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, 1997
                              --------------------------------

[ ]    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 11, 1997,
4,599,200  shares of Common  Stock,  $.001 par value per share,  were issued and
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, 1996 and September 30, 1997              3

        Statements of Operations - For the Three and Nine Months Ended         4
                September 30, 1996 and September 30, 1997

        Statements of Cash Flows - For the Nine  Months  Ended                 5
                September  30, 1996 and September 30, 1997

        Notes to Financial Statements                                          6


     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS
              OF FINANCIAL CONDITION AND RESULTS OF
              OPERATIONS                                                       9

PART II - OTHER INFORMATION

     ITEM 1.  LEGAL PROCEEDINGS                                               14

     ITEM 2.  CHANGES IN SECURITIES                                           14

     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                 14

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY                     14
              HOLDERS

     ITEM 5.  OTHER INFORMATION                                               14

     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                14

     SIGNATURES                                                               15






                            BLUE FISH CLOTHING, INC.
                                 BALANCE SHEETS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                           December 31,               September 30,
     ASSETS                                                    1996                        1997
                                                         -----------------          ------------------


<S>                                                      <C>                        <C> 
CURRENT ASSETS
      Cash and cash equivalents                               $ 1,887,994                 $ 1,086,536
      Restricted cash                                              40,346                     130,752
      Receivables, net of allowance of                            526,157                   1,404,963
           $33,000 and $46,769
      Inventories, net                                          3,005,717                   3,275,559
      Other current assets                                         63,013                     181,726
      Deferred income taxes                                       222,119                     222,119 
                Total current assets                            5,745,346                   6,301,655

PROPERTY AND EQUIPMENT
      Property and equipment, net of accumulated                1,113,411                   1,863,250
           depreciation of $472,343 and $706,777

OTHER ASSETS:
      Restricted certificate of deposit                                 -                     300,000
      Noncompete and consulting agreement, net                     56,667                      16,056
      Security deposits                                           197,884                      54,152
      Deferred income taxes                                        15,876                      15,876 
                                                              $ 7,129,184                 $ 8,550,989
                                                         =================          ==================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITES
      Line of credit                                          $ 1,000,000                   $ 500,000
      Current portion of long-term debt                           193,698                     161,472
      Receivable purchase line of credit                          403,464                   1,307,522
      Accounts payable                                            849,667                     886,976
      Accrued expenses                                            432,099                     565,852 
                Total current liabilities                       2,878,928                   3,421,822 

DEFERRED RENT                                                          -                       59,699 

LONG-TERM DEBT                                                    482,982                   1,174,508 
COMMITMENTS AND CONTINGENCIES


STOCKHOLDERS' EQUITY:
      Common stock, $.001 par value, 11,000,000
           shares authorized, 6,647,896 and 4,599,200
           shares issued and 4,599,200 and 4,599,200
           shares outstanding, respectively                         6,648                       4,599
      Additional paid-in capital                                4,027,766                   3,799,815
      Retained (deficit) earnings                                 (37,140)                     90,546
      Less- Treasury stock, 2,048,696 common
           shares, at cost                                       (230,000)                         - 
                Total stockholders' equity                      3,767,274                   3,894,960 

                                                              $ 7,129,184                 $ 8,550,989
                                                         =================          ==================
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       3








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

<TABLE>
<CAPTION>

                                                           Three Months Ended                          Nine Months Ended
                                                              September 30,                              September 30,
                                                    ----------------------------------         -----------------------------------
                                                         1996               1997                    1996               1997

<S>                                                     <C>                <C>                     <C>                <C>        
SALES                                                   $3,134,942         $3,637,239              $9,008,838         $10,980,101
COST OF GOODS SOLD                                       1,256,247          1,539,347               4,071,438           4,955,387 
          Gross margin                                   1,878,695          2,097,892               4,937,400           6,024,714


OPERATING EXPENSES                                       1,720,413          1,894,081               4,663,406           5,518,506 


          Income from operations                           158,282            203,811                 273,994             506,208


INTEREST EXPENSE, NET                                       25,807             61,088                 120,046             172,757 


INCOME BEFORE INCOME TAXES                                 132,475            142,723                 153,948             333,451


INCOME TAX (BENEFIT) PROVISION                              64,515             72,844                 (98,593)            161,724 


NET INCOME                                                $ 67,960           $ 69,879               $ 252,541           $ 171,727
                                                    ===============    ===============         ===============    ================

NET INCOME PER SHARE                                                           $ 0.01                                      $ 0.04

WEIGHTED AVERAGE SHARES OUTSTANDING                                         4,791,023                                   4,780,791

PRO FORMA DATA unaudited: (Note 5)
     Historical income before income taxes               $ 132,475                                  $ 153,948
     Pro forma income tax provision                         64,515                                     74,973
                                                    ===============                            ===============
PRO FORMA NET INCOME                                      $ 67,960                                   $ 78,975
                                                    ===============                            ===============

PRO FORMA NET INCOME PER SHARE                              $ 0.01                                     $ 0.02

PRO FORMA WEIGHTED AVERAGE SHARES
   OUTSTANDING                                           4,672,556                                  4,267,808
</TABLE>


        The accompanying notes are an integral part of these statements.


                                       4







                             BLUE FISH CLOTHING, INC.
                             STATEMENTS OF CASH FLOW
                                   (unaudited)
<TABLE>
<CAPTION>


                                                                                           Nine Months Ended September 30,
                                                                                   --------------------------------------------
                                                                                          1996                         1997
<S>                                                                                  <C>                          <C> 
OPERATING ACTIVITIES:
     Net income                                                                       $ 252,541                    $ 171,727
     Adjustments to reconcile net income to net cash
        used in operating activities -
          Depreciation and amortization                                                 173,820                      299,711
          Deferred tax benefit                                                         (173,566)                           -
          Provision for deferred rent                                                         -                       59,699
          Provision for losses (recoveries) on accounts receivable                       (2,935)                      38,107
          (Increase) decrease in assets -
             Accounts receivable                                                       (156,261)                    (916,913)
             Inventory                                                                 (551,158)                    (269,842)
             Other assets                                                              (146,336)                      25,019

          Increase (decrease) in liabilities -
             Accounts payable                                                          (240,341)                      37,309
             Accrued expenses                                                            96,589                      168,609
             Accrued bonus - stock grant                                               (219,625)                          - 
                Net cash used in operating activities                                  (967,272)                    (386,574)

INVESTING ACTIVITIES:
     Payments for purchases of property and equipment                                  (228,276)                  (1,043,795)
     Purchase of certificate of deposit                                                      -                      (300,000)
                 Net cash used in investing activities                                 (228,276)                  (1,343,795)
FINANCING ACTIVITIES:
     Net borrowings (repayments) on line of credit                                       20,000                     (500,000)
     Receivable purchase line of credit, net                                             83,507                      904,058
     Borrowing on long-term debt                                                        450,000                      800,000
     Repayments on long-term debt                                                      (153,551)                    (140,700)
     Net cash proceeds received from public offering                                  3,731,974                            -
     Stockholder cash distributions                                                    (508,506)                     (44,041)
     Exercise of employee stock options                                                  12,000                           - 
                 Net cash provided by financing activities                            3,635,424                    1,019,317 

NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS                                                                 2,439,876                     (711,052)
CASH AND CASH EQUIVALENTS,
     BEGINNING OF PERIOD                                                                205,878                    1,928,340 
CASH AND CASH EQUIVALENTS,
     END OF PERIOD                                                                   $2,645,754                   $1,217,288
                                                                                 ===============              ===============

CASH PAID DURING THE PERIOD FOR:
     Interest                                                                         $ 118,830                    $ 164,514
                                                                                 ===============              ===============
     Taxes                                                                              $ 3,452                     $ 33,483
                                                                                 ===============              ===============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       5







                            BLUE FISH CLOTHING, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    FOR THE PERIOD ENDING SEPTEMBER 30, 1997
                    ----------------------------------------


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, as amended, 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,
1997 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  approximately
$3,215,000,  net of  transaction  costs  of  $721,000,  of  which  approximately
$247,000 was expended in 1995. 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,
                                           1996                     1997
                                       ------------             ------------
         Raw materials                 $    304,361             $    443,010
         Work-in-process                    709,302                  696,899
         Finished goods, net              1,992,054                2,135,650
                                       ------------             ------------
                                       $  3,005,717             $  3,275,559
                                       ============             ============



                                       6





Earnings Per Share (EPS)
------------------------
In February  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  of  Financial  Accounting  Standards  (SFAS) No. 128,  "Earnings  per
Share",  which the  Company is  required  to adopt for both  interim  and annual
periods  ending  after  December  15,  1997.  SFAS No.  128  simplifies  the EPS
calculation  by replacing  primary EPS with basic EPS.  Basic EPS is computed by
dividing reported earnings available to common  stockholders by weighted average
shares  outstanding.  Fully  diluted  EPS,  now  called  diluted  EPS,  is still
required.  Early  application is  prohibited,  although  footnote  disclosure of
proforma EPS amounts  computed is required.  Under SFAS 128,  proforma basic EPS
and diluted EPS for the three  months and nine months ended  September  30, 1997
would not have changed from the amount  reported.  All other EPS amounts for the
periods presented remain the same.

Major Customers And Concentration Of Credit Risk
------------------------------------------------
The Company has two significant  customers that accounted for 18.7% and 24.6% of
total sales for the nine months ended September 30, 1996 and September 30, 1997,
respectively.  These same  customers  accounted  for 15.8% and 34.7% of accounts
receivable at December 31, 1996 and September 30, 1997, 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 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.


                                       7






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, 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:

                                                                      1996
                                                                     -----
         Federal statutory tax rate                                   34.0%
         State income taxes, net of federal benefit                    7.9
         Other                                                         6.8
                                                                     -----
                                                                      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.

NOTE 6 - FINANCING ARRANGEMENTS

On June 25 and June 27,  1997,  the Company  refinanced  its  existing  debt and
increased its borrowings.  On June 25, 1997, the Company entered into a Business
Loan  Agreement  with a bank and  received  a  promissory  note in the amount of
$800,000.  This note is subject to monthly interest payments  beginning July 25,
1997, with interest  calculated on the unpaid principal  balances at an interest
rate of two percentage  points over the Index.  The Index  represents the bank's
one year certificate of deposit yield. Four principal payments of $50,000 are to
be paid in annual  installments  commencing June 25, 1998 through June 25, 2001,
and one principal  payment of $600,000 is to be paid on June 25, 2002. This note
was secured by an $842,000  certificate  of deposit and  guaranteed  by Jennifer
Barclay,  a principal  shareholder.  On September 30, 1997,  this  Agreement was
modified  and the bank  reduced  its  security  interest in the  certificate  of
deposit to  $300,000.  In  addition,  the  Company  agreed to maintain a minimum
deposit account with the bank in an amount not less than $500,000.

 
                                        8






As of June 27, 1997, the Company had an outstanding line of credit of $1,000,000
subject to a maximum  outstanding  amount not to exceed  50% of  finished  goods
inventory plus 25% of work in process.  On that date, the Company  modified this
Note and Security Agreement and paid $500,000,  thereby reducing the outstanding
principal  balance due to $500,000 and  extended  the term  through  April 1998.
Interest shall be charged on the outstanding  principal balance of the loan from
June 27, 1997,  until the full amount of  principal  due has been paid at a rate
equal at all times to the Prime Rate plus three quarters  percent per annum. The
Security Agreement shall continue to be a first lien on the Collateral and shall
secure the Note as extended.

NOTE 7 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

Operating Leases
----------------
The Company has entered into a 10 year lease,  commencing  June 15, 1997,  for a
2,300 sq. ft. (approximately 2,000 selling sq. ft.) Westport, Connecticut retail
store at a monthly rent of $4,600 with an adjustment each year for CPI.

NOTE 8 - TREASURY STOCK
-----------------------

The Company  repurchased  2,048,696 shares of the Company's Common Stock.  These
shares were held in Treasury by the Company (the "Treasury Stock").  Pursuant to
a Security Agreement, the Treasury Stock, together with all accounts receivable,
inventories,  work-in-progress,  bank  accounts,  trademarks,  choses in action,
leasehold  interests,  and fixed  assets now or  hereafter  acquired,  served as
collateral to secure the Company's  obligations under certain  promissory notes.
The Company  satisfied  all of its  obligations  pursuant to the  Agreement  and
promissory  notes on April 5, 1997.  On April 20, 1997 the  Company  retired the
Treasury Stock and returned it to the status of authorized but unissued shares.

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

NINE MONTHS ENDED  SEPTEMBER  30, 1997 ("1997  PERIOD")  COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996 ("1996 PERIOD")

     SALES.  The Company's sales increased by $1,971,263 or 21.9% to $10,980,101
in the 1997  period.  The  Company's  wholesale  sales  increased  by 18.1% from
$6,102,820 in the 1996 period to $7,208,816 in the 1997 period, its retail sales
increased by 32.5% from  $2,304,980 in the 1996 period to $3,054,606 in the 1997
period and craft fair sales  increased by 19.2% from $601,038 in the 1996 period
to $716,678 in the 1997  period.  The Company  attributes  the  wholesale  sales
increase during the 1997 period primarily to the enthusiastic  customer response
to the Spring and Summer lines,  which are  particularly  strong selling seasons
for the Company,  a 66.6%  increase in department  store business due to earlier
shipments  than in prior  period,  and to increased  boutique  account  business
resulting  from  improved  relations  with existing  wholesale  accounts and new
business generated through the Messenger Program.  The retail sales increase was
primarily  due to an increase in catalog  sales of 53.2% and stores which opened
in  September  1996 and March  1997  generating  sales  during  the 1997  period
partially offset by a same store sales decrease of 2.5%. The Company  attributes
the increase in catalog business to successful  marketing efforts 

 
                                        9






and a shift of retail  customers into catalog sales.  Same store sales decreased
primarily  due to the  Company's  Early  Fall  and Fall  line not  being as well
received as in prior seasons and a shift of retail customers into catalog sales.
As a result of closing the Company's Taos, New Mexico retail location in January
1997, sales at this location  decreased  $276,188 to $27,563 in the 1997 period.
The  increase in craft fair sales was due to the  continued  sale of past season
and slightly damaged goods at special showplaces.

     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 0.1 percentage
points from 54.8% in the 1996 period to 54.9% in the 1997 period.

     OPERATING EXPENSES.  The Company's operating expenses increased by $855,100
or 18.3% from $4,663,406 in the 1996 period to $5,518,506 in the 1997 period and
decreased as a percentage  of sales by 1.5  percentage  points from 51.8% in the
1996 period to 50.3% in the 1997 period.  The increase in operating  expenses in
the 1997 period was primarily due to the addition of management team members and
staff  support,  expenses  of two new retail  stores  (offset by a  discontinued
store)  accounting for 53.8% of the total dollar increase which did not exist in
the 1996  period,  and  professional  expenses.  Operating  expenses  related to
general and  administrative  functions have increased  throughout 1996 and 1997,
providing capacity for future sales growth. The decline as a percent of sales is
primarily attributable to sales increasing at a faster rate than expenses.

    INTEREST EXPENSE,  NET. The Company's  interest expense,  net,  increased by
$52,711  or 43.9%  from  $120,046  in the 1996  period to  $172,757  in the 1997
period.  Interest expense  increased by $34,665 due to increased  borrowings for
the Company's  working capital needs, an increase in assigned  wholesale  credit
receivables  as a result  of  increased  wholesale  sales,  and an  increase  in
interest on capitalized leases. Interest income decreased by $18,046 as a result
of spending a portion of the Company's public offering proceeds, which were held
in interest bearing instruments in 1996.

     PRE-TAX  INCOME.  As a result of the  foregoing,  income  before income tax
provision  increased  $179,503 or 116.6% from  $153,948 in the 1996 period to an
income before income tax provision of $333,451 in the 1997 period.

     INCOME TAX  (BENEFIT)  PROVISION.  During the 1997 period the effective tax
rate was  48.5%  primarily  due to  Federal  and state  taxes and the  impact of
certain non-deductible  expenditures.  The benefit of $98,593 in the 1996 period
was  primarily  due to the recording of a tax benefit of $173,566 as a result of
establishing  deferred income tax assets upon the conversion of the Company to a
C Corporation shortly before the closing of the Offering.

  
                                       10






THREE MONTHS ENDED SEPTEMBER 30, 1997 ("1997 QUARTER")  COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1996 ("1996 QUARTER")

     SALES.  The Company's sales increased by $502,297 or 16.0% to $3,637,239 in
the 1997  quarter.  The  Company's  wholesale  sales  increased  by  12.4%  from
$2,001,880 in the 1996 quarter to  $2,250,609  in the 1997  quarter,  its retail
sales  increased by 20.2% from $918,857 in the 1996 quarter to $1,104,670 in the
1997 quarter and craft fair sales  increased by 31.6% from  $214,205 in the 1996
quarter to $281,960 in the 1997 quarter.  The Company  attributes  the wholesale
sales  increase  during  the  1997  quarter  primarily  to a 46.2%  increase  in
department store business due to earlier shipments than in prior quarter, and to
increased  boutique  account  business  resulting  from improved  relations with
existing  wholesale  accounts and new business  generated  through the Messenger
Program.  The retail sales  increase was primarily due to stores which opened in
September  1996 and March 1997  generating  sales during the 1997 quarter and an
increase  in catalog  business of 33.5%  partially  offset by a decrease in same
store sales of 10.2%. The Company attributes the increase in catalog business to
successful marketing efforts and a shift of retail customers into catalog sales.
Same store sales  decreased  primarily due to the Company's  Early Fall and Fall
line  not  being as well  received  as in prior  seasons  and a shift of  retail
customers  into catalog  sales.  As a result of closing the Company's  Taos, New
Mexico  retail  location  in  January  1997,  sales at this  location  decreased
$111,056 in the 1997  quarter.  The  increase in craft fair sales was due to the
continued sale of past season and slightly damaged goods at special showplaces.

     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  decreased,  as a percentage of sales, by 2.2 percentage
points from 59.9% in the 1996 period to 57.7% in the 1997 period.

     OPERATING EXPENSES.  The Company's operating expenses increased by $173,668
or 10.1% from  $1,720,413  in the 1996 quarter to $1,894,081 in the 1997 quarter
and  decreased as a percentage of sales by 2.8  percentage  points from 54.9% in
the 1996  quarter  to  52.1% in the 1997  quarter.  The  increase  in  operating
expenses in the 1997 quarter was  primarily  due to the  addition of  management
team members and staff  support,  expenses of two new retail stores (offset by a
discontinued  store) accounting for 94.6% of the total dollar increase which did
not exist in the 1996 quarter,  and professional  expenses.  Operating  expenses
related to general and administrative  functions have increased  throughout 1996
and 1997, providing capacity for future sales growth.

    INTEREST EXPENSE,  NET. The Company's  interest expense,  net,  increased by
$35,281  or 136.7%  from  $25,807  in the 1996  quarter  to  $61,088 in the 1997
quarter.  Interest expense  increased by $7,692 due to increased  borrowings for
the Company's  working capital needs, an increase in assigned  wholesale  credit
receivables  as a result  of  increased  wholesale  sales,  and an  increase  in
interest on capitalized leases. Interest income decreased by $27,589 as a result
of spending a portion of the Company's initial public offering  proceeds,  which
were held in interest bearing instruments in the 1996 quarter.

  
                                       11






     PRE-TAX  INCOME.  As a result of the  foregoing,  income  before income tax
provision  increased  $10,248 or 7.7% from  $132,475  in the 1996  quarter to an
income before income tax provision of $142,723 in the 1997 quarter.

     INCOME TAX (BENEFIT)  PROVISION.  During the 1997 quarter the effective tax
rate was  51.0%  primarily  due to  Federal  and state  taxes and the  impact of
certain non-deductible  expenditures.  During the 1996 quarter the effective tax
rate was  48.7%  primarily  due to  Federal  and state  taxes and the  impact of
certain non-deductible expenditures.

LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------

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
offering  was  closed  as  of  May  15,  1996.  The  public  offering   provided
approximately $3,215,000, net of transaction costs of approximately $721,000.

At September 30, 1997, the Company had  $1,217,288 in cash and cash  equivalents
(of which $130,752 was restricted)  from $1,928,340 in cash and cash equivalents
at December 31, 1996 (of which $40,346 was  restricted),  a receivable  purchase
line of credit for up to $1,500,000 (with $1,307,522 outstanding and in transit)
and a demand bank line of credit for up to $500,000 (with a $500,000 outstanding
balance).  At September 30, 1997, the Company had working capital of $2,879,833,
reflecting an increase in working capital of $13,415 from $2,866,418 on December
31, 1996. Working capital is defined as current assets less current liabilities.

Net  cash  used in  operations  was  ($386,574)  during  the nine  months  ended
September 30, 1997,  consisting primarily of increases in accounts receivable of
$916,913  and  inventory  of  $269,842  partially  offset by net  income  before
depreciation and amortization of $471,438 and an increase in accrued expenses of
$168,609.  Net cash used in operating activities during the same period for 1996
was ($967,272), which consisted primarily in increases in accounts receivable of
$156,261,  inventory of $551,158 and other assets of $146,336,  and decreases in
accounts  payable  of  $240,341,  and  accrued  bonus-stock  grant  of  $219,625
partially offset by net income before depreciation and amortization of $426,361.

Net cash used in investing activities in the 1997 and 1996 nine month period was
$1,343,795 and $228,276,  respectively,  consisting of capital  expenditures  to
purchase  property and  equipment,  including  construction  and buildout of the
Company's  New York retail store which opened in March,  1997,  construction  in
progress of the  Company's  Westport,  Connecticut  retail store which opened in
October,  1997,  the purchase of a restricted  certificate  of deposit,  and the
ongoing  implementation  of the Company's  Management  Information  System.  The
majority of the 1996  expenditures  consisted of the  buildout of the  wholesale
showroom in New York.

Net cash  provided by financing  activities  in the 1997 period was  $1,019,318,
consisting primarily of an increase in the Company's receivable purchase line of
credit of $904,058 and additional  net 


                                       12






borrowings on debt of $159,300. 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   stockholder.   This  funding  was  offset  in  part  by   shareholder
distributions of $508,506 as a withdrawal of accumulated S corporation earnings.

The Company has a receivable purchase 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 $1,500,000.  The Company  assigned
100%  of its  wholesale  credit  receivables  under  this  agreement,  providing
immediate cash availability of up to 88.3% of these  receivables.  This line has
been extended through December 1997.

On June 25 and June 27,  1997,  the Company  refinanced  its  existing  debt and
increased its borrowings.  On June 25, 1997, the Company entered into a Business
Loan  Agreement  with a bank and  received  a  promissory  note in the amount of
$800,000.  This note is subject to monthly interest payments  beginning July 25,
1997, with interest  calculated on the unpaid principal  balances at an interest
rate of two percentage  points over the Index.  The Index  represents the bank's
one year certificate of deposit yield. Four principal payments of $50,000 are to
be paid in annual  installments  commencing June 25, 1998 through June 25, 2001,
and one principal  payment of $600,000 is to be paid on June 25, 2002. This note
was secured by an $842,000  certificate  of deposit and  guaranteed  by Jennifer
Barclay,  a principal  shareholder.  On September 30, 1997,  this  Agreement was
modified  and the bank  reduced  its  security  interest in the  certificate  of
deposit to  $300,000.  In  addition,  the  Company  agreed to maintain a minimum
deposit account with the bank in an amount not less than $500,000.

As of June 27, 1997, the Company had an outstanding line of credit of $1,000,000
subject to a maximum  outstanding  amount not to exceed  50% of  finished  goods
inventory plus 25% of work in process.  On that date, the Company  modified this
Note and Security Agreement and paid $500,000,  thereby reducing the outstanding
principal  balance due to $500,000 and  extended  the term  through  April 1998.
Interest shall be charged on the outstanding  principal balance of the loan from
June 27, 1997,  until the full amount of  principal  due has been paid at a rate
equal at all times to the Prime Rate plus three quarters  percent per annum. The
Security Agreement shall continue to be a first lien on the Collateral and shall
secure the Note as extended.

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 12 months.

The Company  repurchased  2,048,696 shares of the Company's Common Stock.  These
shares were held in Treasury by the Company (the "Treasury Stock").  Pursuant to
a Security Agreement, the Treasury Stock, together with all accounts receivable,
inventories,  work-in-progress,  bank  accounts,  trademarks,  choses in action,
leasehold  interests,  and fixed  assets now or  hereafter  acquired,  served as
collateral to secure the Company's  obligations under certain  promissory notes.
The Company  satisfied  all of its  obligations  pursuant to the  Agreement  and
promissory  notes on April 5, 1997.  On April 20, 1997 the  Company  retired the
Treasury Stock and returned it to the status of authorized but unissued shares.


                                       13



  

                           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 VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

         The Annual meeting of the Company's  shareholders  was held on July 31,
1997 at which time the shareholders voted on the following matters:


    1. Election of Directors

     NOMINEE                     FOR                      WITHHELD
     -------                     ---                      --------
     Jennifer Barclay         4,255,590                     7,023
     Marc Wallach             4,249,461                     7,069
     Ben Cohen                4,249,266                     6,979
     Gary Hirshberg           4,249,141                     7,163


    There were no broker held non-voted shares with respect to this matter.

    2.  Appointment of Arthur Andersen LLP as the Company's  independent  public
accountants for the fiscal year ending December 31, 1997


     FOR            AGAINST             ABSTAIN
     ---            -------             -------

  4,246,968          4,595               6,360


    There were no broker held non-voted shares with respect to this matter.


ITEM 5.  OTHER INFORMATION
         -----------------

     Not applicable


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

    (a)  EXHIBITS

         10.31    Amendment to Assignment of Deposit Account by and between Blue
                  Fish Clothing,  Inc. and Carnegie Bank,  N.A. dated  September
                  30, 1997.

         10.32    Agreement for Cross-Default and Cross Collateralization by and
                  between  Blue Fish  Clothing,  Inc. and Jennifer P. Barclay to
                  and for the benefit of Carnegie Bank, N.A. dated September 30,
                  1997.

         27       Financial Data Schedule

    (b)  REPORTS ON FORM 8-K
         Not applicable

                                       14






                                   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, 1997.


                                                 BLUE FISH CLOTHING, INC.
                                                 (Registrant)




DATE: November 13, 1997                          /s/ Marc Wallach
                                                 -----------------------------
                                                 Marc Wallach
                                                 President and
                                                 Chief Executive Officer




DATE: November 13, 1997                          /s/ Richard E. Swarttz
                                                 -----------------------------
                                                 Richard E. Swarttz
                                                 Chief Financial Officer and
                                                 Treasurer

                                       15





                                  EXHIBIT INDEX


         10.31    Amendment to Assignment of Deposit Account by and between Blue
                  Fish Clothing,  Inc. and Carnegie Bank,  N.A. dated  September
                  30, 1997.

         10.32    Agreement for Cross-Default and Cross Collateralization by and
                  between  Blue Fish  Clothing,  Inc. and Jennifer P. Barclay to
                  and for the benefit of Carnegie Bank, N.A. dated September 30,
                  1997.

         27       Financial Data Schedule