U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                  FORM 10-QSB

(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, 1996
                              -----------------------------------------

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

For the transition period from                       to
                              ----------------------     -----------------------

Commission File Number:    1-14078
                       --------------

                            BLUE FISH CLOTHING, INC.
         ---------------------------------------------------------------
        (Exact Name of Small Business Issuer as Specified in Its Charter)

          Pennsylvania                                       22-2781253
          ------------                                       ----------
(State or Other Jurisdiction of                           (I.R.S. Employer
 Incorporation or Organization)                          Identification No.)



                No. 3 Sixth Street, Frenchtown, New Jersey 08825
                ------------------------------------------------
                    (Address of Principal Executive Offices)



                                 (908) 996-3844
                                 --------------
                (Issuer's Telephone Number, Including Area Code)


                                       N/A
                 ----------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                         If Changed Since Last Report)



         Check whether the issuer: (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
                 -------                                         -------

         State the number of shares  outstanding of each of the issuer's classes
of common  equity as of the latest  practicable  date:  As of November 12, 1996,
6,638,896  shares of Common  Stock,  $.001 par value per share,  were issued and
4,590,200 shares of Common Stock were outstanding.

         Transitional Small Business Disclosure Format (check one):

             YES                                              NO    X
                 -------                                         -------







                            BLUE FISH CLOTHING, INC.

                                      INDEX

                                                                           Page
PART I - FINANCIAL INFORMATION

     ITEM 1.  FINANCIAL STATEMENTS

        Balance Sheets - December 31, 1995 and September 30, 1996            3

        Statements of Operations - For the Three and Nine Months Ended       4
                September 30, 1995 and September 30, 1996

        Statements of Cash Flows - For the Nine Months Ended                 5 
                September 30, 1995 and September 30, 1996

        Notes to Financial Statements                                        6


     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS
              OF FINANCIAL CONDITION AND RESULTS OF
              OPERATIONS                                                     10

PART II - OTHER INFORMATION

     ITEM 1.  LEGAL PROCEEDINGS                                              15

     ITEM 2.  CHANGES IN SECURITIES                                          15

     ITEM 3.  DEFAULTS ON SENIOR SECURITIES                                  15

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS            15

     ITEM 5.  OTHER INFORMATION                                              15

     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                               15

     SIGNATURES                                                              16




<TABLE>
<CAPTION>
                            BLUE FISH CLOTHING, INC.
                                 BALANCE SHEETS
                                   (UNAUDITED)

                                                      DECEMBER 31,          SEPTEMBER 30,
    ASSETS                                               1995                   1996                              
    ------                                            ------------          ------------
<S>                                              <C>                       <C>                           


CURRENT ASSETS
     Cash and cash equivalents                    $      124,862           $    2,556,387
     Restricted cash                                      81,016                   89,367
     Receivables, net of allowance of                    818,066                  977,262
          $33,000 and $33,000
     Inventories                                       2,026,988                2,578,146
     Other current assets                                 20,684                  198,031
     Deferred income taxes                                   -                    107,688
                                                  --------------           --------------
               Total current assets                    3,071,616                6,506,881

PROPERTY AND EQUIPMENT
     Property and equipment, net of accumulated          743,242                  841,437
          depreciation of $291,567 and $421,648

OTHER ASSETS:
     Noncompete and consulting agreement, net             90,667                   65,167
     Security deposits                                    20,201                   20,951
     Deferred offering costs                             512,770                      -
     Deferred income taxes                                   -                     15,878
                                                  --------------           --------------
                                                  $    4,438,496           $    7,450,314
                                                  ==============           ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITES
     Line of credit                               $      500,000           $      520,000
     Current portion of long-term debt                   189,419                  286,309
     Receivable purchase line of credit                  810,163                  893,670
     Accounts payable                                    897,732                  657,391
     Accrued expenses                                    435,287                  531,876
     Shareholder distributions payable                   102,157                    8,139
     Accrued bonus - stock grant                         216,144                  176,845
                                                  --------------           --------------
               Total current liabilities               3,150,902                3,074,230
                                                  --------------           --------------

LONG-TERM DEBT                                           109,610                  309,169
                                                  --------------           --------------
ACCRUED BONUS - STOCK GRANT                              186,845                    6,519
                                                  --------------           --------------

COMMITMENTS AND CONTINGENCIES
     (Note 8)

STOCKHOLDERS' EQUITY:
     Common stock, $.001 par value, 11,000,000 
       shares authorized, 5,848,696 and 6,638,896 
       shares issued and 3,800,000 and 4,590,200
       shares outstanding, respectively                    5,849                    6,639
     Additional paid-in capital                          503,471                4,031,216
     Retained earnings                                   711,819                  252,541
     Less- Treasury stock, 2,048,696 common
       shares, at cost                                  (230,000)                (230,000)
                                                  --------------           --------------
         Total stockholders' equity                      991,139                4,060,396
                                                  --------------           --------------
                                                  $    4,438,496           $    7,450,314
                                                  ==============           ==============

        The accompanying notes are an integral part of these statements.

                                       3






                            BLUE FISH CLOTHING, INC.
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                                   THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                      SEPTEMBER 30,                  SEPTEMBER 30,
                                                                  --------------------            ---------------------
                                                                  1995            1996            1995             1996
                                                                  ----            ----            ----             ----


SALES                                                          $2,794,061      $3,134,942      $7,001,099       $9,008,838
COST OF GOODS SOLD                                              1,364,089       1,256,247       3,205,170        4,071,438
                                                           --------------  --------------  --------------   --------------
          Gross margin                                          1,429,972       1,878,695       3,795,929        4,937,400


OPERATING EXPENSES                                              1,166,786       1,720,413       3,268,811        4,663,406
                                                           --------------  --------------  --------------   --------------
COMPENSATION EXPENSE RELATED TO
     STOCK GRANT                                                  873,309             -           873,309             -
                                                           --------------  --------------  --------------   --------------


          Income (loss) from operations                          (610,123)        158,282        (346,191)         273,994


INTEREST EXPENSE, NET                                              44,368          25,807         119,464          120,046
                                                           --------------  --------------  --------------   --------------

INCOME (LOSS) BEFORE PROVISION
     (BENEFIT) FOR INCOME TAX                                    (654,491)        132,475        (465,655)         153,948


INCOME TAX PROVISION (BENEFIT) (Note 4)                                -           64,515          13,527          (98,593)
                                                           --------------  --------------  --------------   --------------

NET INCOME (LOSS)                                             $  (654,491)   $     67,960     $  (479,182)     $   252,541
                                                            ==============  ==============  ==============   =============

PRO FORMA DATA (Note 5) unaudited:
     Historical income (loss) before income taxes             $ (654,491)    $   (132,475)    $  (465,655)     $   153,948
     Pro forma income tax provision (benefit)                   (272,923)        (264,515)       (194,178)          74,973
                                                            --------------  --------------  --------------   -------------
PRO FORMA NET INCOME (LOSS)                                   $ (381,568)    $     67,960     $  (271,477)     $    78,975
                                                            ==============  ==============  ==============   =============

PRO FORMA NET INCOME (LOSS) PER SHARE                         $    (0.10)    $       0.01     $     (0.07)     $      0.02

PRO FORMA WEIGHTED AVERAGE SHARES
   OUTSTANDING                                                 3,831,800        4,672,556       3,831,800        4,267,808


        The accompanying notes are an integral part of these statements.

                                       4



                            BLUE FISH CLOTHING, INC.
                             STATEMENTS OF CASH FLOW
                                   (UNAUDITED)


                                                                        Nine Months Ended September 30,
                                                                     -------------------------------------
                                                                          1995                     1996
                                                                          ----                     ----
OPERATING ACTIVITIES:
    Net income (loss)                                                  $(479,182)             $    252,541
    Adjustments to reconcile net income to net cash
       used in operating activities -
         Non-cash stock grant                                            480,320                       -
         Depreciation and amortization                                   113,000                   173,820
         Deferred tax benefit                                                -                    (173,566)
         Provision for losses (recoveries) on accounts receivable         46,874                    (2,935)
         (Increase) decrease in assets -
            Accounts receivable                                         (189,511)                 (156,261)
            Inventory                                                   (337,730)                 (551,158)
            Other assets                                                  22,156                  (146,336)

         Increase (decrease) in liabilities -
            Accounts payable                                             240,383                  (240,341)
            Accrued expenses                                             152,643                    96,589
            Accrued bonus - stock grant                                      -                    (219,625)
                                                                     ------------             -------------
               Net cash provided by (used in) operating activities        48,953                  (967,272)
                                                                     ------------             -------------

INVESTING ACTIVITIES:
    Payments for purchases of property and equipment                    (159,383)                 (228,276)
                                                                     ------------             -------------
                Net cash used in investing activities                   (159,383)                 (228,276)
                                                                     ------------             -------------

FINANCING ACTIVITIES:
    Net borrowings on line of credit                                     300,000                    20,000
    Receivable purchase line of credit, net                              213,186                    83,507
    Borrowing on long-term debt                                           27,099                   450,000
    Repayments on long-term debt                                         (58,212)                 (153,551)
    Deferred offering expenses paid                                     (203,094)                      -
    Net cash proceeds received from public offering                          -                   3,731,974
    Stockholder cash distributions                                      (289,521)                 (508,506)
    Exercise of employee stock options                                       -                      12,000
                                                                     ------------             -------------
                Net cash provided (used in) financing activities         (10,542)                3,635,424
                                                                     ------------             -------------

NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                    (120,972)                2,439,876
CASH AND CASH EQUIVALENTS,
    BEGINNING OF PERIOD                                                  405,564                   205,878
                                                                     ------------             -------------
CASH AND CASH EQUIVALENTS,
    END OF PERIOD                                                      $ 284,592              $  2,645,754
                                                                     ============            =============

CASH PAID DURING THE PERIOD FOR:
    Interest                                                           $ 119,464              $    118,830
                                                                     ============            =============
    Taxes                                                              $  13,527              $      3,452
                                                                     ============            =============

        The accompanying notes are an integral part of these statements.

                                       5

</TABLE>



                            BLUE FISH CLOTHING, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    FOR THE PERIOD ENDING SEPTEMBER 30, 1996


NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION:

The accompanying unaudited financial statements are presented in accordance with
the requirements for Form 10-QSB and do not include all the disclosures required
by generally accepted accounting  principles for complete financial  statements.
Reference  should  be made to the Blue Fish  Clothing,  Inc.'s  (the  "Company")
annual report on Form 10-KSB for additional  disclosures  including a summary of
the Company's accounting policies.

In the opinion of management of the Company,  the financial  statements  include
all adjustments,  consisting of only normal recurring accruals,  necessary for a
fair  presentation  of the financial  position of Blue Fish  Clothing,  Inc. The
results of operations  for the three months and nine months ended  September 30,
1996 or any other interim period, are not necessarily  indicative of the results
to be expected for the full year.

NOTE 2 - INITIAL PUBLIC OFFERING:

On November 13, 1995, the Company commenced the sale of 800,000 shares of common
stock in a public offering at a price of $5.00 per share.  The offering was made
directly by the Company on a "Minimum/Maximum" basis subject to subscription and
payment for not less than 500,000 shares (the Minimum) and not more than 800,000
shares (the Maximum).  The Minimum was raised as of May 13, 1996, and the public
offering was closed as of May 15, 1996,  generating  cash of $3,219,216,  net of
total transaction costs of $716,784. Upon the closing of the offering,  offering
costs deferred prior to the offering were  reclassified to stockholders'  equity
and the Company  converted to C Corporation  status and recorded deferred income
tax  assets  of  $173,566  (see  Note  4).  All  S  Corporation   earnings  were
reclassified to additional paid in capital.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES:

Inventories
-----------
The components of inventory as presented are as follows:

                                        December 31,           September 30,
                                            1995                    1996
                                        ------------           -------------

         Raw materials                 $    200,297           $      215,154
         Work-in-process                    689,337                  702,634
         Finished goods                   1,137,354                1,660,358
                                        ------------           -------------
                                       $  2,026,988           $    2,578,146
                                        ============           =============


                                       6



Major Customers and Concentration of Credit Risk
------------------------------------------------
The Company has one  significant  customer that accounted for 18.9% and 10.0% of
total sales through December 31, 1995 and September 30, 1996, respectively. This
same  customer  accounted  for  16.5%  and 8.5% of net  accounts  receivable  at
December 31, 1995 and September 30, 1996, respectively.

NOTE 4 - INCOME TAXES:

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards  (SFAS)  No.  109,  "Accounting  for  Income  Taxes,"  the
objective  of which is to recognize  the amount of current and  deferred  income
taxes payable or refundable at the date of the financial  statements as a result
of all events that have been recognized in the financial  statements as measured
by enacted tax laws.

Prior to the closing of the Offering,  the Company had elected to be taxed under
Subchapter  S of the Internal  Revenue  Code.  As a result,  the Company was not
subject to federal  income  taxes,  and the  taxable  income of the  Company was
included in the  stockholders'  tax  returns.  The  Company  had also  elected S
Corporation  status in certain  states  and,  therefore,  had amount  recorded a
provision  for state  income  taxes for those  states that do not  recognize  or
partially recognize S Corporation treatment.

Shortly before the closing of the Offering, the Company terminated its status as
an S  Corporation  and is now subject to federal  and  additional  state  income
taxes.  The  Company  recorded  a  tax  benefit  of  $173,566  as  a  result  of
establishing deferred income tax assets upon its conversion to a C Corporation.

The provision for income taxes is as follows:

                                               Three Months        Nine Months
                                                  ended               ended
                                               September 30,       September 30,
                                                   1996                1996
                                                   ----                ----

  Federal                                     $  63,439           $  71,471 
  State                                           1,076               3,502
                                                 ------             -------
                                                 64,515              74,973     
  Reinstatement of deferred income tax             -0-             (173,566)
                                                 ------             -------
                                              $  64,515           $( 98,593)
                                                 ======             =======

                                       7





The  approximate  income  tax  effect of each type of  temporary  difference  at
September 30, 1996 is as follows:

           Current deferred income tax assets:
                Uniform inventory capitalization                $   12,971
                Accrued bonus stock grant                           66,788
                Accruals and reserves not currently
                    deductible for tax                              27,929
                                                                 ---------
                                                                   107,688
                                                                 ---------
           Noncurrent deferred income tax assets:
                Depreciation                                        11,233
                Other                                                4,645
                                                                 ---------
                                                                    15,878
                                                                 ---------

                Net deferred income tax asset                   $  123,566
                                                                 ---------

NOTE 5 - PRO FORMA INFORMATION:

Pro Forma Statement of Operations Data
--------------------------------------
For informational  purposes,  the accompanying  statements of operations for the
quarter and nine months ended  September  30, 1995 and 1996 include an unaudited
pro forma  adjustment for the income taxes which would have been recorded if the
Company had not been an S  Corporation,  based on the tax laws in effect  during
the respective period.

The differences  between the federal statutory income tax rate and the pro forma
income tax rate for all periods presented are as follows:
                                                          1995             1996
                                                          ----             ----
         Federal statutory tax rate                       34.0%            34.0%
         State income taxes, net of federal benefit        6.8              7.9
         Other                                             0.9              6.8
                                                          -----            -----
                                                          41.7%            48.7%
                                                          =====            =====

Pro Forma Net Income Per Share
------------------------------
Pro forma net income per share was  calculated  by dividing pro forma net income
by the weighted  average  number of shares of common stock  outstanding  for the
respective periods, adjusted for the dilutive effect of common stock equivalents
which consist of stock options.  Pursuant to the  requirements of the Securities
and Exchange  Commission,  common stock issued by the Company  during the twelve
months  immediately  preceding the initial public  offering,  plus the number of
common  equivalent  shares which were authorized and will become issuable during
the same  period  pursuant  to the  grant of  common  stock  options,  have been
included in the calculation of the shares used in computing pro forma net income
per  share as if they  were  outstanding  for all  periods  presented  using the
treasury stock method and the offering price of $5.00 per share.

                                       8



NOTE 6 - FACTORING AND FINANCING AGREEMENTS:

During 1995,  the Company had a receivable  purchases  line of credit  agreement
with a bank  which  provided  for  the  assignment  and  processing  of  Company
receivables  with  recourse  to  a  maximum   outstanding   assigned  amount  of
$1,000,000.  The Company assigned 100% of its wholesale credit receivables under
this agreement,  providing  immediate cash availability of up to 88.25% of these
receivables.  In February,  1996, the Company  refinanced  this purchase line of
credit  with  another  bank  subject to  identical  conditions  of the  original
agreement. This line of credit was increased to $1,500,000 on June 21, 1996.

NOTE 7- LINE OF CREDIT:

The Company fully utilized its $500,000 line of credit at March 31, 1995,  which
bore interest at prime plus .75%. In February, 1996, the Company refinanced this
line of credit with another bank,  and increased the available line of credit to
$1,000,000.  This line of  credit is  subject  to a maximum  outstanding  not to
exceed 50% of finished goods inventory plus 25% of work in process. At September
30, 1996, $520,000 of this line of credit was advanced and outstanding.

NOTE 8 - COMMITMENTS AND CONTINGENCIES:

Operating Leases
----------------
Effective January,  1, 1996, the Company entered into a six-year lease to secure
a wholesale  showroom  space in New York City,  New York at an annual  rental of
$59,520.

On January 5, 1996,  the  Company  entered a five year lease to operate a retail
store in Austin,  Texas,  which  opened  September  1, 1996.  This lease,  which
commenced on October 1, 1996, has scaleable monthly rents of $4,356 to $4,981.

NOTE 9 - RELATED PARTY TRANSACTION:

The  Company  leases  one of its  facilities  from  the  father  of the  Company
president.  This is a ten-year  operating  lease for  approximately  $30,000 per
year.  The  Company  also  leases  an  apartment  which  is used  as its  Retail
Operations  office  from  this same  individual  on a  month-to-month  lease for
approximately $9,500 per year.

On January 2, 1996, the Company's majority  shareholder withdrew $450,000 of the
taxed but  undistributed S corporation  earnings.  The shareholder  loaned these
funds  back to the  Company  on an  unsecured  basis and has waived the right to
receive any further  distributions  of S corporation  earnings other than to pay
taxes on S  corporation  earnings.  The  Company  borrowed  these funds from the
shareholder  and issued a promissory  note in the amount of $450,000 and bearing
interest at 7%. Interest is payable monthly,  and the principal is due on demand
subject  to certain  limitations,  as  defined,  including  limiting  payment to
$100,000 in any 12 month period.

                                        9


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

NINE MONTHS ENDED  SEPTEMBER  30, 1996 ("1996  PERIOD")  COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1995 ("1995 PERIOD")

     SALES. The Company's sales increased by $2,007,739 or 28.7% from $7,001,099
in the 1995 period to  $9,008,838 in the 1996 period.  The  Company's  wholesale
sales increased by 29.7% from $4,704,676 in the 1995 period to $6,102,820 in the
1996 period,  its retail sales  increased by 17.8% from  $1,957,476  in the 1995
period to $2,304,980 in the 1996 period and craft fair sales  increased by 77.3%
from  $338,947 in the 1995 period to  $601,038 in the 1996  period.  The Company
attributes the wholesale sales increase  during the 1996 period  primarily to an
increase in the number of wholesale accounts,  improved relations with wholesale
accounts through the Messenger  Program,  and the February,  1996 opening of its
New York City showroom.  The retail sales increase was primarily due to an 11.0%
increase in same store sales at the Company's  Frenchtown retail location,  from
$1,166,498  in the 1995  period  to  $1,295,080  in the 1996  period,  which the
Company attributes to increased marketing efforts, personal shopping through its
phone sales,  and repeat  customer  purchases.  The Company  opened the Santa Fe
store in December  1994,  which achieved  $653,369 in the 1996 period,  up 40.3%
from its  $465,530  sales in the 1995 period.  The  Company's  Taos,  New Mexico
retail  location  decreased by 6.7% from $325,448 in the 1995 period to $303,751
in the 1996  period.  The Company  opened the Austin store on September 1, 1996,
and achieved  sales of $52,780  during this  period.  The increase in craft fair
sales was due to an  increase  in the  number of fairs  and  festivals  that the
Company  attended,  as well as the  continued  sale of past season and  slightly
damaged  goods at special  showplaces.  The decrease in sales at the Taos retail
location was primarily  attributable  to the Santa Fe store  increase which took
away business from Taos. The Santa Fe store is only seventy-five miles away from
Taos.

     GROSS MARGIN. The major components  affecting gross margin are raw material
and production costs, wholesale and retail maintained margins and sales mix. The
Company's  gross margin  increased,  as a percentage of sales, by 0.6 percentage
points  from 54.2% in the 1995 period to 54.8% in the 1996  period.  The Company
attributes  this  increase  to fewer  discounted  sales  and  increased  initial
mark-ups at its retail stores, as well as overall production efficiencies.

     OPERATING   EXPENSES.   The  Company's   operating  expenses  increased  by
$1,394,595 or 42.7% from $3,268,811 in the 1995 period to $4,663,406 in the 1996
period and  increased as a  percentage  of sales by 5.1  percentage  points from
46.7% in the 1995 period to 51.8% in the 1996 period.  The increase in operating
expenses in the 1996 period was primarily due to the addition of management team
members and staff support, insurance,  accounting and legal expenses.  Operating
expenses  related  to  general  and  administrative   functions  have  increased
throughout 1995 and 1996, providing capacity for future sales growth.


                                       10




      COMPENSATION  EXPENSE  RELATED TO STOCK  GRANT.  In  September  1995,  the
Company granted its Chief Executive  Officer 304,000 shares of common stock at a
market  value of $1.58 per share,  which  resulted  in  compensation  expense of
$480,320.  In addition to this grant,  the Company also accrued a $392,989 bonus
to be paid to its Chief Executive  Officer during the fourth quarter of 1995 for
the payment of income taxes associated with this stock grant.

      INTEREST EXPENSE,  NET. The Company's interest expense,  net, increased by
$582 or 0.5% from  $119,464 in the 1995  period to $120,046 in the 1996  period.
Interest  expense  increased  by $68,721  due to  increased  borrowings  for the
Company's  working  capital  needs.  Interest  income  increased by $68,139 as a
result of the Company  investing cash raised from the initial public offering in
interest bearing instruments.

      NET INCOME. As a result of the foregoing,  income (loss) before income tax
provision  (benefit)  increased  $619,603 or 133.1% from a loss of ($465,655) in
the 1995 period to an income before income tax provision of $153,948 in the 1996
period. Adjusting for the impact of the compensation expense in the 1995 period,
net income before taxes would have  declined by 62.2%.  Although the addition of
senior  managers,  support  staff and a new retail store has and may continue to
temporarily  reduce net income,  the Company  believes  these  expenditures  are
imperative for the Company's  anticipated  future growth.  The Company  believes
that higher levels of fixed costs will be diluted by  realization of anticipated
future  sales  expansion.  The Company  expects to  recognize  reduced  earnings
throughout  the  fourth   quarter  of  1996  due  to  continued   infrastructure
improvements.

Net income (loss) after taxes increased by $731,723 or 152.7% from ($479,182) in
the 1995 period to $252,541 in the 1996 period.  This increase was primarily due
to the  recording of a tax benefit of $173,566 in the 1996 period as a result of
establishing  deferred  income tax assets upon the  Company's  conversion to a C
Corporation (see Note 4 to Financial  Statements),  and the compensation expense
related to the stock grant which occurred in the 1995 period.

THREE MONTHS ENDED SEPTEMBER 30, 1996 ("1996 QUARTER")  COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1995 ("1995 QUARTER")

      SALES.  The Company's sales increased by $340,881 or 12.2% from $2,794,061
in the 1995 quarter to $3,134,942 in the 1996 quarter.  The Company's  wholesale
sales  increased by 12.4% from  $1,781,263  in the 1995 quarter to $2,001,880 in
the 1996 quarter,  its retail sales increased by 11.1% from $827,215 in the 1995
quarter to $918,857 in the 1996 quarter and craft fair sales  increased by 15.4%
from $185,583 in the 1995 quarter to $214,205 in the 1996  quarter.  The Company
attributes the wholesale sales increase during the 1996 quarter  primarily to an
increase in the number of wholesale accounts,  improved relations with wholesale
accounts through the Messenger  Program,  and the February,  1996 opening of its
New York City  showroom.  The retail sales increase was primarily due to a 13.9%
increase in same store sales at the Company's 

                                       11



Frenchtown retail location, from $415,520 in the 1995 quarter to $473,114 in the
1996 quarter.  The Company's  Santa Fe retail  location  increased by 10.9% from
$254,141 in the 1995  quarter to $281,907 in the 1996  quarter.  This growth was
offset in part by a 29.5%  decrease  in same store sales at the  Company's  Taos
retail  location,  from  $157,554  in the 1995  quarter to  $111,056 in the 1996
quarter. In addition,  the Company opened the Austin store on September 1, 1996,
and achieved sales of $52,780 during this period.

      GROSS MARGIN. The major components affecting gross margin are raw material
and production costs, wholesale and retail maintained margins and sales mix. The
Company's  gross margin  increased,  as a percentage of sales, by 8.7 percentage
points from 51.2% in the 1995 quarter to 59.9% in the 1996 quarter.  The Company
attributes this increase to less discounted sales and increased initial mark-ups
at its retail stores, as well as overall production efficiencies.

      OPERATING EXPENSES. The Company's operating expenses increased by $553,627
or 47.4% from  $1,166,786  in the 1995 quarter to $1,720,413 in the 1996 quarter
and increased as a percentage of sales by 13.1  percentage  points from 41.8% in
the 1995  quarter  to  54.9% in the 1996  quarter.  The  increase  in  operating
expenses in the 1996 quarter was  primarily  due to the  addition of  management
team  members  and staff  support,  insurance,  accounting  and legal  expenses.
Operating  expenses  related  to  general  and  administrative   functions  have
increased throughout 1995 and 1996, providing capacity for future sales growth.

      COMPENSATION  EXPENSE  RELATED TO STOCK  GRANT.  In  September  1995,  the
Company granted its Chief Executive  Officer 304,000 shares of common stock at a
market  value of $1.58 per share,  which  resulted  in  compensation  expense of
$480,320.  In addition to this grant,  the Company also accrued a $392,989 bonus
to be paid to its Chief Executive  Officer during the fourth quarter of 1995 for
the payment of income taxes associated with this stock grant.

      INTEREST EXPENSE,  NET. The Company's interest expense,  net, decreased by
41.8% or $18,561 from $44,368 in the 1995 quarter to $25,807 in the 1996 quarter
due to interest  income of $41,353  earned as a result of the Company  investing
cash raised from the initial public  offering in interest  bearing  instruments,
which offsets the interest expense resulting from the Company's line of credit.

      NET INCOME. As a result of the foregoing,  income (loss) before income tax
provision (benefit) increased by $786,966 or 120.2% from a loss of ($654,491) in
the 1995 quarter to $132,475 in the 1996 quarter.

Net income (loss) after taxes increased by $722,451 or 110.4% from ($654,491) in
the 1995  quarter to a net income  after  taxes of $67,960 in the 1996  quarter.
This increase was primarily  due to the  recording of the  compensation  expense
related to the stock grant of $873,309 in the 1995 quarter.


                                       12



LIQUIDITY AND CAPITAL RESOURCES:

      On November 13, 1996, the Company  commenced the sale of 800,000 shares of
common  stock in a public  offering at a price of $5.00 per share.  The offering
was made  directly  by the  Company  on a  "Minimum/Maximum"  basis  subject  to
subscription  and payment for not less than 500,000 shares (the Minimum) and not
more than  800,000  shares (the  Maximum).  The Minimum was raised as of May 13,
1996,  and the  offering  was closed as of May 15,  1996.  The  public  offering
provided $3,219,216, net of transaction costs of $716,784, all of which had been
paid as of September 30, 1996.

      Since its inception,  the Company has financed its operations through bank
lines of credit,  factoring agreements,  bank notes and capital lease financing,
which has  subjected  the  Company  to  significant  financial  constraints.  At
September 30, 1996, as a result of the Company's  initial public  offering,  the
Company  had  $2,645,754  in cash and cash  equivalents  (of which  $89,367  was
restricted)  from $205,878 in cash and cash equivalents at December 31, 1995 (of
which $81,016 was  restricted),  a receivable  purchase line of credit for up to
$1,500,000 (with $893,670  outstanding and in transit) and a demand bank line of
credit for up to $1,000,000 (with a $520,000 outstanding  balance). At September
30, 1996, the Company had working capital of $3,432,651,  reflecting an increase
in working  capital of $3,511,937  from $(79,286) on December 31, 1995.  Working
capital is defined as current assets less current liabilities.

      Net cash used in operations  was  ($967,273)  during the nine months ended
September  30,  1996,  consisting  primarily  of the  Company's  net  income  of
$252,541,  offset by an increase in  inventory  of  $551,158,  and  decreases in
accounts payable of $240,341,  and accrued  bonus-stock  grant of $219,625.  Net
cash  provided  in  operating  activities  during  the same  period for 1995 was
$48,953 and consisted  primarily of the  Company's net loss of $479,182,  and an
increase in  inventory of $337,730  offset by the non cash stock  grant,  and an
increase in accounts payable of $240,383.

      Net cash used in  investing  activities  in the 1996 and 1995  nine  month
periods  was  $228,276  and  $159,383,   respectively,   consisting  of  capital
expenditures  to purchase  property and equipment,  including the opening of the
Company's  Santa Fe retail  store,  the  renovation  of its Taos retail  store ,
construction  and  buildout of the  Company's  new Austin  store which opened in
September,  1996, and the implementation of the Company's Management Information
System  Foundation in 1995. The majority of the 1996  expenditures  consisted of
the buildout of the wholesale  showroom in New York and the Austin retail store.
The  Company  anticipates  that  future  investing  activities  will  be  funded
substantially by the proceeds of its Offering, as described by "Use of Proceeds"
under Form SB-2, Registration Number 33-97418-NY.

      Net  cash  provided  by  financing  activities  in  the  1996  period  was
$3,635,424,  consisting  primarily of net cash proceeds received from the public
offering of $3,731,974,  and $450,000 of borrowings from a majority shareholder.
This funding was offset in part by  shareholder  distributions  of $508,506 as a
withdrawal of  accumulated S  corporation  


                                       13



earnings.  Net cash used by financing activities in the same period for 1995 was
$10,542.  This  consisted of an increase in borrowings on the Company's  line of
credit of $300,000,  and on the  Company's  purchase line of credit of $213,186,
which was offset by cash used from deferred  offering  expenses paid of $203,094
and stockholder cash distributions paid of $289,521.

      During  1995,  the  Company  had a  receivable  purchases  line of  credit
agreement  with a bank which  provided  for the  assignment  and  processing  of
Company  receivables with recourse to a maximum  outstanding  assigned amount of
$1,000,000.  The Company assigned 100% of its wholesale credit receivables under
this agreement,  providing  immediate cash  availability of up to 88.3% of these
receivables.  In February,  1996, the Company  refinanced  this purchase line of
credit  with  another  bank  subject to  identical  conditions  of the  original
agreement.  This line of credit was increased to $1,500,000 on June 21, 1996. At
September  30,  1996,  $893,670  of this line of credit was  outstanding  and in
transit.

      The Company fully  utilized its $500,000 line of credit at March 31, 1995,
which  bore  interest  at prime  plus  .75%.  In  February,  1996,  the  Company
refinanced  this line of credit with another  bank,  and increased the available
line of credit to  $1,000,000.  This  line of  credit  is  subject  to a maximum
outstanding  amount not to exceed 50% of finished  goods  inventory  plus 25% of
work in process.  At  September  30,  1996,  $520,000 of this line of credit was
advanced and outstanding.

      The net proceeds of the Company's  initial public offering,  together with
the lines of credit described above and income  generated from  operations,  are
expected  to meet the  Company's  funding  needs to achieve its  objectives  and
growth strategy for at least the next 18 months.


                                       14



                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     Not applicable


ITEM 2.  CHANGES IN SECURITIES

     Not applicable


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

     Not applicable


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

     Not applicable


ITEM 5.  OTHER INFORMATION

     Not applicable


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  EXHIBITS
          Not applicable


     (b)  REPORTS ON FORM 8-K
          Not applicable



                                       15




                                   SIGNATURES


     Pursuant to the  requirements of the Securities Act of 1934, the Registrant
certifies  that it has  caused  this  Report to be  signed on its  behalf by the
undersigned,  thereunto duly authorized,  in the Town of Frenchtown in the State
of New Jersey on November 13, 1996.


                                                        BLUE FISH CLOTHING, INC.
                                                        ------------------------
                                                        (Registrant)





DATE:      November 13, 1996                         /s/ Marc Wallach
                                                     ---------------------------
                                                     Marc Wallach
                                                     Chief Executive Officer





DATE:      November 13, 1996                         /s/ Richard E. Swarttz
                                                     ---------------------------
                                                     Richard E. Swarttz
                                                     Chief Financial Officer and
                                                     Treasurer