Series C
 Preferred Stock                                                                            --   $       225,000
                                                                               ===============   ===============
Warrants issued to related party shareholders                                               --   $        43,000
                                                                               ===============   ===============
Interest paid                                                                  $       121,000   $        46,000
                                                                               ===============   ===============
</TABLE>

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

                                        6
<PAGE>

                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2004

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnote
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation 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. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's Form 10-K/A for
the year ended December 31, 2003.

The Company has sustained net losses and negative cash flows from operations
since the formation of Bluefly.com. The Company's ability to meet its
obligations in the ordinary course of business is dependent on its ability to
establish profitable operations and/or raise additional financing through public
or private debt or equity financing, or other sources to fund operations. The
Company believes that its current funds, together with working capital, will be
sufficient to enable it to meet its planned expenditures through at least
December 31, 2004. The Company may seek additional equity or debt financing to
maximize the growth of its business or if anticipated operating results are not
achieved. If such financings are not available on terms acceptable to the
Company, and/or the Company does not achieve its operating plan, future
operations will need to be modified, scaled back or discontinued.

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 up to 75% off
retail value. The Company's Web store ("Bluefly.com" or Web Site") was launched
in September 1998.

NOTE 3 - JANUARY 2004 FINANCING

On January 12, 2004, the Company completed a private placement pursuant to which
it raised $5,000,000. Under the terms of the deal, the Company issued 1,543,209
shares of Common Stock at $3.24 per share, which was 90% of the trailing
five-day average of the Company's volume-weighted stock price as of December 29,
2003, the date that a preliminary agreement was reached as to the pricing of the
deal. The Company also issued to the new investors warrants to purchase 385,801
shares of Common Stock at any time during the next five years at an exercise
price equal to $3.96 per share. After professional fees and finders fees paid to
brokers, the net proceeds from the transaction were approximately $4,577,000.

In accordance with EITF 00-19, the Company accounted for the warrants issued in
January 2004 at fair market value and classified the warrants as a liability
because the Company may be required to make cash payments to the investors who
purchased the warrants in the event that the registration statement covering the
offer and sale of the shares underlying the warrants were to no longer be
effective. The Company used the Black-Scholes option pricing method (assumption:
volatility 147%, risk free rate 3.76%, two year expected life and zero dividend
yield) to calculate the value of the warrants. At January 12, 2004, the date of
the transaction (the "Transaction Date"), the warrants had a value of
$1,096,000. The value of the warrants was marked to market in each subsequent
reporting period as a derivative gain or loss until June 17, 2004 (the "End
Date"), at which time EITF 00-19 called for the warrants to be re-classified as
equity because the maximum potential cash amount payable to the investors had
decreased to the point where it was no longer considered significant.

During the period beginning on the Transaction Date and ending on the End Date,
the value of the warrants decreased from $1,096,000 to $532,000, and,
accordingly the Company recognized $564,000 of other income for the nine months
ended September 30, 2004.

In January 2004, the Company also extended the maturity dates on the Convertible
Promissory Notes issued to affiliates of Soros Private Equity Partners, LLC that
collectively own a majority of its capital stock (collectively, "Soros") in July
and October 2003 (the "Notes"). The maturity dates of the Notes, which were
originally January and April 2004, respectively, were

                                        7
<PAGE>

                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2004

each extended to March 1,2005.  In February 2004, the maturity date of the Notes
was further extended to May 1, 2005.

NOTE 4 - FINANCING AGREEMENT

The Company has a Financing Agreement (the "Financing Agreement") with Rosenthal
& Rosenthal, Inc. ("Rosenthal") pursuant to which Rosenthal provides the Company
with certain credit accommodations, including loans and advances,
factor-to-factor guarantees or letters of credit in favor of suppliers or
factors or purchases of payables owed to the Company's suppliers (the "Loan
Facility").

The Financing Agreement was amended in April 2004 to: (i) extend the term until
March 30, 2005; (ii) substitute $1.25 million of cash collateral pledged by the
Company for the $2.0 million standby letter of credit previously provided by
Soros as collateral security for the Company's obligations under the Loan
Facility; (iii) decrease the maximum amount available under the Loan Facility
from $4.5 million to $4.0 million; (iv) increase the tangible net worth
requirement to $7.0 million; (v) increase the working capital requirement to
$6.0 million; and (vi) increase the minimum cash balance that the Company is
required to maintain to $750,000 (exclusive of the $1.25 million in cash
collateral). The cash collateral is included on the balance sheet as "Restricted
Cash" and represents monies deposited in a segregated account that has been
pledged to Rosenthal as collateral for the facility.

As of September 30, 2004, the maximum availability under the Loan Facility was
approximately $3.5 million of which approximately $2.5 million was committed,
leaving approximately $1.0 million available under the Loan Facility.

NOTE 5 - LOSS PER SHARE

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

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

<TABLE>
<CAPTION>
         Security                September 30, 2004    Exercise Prices     September 30, 2003     Exercise Prices
         --------                ------------------    ---------------     ------------------     ---------------
         <S>                            <C>            <C>                        <C>             <C>
         Options                         10,071,023    $0.69  - $16.60             10,370,912     $0.69  - $16.60
         Warrants                         1,704,945    $0.78  - $ 9.08              1,119,144     $0.78  - $ 9.08
         Preferred Stock                43,323,430*                               43,323,430*
         Convertible Notes**                     --                                        --
</TABLE>

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

                                       8
<PAGE>

                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2004

NOTE 6 -  STOCK BASED COMPENSATION

The Company applies Statement of Financial Accounting Standards No. ("SFAS") No.
148 "Accounting for Stock Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123," SFAS No. 123 "Accounting for Stock Based
Compensation," and FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" in accounting for its stock based
compensation plan. In accordance with SFAS No. 123, the Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations for
expense recognition. In the nine months ended September 30, 2004, compensation
expense of $10,000 was recorded in connection with certain options issued below
market value to the Company's Chief Executive Officer in accordance with the
terms of her employment agreement, and $113,000 in compensation expense was
recorded in connection with certain options issued to the Company's former Chief
Executive Officer pursuant to his separation agreement. Except for these
options, no compensation expense has been recorded in the nine months ended
September 30, 2004 and September 30, 2003 in connection with stock option grants
to employees, because the exercise price of employee stock options equals or
exceeds the market price of the underlying stock on the date of grant. Had
compensation expense for the Plan been determined consistent with the provisions
of SFAS No. 123, the effect on the Company's basic and diluted net loss per
share would have been as follows:

<TABLE>
<CAPTION>
                                               For the Nine Months Ended         For the Three Months Ended
                                             ------------------------------    ------------------------------
                                             September 30,    September 30,    September 30,    September 30,
                                                 2004             2003             2004             2003
                                             -------------    -------------    -------------    -------------
<S>                                          <C>              <C>              <C>              <C>
Net loss available to common shareholders    $  (6,974,000)   $  (9,059,000)   $  (3,050,000)   $  (3,388,000)
Add: Stock-based employee compensation
 expense included in reported net income           123,000               --          121,000               --
Deduct: total stock-based employee
 compensation expense determined under
 fair value based method for all awards         (2,328,000)      (3,206,000)      (1,094,000)      (1,106,000)

Pro forma,  net loss  available  to common
 shareholders                                   (9,179,000)     (12,265,000)      (4,023,000)      (4,494,000)
Loss Per Share:
  Basic and diluted, as reported             $       (0.48)   $       (0.82)   $       (0.21)   $       (0.31)
  Basic and diluted, pro forma               $       (0.63)   $       (1.11)   $       (0.27)   $       (0.41)
</TABLE>

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts, as additional stock option awards are anticipated
in future years.

NOTE 7 - OTHER INCOME

In June 2002, the Company entered into an agreement with a third party investor
pursuant to which the investor committed to purchase approximately $7 million of
Common Stock and warrants from the Company. The investor breached the contract
by failing to consummate the investment, although it did provide the Company
with $169,000 as a good faith deposit. In October 2002, the Company filed an
action against the investor based on its failure to consummate the investment,
and in December 2003, the court entered judgment in the Company's favor against
the third party investor in the amount of $3,793,688. In the first quarter of
2004, following the expiration of all applicable appeal periods, the Company
recognized the good faith deposit of $169,000 as other income, as a partial
recognition of litigation settlement. Based on the information currently
available to it regarding the investor's finances, the Company does not believe
that it will be successful in collecting a material amount of additional funds
as a result of the damages award.

In addition, as discussed in Note 3 above, the Company recognized $564,000 of
other income for the nine months ended

                                       9
<PAGE>

                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2004

September 30, 2004 to adjust a liability associated with warrants issued by the
Company to its fair value as of June 17, 2004 (at which point the liability was
reclassified as equity in accordance with EITF 00-19 and described in Note 3).

NOTE 8 - RECLASSIFICATIONS

Certain amounts in the consolidated condensed financial statements of the prior
period have been reclassified to conform to the current period presentation for
comparative purposes.

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

OVERVIEW

Bluefly, Inc., a Delaware corporation, is a leading Internet retailer that sells
over 350 brands of designer apparel, accessories and home products at discounts
up to 75% off retail value. Bluefly.com, our Web site, was launched in September
1998. Although we do not have permanent brick and mortar stores, we operated a
temporary store in the New York city area during the 2003 holiday season and
intend to do so again this year.

Our net sales increased approximately 6% to $8,675,000 for the three months
ended September 30, 2004 from $8,210,000 for the three months ended September
30, 2003. For the nine months ended September 30, 2004, our net sales increased
approximately 22% to approximately $29,284,000 from $23,935,000 for the nine
months ended September 30, 2003.

Our gross margin increased to 34.2% in the third quarter of 2004 from 21.3% in
the third quarter of 2003. For the nine months ended September 30, 2004, our
gross margin increased to 36.0% from 24.7% for the nine months ended September
30, 2003. Our gross margin is dependent upon a number of factors, including our
ability to forecast demand and fashion trends accurately, and, accordingly,
there can be no assurance that we will meet any particular margin level.

Our customer acquisition costs decreased to $8.41 per customer in the third
quarter of 2004, from $10.52 per customer in the third quarter of 2003. For the
nine months ended September 30, 2004, customer acquisition costs were $10.04 per
customer, as compared to $10.05 per customer for the nine months ended September
30, 2003. On average, the positive contribution to overhead that we generate
from a customer's first purchase exceeds our current customer acquisition costs
by a significant margin. Accordingly, we believe that it may be prudent to be
more aggressive in acquiring customers (even though it may increase our customer
acquisition costs for the remainder of 2004 and beyond) in order to acquire
larger numbers of customers with profitable ordering patterns.

Our reserve for returns and credit card chargebacks decreased to 37.2% in the
third quarter of 2004 from 39.5% in the third quarter of 2003. The reserve was
38% for the nine month periods ended September 30, 2004 and 2003. On the whole,
our reserve for returns and credit card chargebacks has risen for the past few
years, from 32% in 2001, to 36% in 2002 to 37% in 2003 as a result of increasing
return rates. The increase in return rates has primarily been driven by shifts
in our merchandise mix. However, we believe that the increase in return rates is
more than offset by higher gross margins and average order sizes that have been
generated by this shift in merchandise mix. While we continue to test smaller
changes to our merchandise mix as well as improvements to our product
descriptions and packaging in order to reduce our return rates, which may have
had some impact on the decrease in return rates during the third quarter of this
year, we believe that the overall shift in merchandise mix has been beneficial
to the overall gross profit realized per order. Accordingly, we do not know
whether the recent trend towards decreasing return rates will continue.

From time to time, a portion of our inventory consists of out-of-season
merchandise that we either purchased with the intention of holding for the
appropriate season or were unable to sell in a prior season and have determined
to hold for the next selling season, subject (in some cases) to appropriate
mark-downs.

At September 30, 2004, we had an accumulated deficit of $96,134,000, of which
approximately $29,000,000 was the result of non-cash beneficial conversion
charges incurred in connection with the reduction of the conversion price of the
Company's Preferred Stock. The net losses and accumulated deficit resulted
primarily from the costs associated with developing and

                                       10
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

marketing our Web site and building our infrastructure. In order to expand our
business, we intend to invest in sales, marketing, merchandising, operations,
information systems, site development and additional personnel to support these
activities. We therefore expect to continue to incur substantial operating
losses for the near future. Although we have experienced revenue growth in
recent years, this growth may not be sustainable and therefore should not be
considered indicative of future performance.

CRITICAL ACCOUNTING POLICIES

Management Estimates

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

Revenue Recognition

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

     .    A customer executes an order.

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

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

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

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

Provision for Returns and Doubtful Accounts

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

Inventory Valuation

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

Deferred Tax Valuation Allowance

We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on

                                       11
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

deferred taxes of a change in tax rates is realized in income in the period that
included the enactment date. We have assessed the future taxable income and
determined that a 100% deferred tax valuation allowance is deemed necessary. In
the event that we were to determine that we would be able to realize our
deferred tax assets, an adjustment to the deferred tax valuation allowance would
increase income in the period such determination is made.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003

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

<TABLE>
<CAPTION>
                                                      2004                    2003                    2002
                                              --------------------    --------------------    --------------------
                                                         As a % of               As a % of               As a % of
                                                         Net Sales               Net Sales               Net Sales
                                                         ---------               ---------               ---------
<S>                                           <C>            <C>      <C>            <C>      <C>            <C>
Net sales                                     $ 29,284       100.0%   $ 23,935       100.0%   $ 20,750       100.0%
Cost of sales                                   18,729        64.0%     18,015        75.3%     13,770        66.4%
                                              --------                --------                --------
  Gross profit                                  10,555        36.0%      5,920        24.7%      6,980        33.6%

Selling, marketing and fulfillment expenses      9,718        33.2%      8,277        34.6%      8,047        38.8%
General and administrative expenses              4,896        16.7%      3,883        16.2%      3,546        17.1%
                                              --------                --------                --------
  Total operating expenses                      14,614        49.9%     12,160        50.8%     11,593        55.9%

Operating loss                                  (4,059)      (13.9)%    (6,240)      (26.1)%    (4,613)      (22.3)%
Interest expense and (other income)                261         0.9%       (240)       (1.0)%      (206)       (1.0)%
                                              --------                --------                --------
  Net loss                                      (3,798)      (13.0)%    (6,480)      (27.1)%    (4,819)      (23.3)%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                             2004         2003         2002
                                                                          ----------   ----------   ----------
<S>                                                                       <C>          <C>          <C>
Average Order Size (including shipping & handling)                        $   185.83   $   168.03   $   162.32
Average Order Size Per New Customer (including shipping & handling)       $   162.02   $   153.37   $   145.82
Average Order Size Per Repeat Customer (including shipping & handling)    $   198.83   $   176.10   $   171.23

New Customers Added during the Period                                         84,605       79,134       68,323
Revenue from Repeat Customers as a % of total Revenue                             70%          68%          69%
Customer Acquisition Costs                                                $    10.04    $    10.05   $    16.20
</TABLE>

We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.

NET SALES: Gross sales (which includes sales of product and shipping revenue)
for the nine months ended September 30, 2004 increased by over 22% to
$47,188,000, from $38,612,000 for the nine months ended September 30, 2003. For
the nine months ended September 30, 2004, we recorded a provision for returns
and credit card chargebacks and other discounts of $17,904,000, or approximately
38% of gross sales. For the nine months ended September 30, 2003, the provision
for returns and credit card chargebacks and other discounts was $14,677,000, or
approximately 38% of gross sales.

                                       12
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the nine months ended
September 30, 2004 were $29,284,000. This represents an increase of
approximately 22% compared to the nine months ended September 30, 2003, in which
net sales totaled $23,935,000. The growth in net sales resulted from both the
net revenue from new customers acquired and an increase in average order size
(approximately 11% higher compared to the nine months ended September 2003). For
the nine months ended September 30, 2004 revenue from shipping and handling
(which is included in net sales) increased by almost 23% to $2,320,000 from
$1,892,000 for the nine months ended September 30, 2003. Shipping and handling
revenue increased at a slightly higher rate than revenue as a whole because we
have not offered as many free shipping promotions in 2004, although this effect
has been partially offset by an increase in average order size.

COST OF SALES: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the nine months ended September 30, 2004
totaled $18,729,000, resulting in gross margin of approximately 36.0%. Cost of
sales for the nine months ended September 30, 2003 totaled $18,015,000,
resulting in gross margin of 24.7%. Gross profit increased by approximately 78%,
to $10,555,000 for the nine months ended September 30, 2004 compared to
$5,920,000 for the nine months ended September 30, 2003. The growth in gross
margin is primarily the result of increased product margins. Our gross margins
were lower in 2003 than they had been historically because we decided to turn
more of our out-of-season merchandise, as well as inventory items that we were
particularly deep in, into cash that could be used to purchase new inventory,
rather than holding the inventory for the next season. Because we currently have
significantly more cash than we did during a large part of 2003, we do not
currently face the same issues. In addition, our merchandise strategy is now
focused on offering the most current trends, which allows us to generate a
higher product margin while still providing significant value to our customers.

SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses increased by approximately 17.4% for the first nine months of 2004
compared to the first nine months of 2003. Selling, marketing and fulfillment
expenses consist of the following:

             Nine Months Ended      Nine Months Ended     Percentage Difference
             September 30, 2004     September 30, 2003     increase (decrease)
             ------------------     ------------------    ---------------------
Marketing    $        1,389,000     $        1,227,000                     13.2%
Operating             3,891,000              3,451,000                     12.7%
Technology            3,134,000              2,579,000                     21.5%
E-Commerce            1,304,000              1,020,000                     27.8%
             ------------------     ------------------
             $        9,718,000     $        8,277,000                     17.4%

As a percentage of net sales, our selling, marketing and fulfillment expenses
decreased slightly to 33.2% for the nine months ended September 30, 2004 from
34.6% for the nine months ended September 30, 2003. The decrease in selling,
marketing and fulfillment expenses as a percentage of net sales resulted from
efficiencies in our marketing and operating expenses, both of which increased at
a lower rate than our net sales.

Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. Marketing expenses
increased in the first nine months of 2004 by approximately 13.2% compared to
the first nine months of 2003. Marketing expenses increased by a lower
percentage than revenue primarily because of the increases in average order size
and in the percentage of total revenue generated from repeat customers. The
average order size for the first nine months of 2004 was approximately $186, as
compared to approximately $168 for the first nine months of 2003. Revenue from
repeat customers represented 70% of total revenue for the nine months ended
September 30, 2004, as compared to 68% for the nine months ended September 30,
2003. Customer acquisition costs remained relatively unchanged at $10.04 per
customer for the nine months ended September 30, 2004, from $10.05 per customer
for the nine months ended September 30, 2003. On average, the positive
contribution to overhead that we generate from a customer's purchase exceeds our
current customer acquisition costs by a significant margin. Accordingly, we
believe that it may be prudent to continue to be more aggressive in acquiring
customers (even though it may increase our customer acquisition costs for the
remainder of 2004 and beyond) in order to acquire larger numbers of customers
with profitable ordering patterns.

Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first nine months of 2004 by approximately 12.7% compared to
the first nine months of

                                       13
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

2003 as a result of variable costs associated with the increased sales volume
(e.g., picking and packing orders, processing returns and credit card fees), as
well as costs associated with our seasonal clearance store, which closed in
March. Operating expenses increased by a lower percentage than revenue primarily
as a result of economies of scale, as the fixed costs associated with our
fulfillment operations are allocated over a larger revenue base. Our goal is to
achieve greater economies of scale as our business grows, although there can be
no assurance that we will be successful in doing so.

Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web Site hosting. For the nine months ended September 30,
2004 technology expenses increased by approximately 21.5% compared to the nine
months ended September 30, 2003. This increase resulted from an increase in
headcount and salary related expenses, an increase in web hosting expense,
consulting expense and was offset by a decrease in depreciation expense.

E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the nine months ended September 30, 2004,
this amount increased by approximately 27.8% as compared to the nine months
ended September 30, 2003, primarily due to an increase in salary related
expenses as well as an increase in expenses associated with outside research
tools. We believe that our increased investment in the e-commerce group played a
key role in the growth of our business during the first nine months, and we
intend to continue to invest in this area in the near future.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the nine months ended
September 30, 2004 increased by approximately 26.1% to $4,896,000 as compared to
$3,883,000 for the nine months ended September 30, 2003. The increase in general
and administrative expenses was the result of increased salary and benefit
expenses, as well as approximately $325,000 of expenses (including $113,000 of
non-cash charges resulting from a stock option grant) incurred in connection
with the separation agreement with our former CEO, as well as an increase in
public company expenses, and were partially offset by a decrease in professional
and consulting fees. As a percentage of net sales, general and administrative
expenses for the first nine months of 2004 and 2003 remained relatively
unchanged at approximately 16%.

LOSS FROM OPERATIONS: Operating loss decreased by almost 35% in the first nine
months of 2004 to $4,059,000 from $6,240,000 in the first nine months of 2003 as
a result of the increase in gross margin and revenue.

INTEREST AND OTHER INCOME: Other income for the nine months ended September 30,
2004 increased to $815,000 from $28,000 for the nine months ended September 30,
2003. The increase resulted from $564,000 recognized to adjust a liability
associated with warrants issued by us to their fair value as of June 17, 2004
(at which time the warrants were re-classified as equity as described in Note 3
to our financial statements), the $169,000 realized in connection with the
judgment we received in the Breider Moore litigation and an increase in interest
income earned on our cash balance.

INTEREST EXPENSE: Interest expense for the nine months ended September 30, 2004
totaled $554,000, and related primarily to fees paid in connection with the Loan
Facility and interest expense on the Convertible Notes. For the nine months
ended September 30, 2003, interest expense totaled $268,000, and related to fees
paid in connection with our Loan Facility as well as amortization of warrants
issued in connection with the January 2003 Financing.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003

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

<TABLE>
<CAPTION>
                                                       2004                     2003                   2002
                                              ---------------------   ---------------------   ---------------------
                                                          As a % of               As a % of               As a % of
                                                          Net Sales               Net Sales               Net Sales
                                                          ---------               ---------               ---------
<S>                                           <C>             <C>     <C>             <C>     <C>             <C>
Net sales                                     $   8,675       100.0%  $   8,210       100.0%  $   6,305       100.0%
Cost of sales                                     5,709        65.8%      6,462        78.7%      4,232        67.1%
                                              ---------               ---------               ---------
  Gross profit                                    2,966        34.2%      1,748        21.3%      2,073        32.9%

Selling, marketing and fulfillment expenses       3,059        35.2%      2,883        35.1%      2,952        46.8%
General and administrative expenses               1,743        20.1%      1,274        15.5%      1,277        20.3%
                                              ---------               ---------               ---------
  Total operating expenses                        4,802        55.3%      4,157        50.6%      4,229        67.1%

Operating loss                                   (1,836)      (21.1)%    (2,409)      (29.3)%    (2,156)      (34.2)%
Interest (expense) and other income, net           (124)       (1.4)%      (108)       (1.3)%       (79)       (1.2)%
                                              ---------               ---------               ---------
  Net loss                                       (1,960)      (22.5)%    (2,517)      (30.6)%    (2,235)      (35.4)%
</TABLE>

                                       14
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

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

<TABLE>
<CAPTION>
                                                                             2004         2003         2002
                                                                          ----------   ----------   ----------
<S>                                                                       <C>          <C>          <C>
Average Order Size (including shipping & handling)                        $   179.48   $   161.87   $   163.64
Average Order Size Per New Customer (including shipping & handling)       $   151.40   $   144.69   $   144.03
Average Order Size Per Repeat Customer (including shipping & handling)    $   194.31   $   171.51   $   174.61

New Customers Added during the Period                                         25,792       29,522       22,393
Revenue from Repeat Customers as a % of total Revenue                             71%          68%          68%
Customer Acquisition Costs                                                $     8.41   $    10.52   $    23.07
</TABLE>

We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.

NET SALES: Gross sales (which includes sales of product and shipping revenue)
for the three months ended September 30, 2004 increased by approximately 1.8% to
$13,819,000, from $13,574,000 for the three months ended September 30, 2003. For
the three months ended September 30, 2004, we recorded a provision for returns
and credit card chargebacks and other discounts of $5,144,000, or approximately
37.2% of gross sales. For the three months ended September 30, 2003, the
provision for returns and credit card chargebacks and other discounts was
$5,364,000, or approximately 39.5% of gross sales. The decrease in this
provision as a percentage of gross sales resulted from a slight decrease in the
return rate. While we continue to test smaller changes to our merchandise mix as
well as improvements to our product descriptions and packaging in order to
decrease return rates, there can be no assurance that return rates will continue
to decline, and, they may, in fact, increase.

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended September 30, 2004 were $8,675,000. This represents an increase of
approximately 6% compared to the three months ended September 30, 2003, in which
net sales totaled $8,210,000. The growth in net sales resulted primarily from
the decrease in return rate, as well as an increase in average order size
(approximately 11% higher compared to the third quarter of 2003), partially
offset by a decrease in the number of orders. For the three months ended
September 30, 2004, revenue from shipping and handling (which is included in net
sales) increased by 11% to $709,000 from $640,000 for the quarter ended
September 30, 2003. Shipping and handling revenue increased at a slightly higher
rate than revenue as a whole because we have not offered as many free shipping
promotions in 2004, although this effect has been partially offset by an
increase in average order size.

COST OF SALES: Cost of sales for the three months ended September 30, 2004
totaled $5,709,000, resulting in gross margin of approximately 34.2%. Cost of
sales for the three months ended September 30, 2003 totaled $6,462,000,
resulting in gross margin of 21.3%. Gross profit increased by more than 69%, to
$2,966,000 for the three months ended September 30, 2004 compared to $1,748,000
for the three months ended September 30, 2003. The growth in gross margin is
primarily the result of increased product margins. Our gross margins were lower
in 2003 than they had been historically because we decided to turn more of our
out-of-season merchandise, as well as inventory items that we were particularly
deep in, into cash that could be used to purchase new inventory, rather than
holding the inventory for the next season. Because we currently have
significantly more cash than we

                                       15
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

did during a large part of 2003, we do not currently face the same issues. In
addition, our merchandise strategy is now focused on offering the most current
trends, which allows us to generate a higher product margin while still
providing significant value to our customers.

SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses increased by approximately 6.1% for the three months ended September
30, 2004 compared to the three months ended September 30, 2003. Selling,
marketing and fulfillment expenses were comprised of the following:

<TABLE>
<CAPTION>
                                  Three Months Ended      Three Months Ended     Percentage Difference
                                  September 30, 2004      September 30, 2003      increase (decrease)
                                 ---------------------   ---------------------   ---------------------
<S>                              <C>                     <C>                                     <C>
Marketing                        $             365,000   $             451,000                   (19.1)%
Operating                                    1,069,000               1,202,000                   (11.1)%
Technology                                   1,114,000                 817,000                    36.4%
E-Commerce                                     511,000                 413,000                    23.7%
                                 ---------------------   ---------------------
                                 $           3,059,000   $           2,883,000                     6.1%
</TABLE>

As a percentage of net sales, our selling, marketing and fulfillment expenses
remained relatively unchanged at 35%.

Marketing expenses decreased because our total customer acquisition costs in the
quarter were lower, due in part to the fact that we did not do a direct mail
campaign in the third quarter of 2004 and did not generate as much revenue
through our affiliate program, which requires us to pay a commission on each
sale. As a result, the total number of customers acquired during the quarter
decreased by approximately 14.5%, to 25,792 in the three months ended September
30, 2004 from 29,522 in the three months ended September 30, 2003, while
customer acquisition costs decreased to $8.41 per customer for the three months
ended September 30, 2004, from $10.52 per customer for the three months ended
September 30, 2003. On average, the positive contribution to overhead that we
generate from a customer's purchase exceeds our current customer acquisition
costs by a significant margin. Accordingly, we believe that it may be prudent to
be more aggressive in acquiring customers (even though it may increase our
customer acquisition costs during the remainder of 2004 and beyond) in order to
acquire larger numbers of customers with profitable ordering patterns.

Operating expenses decreased for the three months ended September 30, 2004 by
approximately 11% compared to the three months ended September 30, 2003. This
decrease was primarily the result of certain contractual pricing rebates we
received from our third party fulfillment center. Our goal is to achieve greater
economies of scale as our business grows, although there can be no assurance
that we will be successful in doing so.

For the three months ended September 30, 2004, technology expenses increased by
approximately 36% compared to the three months ended September 30, 2003. This
increase resulted from an increase in headcount and salary related expense,
depreciation expense, consulting expenses and an increase in web hosting
expense.

For the three months ended September 30, 2004, e-commerce expenses increased by
approximately 24% as compared to the three months ended September 30, 2003,
primarily due to an increase in salary related expenses as well as an increase
in expenses associated with outside research tools.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses for the
three months ended September 30, 2004 increased by approximately 37% to
$1,743,000 as compared to $1,274,000 for the three months ended September 30,
2003. The increase in general and administrative expenses was primarily the
result of approximately $325,000 of expenses (including $113,000 of non-cash
charges resulting from a stock option grant) incurred in connection with the
separation agreement with our former CEO. As a percentage of net sales, general
and administrative expenses for the three months ended September 30, 2004
increased to approximately 20% from 15.5% for the three months ended September
30, 2003.

LOSS FROM OPERATIONS: Operating loss decreased by almost 24% for the three
months ended September 30, 2004 to $1,836,000 from $2,409,000 for the three
months ended September 30, 2003, primarily as a result of the increase in gross
margin and revenue.

                                       16
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

INTEREST AND OTHER INCOME: Other income for the three months ended September 30,
2004 increased to $30,000 from $6,000 for the three months ended September 30,
2003. The increase resulted from an increase in interest income earned on our
cash balance.

INTEREST EXPENSE: Interest expense for the three months ended September 30, 2004
totaled $154,000, and related primarily to fees paid in connection with the Loan
Facility and interest expense on the Convertible Notes. For the three months
ended September 30, 2003, interest expense totaled $114,000, and related to fees
paid in connection with our Loan Facility as well as amortization of warrants
issued in connection with the January 2003 Financing.

LIQUIDITY AND CAPITAL RESOURCES

General

At September 30, 2004, we had approximately $7.4 million of liquid assets,
entirely in the form of cash and cash equivalents, and working capital of
approximately $7.6 million (both amounts exclude the $1.25 million of restricted
cash). In addition, as of September 30, 2004, we had approximately $2.5 million
of borrowings committed under the Loan Facility, leaving approximately $1.0
million of availability.

We fund our operations through cash on hand, operating cash flow, as well as the
proceeds of any equity or debt financing. Operating cash flow is affected by
gross revenue and product margin levels, as well as return rates, and any
deterioration in our performance on these financial measures would have a
negative impact on our liquidity. Total availability under the Loan Facility is
based upon our inventory levels and is dependent, among other things, on the
Company having at least $7.0 million of tangible net worth, $6.0 million of
working capital and cash balances of at least $750,000 (exclusive of the $1.25
million cash collateral pledged to Rosenthal to secure our obligations under the
Loan Facility). In addition, both availability under the Loan Facility and our
operating cash flows are affected by the payment terms that we receive from
suppliers and service providers, and the extent to which suppliers require us to
request Rosenthal to provide credit support under the Loan Facility. We believe
that our suppliers' decision-making with respect to payment terms and/or the
type of credit support requested is largely driven by their perception of our
credit rating, which is affected by information reported in the industry and
financial press and elsewhere as to our financial strength. Accordingly,
negative perceptions as to our financial strength could have a negative impact
on our liquidity.

We believe that our current funds, together with working capital, will be
sufficient to enable us to meet our planned expenditures through at least
December 31, 2004. We may seek additional equity or debt financing to maximize
the growth of our business or if anticipated operating results are not achieved.
If such financings are not available on terms acceptable to us, and/or we do not
achieve our operating plan, future operations will need to be modified, scaled
back or discontinued.

Loan Facility

Pursuant to the Loan Facility, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers. The Rosenthal Financing Agreement was amended in April
2004 to: (i) extend the term until March 30, 2005; (ii) substitute $1.25 million
of cash collateral pledged by the Company for the $2.0 million standby letter of
credit previously provided by Soros as collateral security for the Company's
obligations under the Loan Facility; (iii) decrease the maximum amount available
under the Loan Facility from $4.5 million to $4.0 million; (iv) increase the
tangible net worth requirement to $7.0 million; (v) increase the working capital
requirement to $6.0 million; and (vi) increase the minimum cash balance that the
Company is required to maintain to $750,000 (exclusive of the $1.25 million in
cash collateral). Because we removed the requirement that Soros provide a
standby letter of credit to secure the Loan Facility, we are no longer subject
to an agreement with Soros that previously required us to issue additional
warrants to Soros with an exercise price equal to 75% of market price in the
event that Rosenthal were to draw on Soros' letter of credit.

Interest accrues monthly on the average daily amount outstanding under the Loan
Facility during the preceding month at a per annum rate equal to the prime rate
plus 1%. We pay an annual facility fee equal to 1.5% of the portion of the Loan
Facility that

                                       17
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

is provided on the basis of our inventory level. This formula currently results
in an annual facility fee of $33,750. We also pay Rosenthal 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.

In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts (including the $1.25 million of cash
collateral, which has been placed in a segregated, restricted account) upon an
event of default and certain of our cash accounts in the event that the total
amount of funded debt loaned to us under the Loan Facility exceeds 90% of the
maximum amount available under the Loan Facility for more than 10 days.

Under the terms of the Loan Facility, Soros has the right to purchase all of our
obligations from Rosenthal at any time during its term.

Commitments and Long Term Obligations

As of September 30, 2004, we had the following commitments and long term
obligations:

<TABLE>
<CAPTION>
                                  2004         2005        2006      2007      2008     Thereafter      Total
                                ---------   ---------   ---------   -------   -------   ----------   -----------
<S>                             <C>         <C>         <C>         <C>       <C>          <C>       <C>
Marketing and Advertising       $  49,000     185,000          --        --        --           --   $   234,000
Operating Leases                $ 115,000     462,000     469,000   481,000   442,000      476,000   $ 2,445,000
Capital Leases                  $  81,000     151,000      54,000    27,000        --           --   $   313,000
Employment Contracts            $ 507,000   1,066,000     730,000    99,000        --           --   $ 2,402,000
Notes payable to shareholders   $ 182,000   4,000,000          --        --        --           --   $ 4,182,000
                                ---------   ---------   ---------   -------   -------   ----------   -----------
  Grand total                   $ 934,000   5,864,000   1,253,000   607,000   442,000      476,000   $ 9,576,000
</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 our
business. However, our marketing budget and our ability to hire such employees
is subject to a number of factors, including our results of operations as well
as the amount of additional capital that we raise.

RECENT ACCOUNTING PRONOUNCEMENTS

In March, 2004, the Emerging Issues Task Force issued EITF 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128". This
statement provides additional guidance on the calculation and disclosure
requirements for earnings per share. The FASB concluded in EITF 03-6 that
companies with multiple classes of common stock or participating securities, as
defined by SFAS No. 128, calculate and disclose earnings per share based on the
two-class method. The adoption of this statement does not have an impact to the
Company's financial statement presentation as the Company is currently in a loss
position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND DISCLOSURES.

As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in our periodic SEC filings.
There have been no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially

                                       18
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

affect, our internal control over financial reporting.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by us with the
Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and uncertainties include, but are not limited to, the following:
our history of losses and anticipated future losses; need for additional capital
and potential inability to raise such capital; the risk of default by us under
the Rosenthal financing agreement and the consequences that might arise from us
having granted a lien on substantially all of our assets under that agreement;
potential dilution arising from future equity financings, including potential
dilution as a result of the anti-dilution provisions contained in our Preferred
Stock and Convertible Notes; risks associated with Soros owning a majority of
our stock; the potential failure to forecast revenues and/or to make adjustments
to our operating plans necessary as a result of any failure to forecast
accurately; unexpected changes in fashion trends; cyclical variations in the
apparel and e-commerce markets; risks of litigation for sale of unauthentic or
damaged goods and litigation risks related to sales in foreign countries; the
dependence on third parties and certain relationships for certain services,
including our dependence on U.P.S. (and the risks of a mail slowdown due to
terrorist activity) and our dependence on our third-party web hosting and
fulfillment 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 its Web site; rising return rates; dependence upon executive
personnel; the successful hiring and retaining of new personnel; risks
associated with expanding our operations; risks associated with potential
infringement of other's intellectual property; the potential inability to
protect our intellectual property; government regulation and legal
uncertainties; uncertainties relating to the imposition of sales tax on Internet
sales; and risks associated with the agreements with Soros with respect to a
change of control and the liquidation preference of the Preferred Stock owned by
Soros.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

                                       19
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

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

On July 29, 2004, we held our annual meeting of stockholders. At the meeting,
our stockholders voted for six directors, electing E. Kenneth Seiff, Melissa
Payner-Gregor, Josephine Esquivel, Alan Kane, Martin Miller and Robert Stevens
as members of our board of directors. In addition, our stockholders voted in
favor of proposals to (i) approve amendments to our 1997 Stock Option Plan, and
(ii) approve the conversion provisions of our Convertible Notes. The results of
the voting were as follows:

             PROPOSAL                    VOTES FOR     VOTES WITHHELD
----------------------------------       ----------    --------------
Election of E. Kenneth Seiff             63,220,080           877,855
Election of Melissa Payner-Gregor        63,224,102           873,833
Election of Josephine Esquivel           63,876,970           220,965
Election of Alan Kane                    63,877,270           220,665
Election of Martin Miller                63,871,078           226,857
Election of Robert Stevens               63,224,322           873,613

<TABLE>
<CAPTION>
                                                                            ABSTENTIONS AND
                                         VOTES FOR     VOTES AGAINST       BROKER NON-VOTES
                                         ----------    -------------    ----------------------
<S>                                      <C>                 <C>                     <C>
Approval of Amendments to the 1997       59,112,785          318,799                 4,666,351
Stock Option Plan
Approval of Conversion Provisions        58,485,179          945,018                 4,667,738
of the Convertible Notes
</TABLE>

In addition to the directors elected at the meeting, Neal Moszkowski and David
Wassong have been elected to the Board of Directors as the designees of the
Series A Preferred Stock and the Series B Preferred Stock, respectively.

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

                                       20
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2004

                                   SIGNATURES

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

                                              BLUEFLY, INC.

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

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

November 10, 2004

                                       21