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, 1998

[  ]     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 20, 1998, 4,719,200 shares of Common Stock, $.001 par value per
share, were issued and outstanding.

       Transitional Small Business Disclosure Format (check one): YES     NO  X
                                                                      ---    ---


<PAGE>

                            BLUE FISH CLOTHING, INC.

                                      INDEX

                                                                            Page
                                                                            ----
PART I - FINANCIAL INFORMATION

     ITEM 1.  FINANCIAL STATEMENTS

        Balance Sheets - December 31, 1997 and September 30, 1998             3

        Statements of Operations - For the Three and Nine Months Ended        4
                September 30, 1997 and September 30, 1998

        Statements of Cash Flows - For the Nine Months Ended                  5
                September 30, 1997 and September 30, 1998

        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                                              18

     ITEM 2.  CHANGES IN SECURITIES                                          18

     ITEM 3.  DEFAULTS ON SENIOR SECURITIES                                  18

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY                    19
              HOLDERS

     ITEM 5.  OTHER INFORMATION                                              19

     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                               19

     SIGNATURES                                                              20



                                      -2-
<PAGE>
                            BLUE FISH CLOTHING, INC.
                                 BALANCE SHEETS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                           December 31,        September 30,
      ASSETS                                                   1997                1998
                                                            ----------          -----------
<S>                                                         <C>                 <C>
CURRENT ASSETS
      Cash and cash equivalents                              $ 350,477            $ 121,237
      Restricted cash                                          116,065               70,242
      Certificate of deposit                                   500,000                    -
      Receivables, net of allowance of
           $40,000 and $51,386                               1,180,962              690,149
      Inventories, net                                       2,944,166            2,492,671
      Other current assets                                     175,736               95,234
                                                            ----------          -----------
                Total current assets                         5,267,406            3,469,533

PROPERTY AND EQUIPMENT
      Property and equipment, net of accumulated
           depreciation of $819,575 and $1,199,406           1,898,489            1,541,504

OTHER ASSETS:
      Restricted certificate of deposit                        300,000              300,000
      Security deposits                                        254,551              128,374
                                                            ----------          -----------
                                                            $7,720,446          $ 5,439,411
                                                            ==========          ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITES
      Line of credit                                         $ 500,000          $ 1,000,000
      Current portion of long-term debt                        222,786              252,677
      Receivable purchase line of credit                     1,160,648              702,422
      Accounts payable                                         808,893            1,635,140
      Accrued expenses                                         364,947              444,574
                                                            ----------          -----------
                Total current liabilities                    3,057,274            4,034,813
                                                            ----------          -----------
DEFERRED RENT AND OTHER NON-CURRENT LIABILITIES                267,553               88,221
                                                            ----------          -----------
LONG-TERM DEBT                                               1,055,195              999,732
                                                            ----------          -----------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
      Common stock, $.001 par value, 11,000,000
           shares authorized, 4,599,200 and 4,719,200
           shares issued and outstanding, respectively           4,599                4,719
      Additional paid-in capital                             3,799,815            3,949,695
      Retained (deficit)                                      (463,990)          (3,637,769)
                                                            ----------          -----------
                Total stockholders' equity                   3,340,424              316,646

                                                            $7,720,446          $ 5,439,411
                                                            ==========          ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      -3-
<PAGE>
                            BLUE FISH CLOTHING, INC.
                            STATEMENTS OF OPERATIONS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                 Three Months Ended               Nine Months Ended
                                                    September 30,                   September 30,
                                             --------------------------     ----------------------------
                                                1997            1998            1997            1998
<S>                                          <C>            <C>             <C>              <C>        
SALES                                        $3,637,239     $ 3,199,876     $ 10,980,101     $ 8,644,326
COST OF GOODS SOLD                            1,539,347       2,228,774        4,955,387       5,235,731
                                             ----------     -----------     ------------     -----------
          Gross margin                        2,097,892         971,102        6,024,714       3,408,595

UNUSUAL ITEMS                                         -               -                -         425,000

OPERATING EXPENSES                            1,894,081       2,038,697        5,518,506       5,981,924
                                             ----------     -----------     ------------     -----------

          Income (loss) from operations         203,811      (1,067,595)         506,208      (2,998,329)


INTEREST EXPENSE, NET                            61,088          63,240          172,757         175,450
                                             ----------     -----------     ------------     -----------

INCOME (LOSS) BEFORE INCOME TAXES               142,723      (1,130,835)         333,451      (3,173,779)


INCOME TAX  EXPENSE                              72,844               -          161,724               -
                                             ----------     -----------     ------------     -----------

NET INCOME (LOSS)                              $ 69,879    $ (1,130,835)       $ 171,727     $(3,173,779)
                                             ===========   =============    =============    ============

Net income (loss) per share:
                                             ----------     -----------     ------------     -----------
       Basic                                     $ 0.01         $ (0.24)          $ 0.04         $ (0.68)
                                             ===========   =============    =============    ============
       Diluted                                   $ 0.01         $ (0.24)          $ 0.04         $ (0.68)
                                             ===========   =============    =============    ============

Weighted Average Shares Outstanding:
       Basic                                  4,672,556       4,710,070        4,267,808       4,636,563
                                             ===========   =============    =============    ============
       Diluted                                4,791,023       4,710,070        4,780,791       4,636,563
                                             ===========   =============    =============    ============

</TABLE>

                                      -4-

        The accompanying notes are an integral part of these statements.
<PAGE>
                            BLUE FISH CLOTHING, INC.
                             STATEMENTS OF CASH FLOW
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                                ------------------------------
                                                                                    1997             1998
<S>                                                                             <C>              <C>
OPERATING ACTIVITIES:
              Net income (loss)                                                   $ 171,727      $ (3,173,779)
              Adjustments to reconcile net income (loss) to net cash
                 used in operating activities -
                   Deferred tax (benefit) expense                                                           -
                   Provision for deferred rent                                       59,699          (179,332)
                   Depreciation and amortization                                    299,711           379,831
                   Lease termination charge                                                           150,000
                   Provision for losses on accounts receivable                       38,107            11,386
                   (Increase) decrease in assets -
                      Accounts receivable                                          (916,913)          479,427
                      Inventory                                                    (269,842)          451,495
                      Other assets                                                   25,019           206,679

                   Increase in liabilities -
                      Accounts payable                                              168,609           826,247
                      Accrued expenses                                               37,309            79,627
                                                                                ------------     -------------
                         Net cash used in operating activities                     (386,574)         (768,419)
                                                                                ------------     -------------
INVESTING ACTIVITIES:
              Proceeds from sale of property and equipment                                -                 -
              Payments for purchases of property and equipment                   (1,043,795)          (22,846)
              (Purchase) redemption of certificate of deposit                      (300,000)          500,000
                                                                                ------------     -------------
                          Net cash (used in) provided by investing activities    (1,343,795)          477,154
                                                                                ------------     -------------
FINANCING ACTIVITIES:
              Net borrowings (repayments) on line of credit                        (500,000)          500,000
              Receivable purchase line of credit, net                               904,058          (458,226)
              Borrowing on long-term debt                                                 -            78,000
              Repayments on long-term debt                                         (102,016)          (60,874)
              Borrowing on long-term debt                                           800,000                 -
              Payments on capital lease obligations                                 (38,684)          (42,698)
              S corporation distributions paid                                      (44,041)               -
                                                                                ------------     -------------
              Exercise of employee stock options                                         -                 -
                                                                                ------------     -------------
                          Net cash provided by financing activities               1,019,317            16,202
                                                                                ------------     -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                          (711,052)         (275,063)
CASH AND CASH EQUIVALENTS,
              BEGINNING OF PERIOD                                                 1,928,340           466,542
                                                                                ------------     -------------
CASH AND CASH EQUIVALENTS,
              END OF PERIOD                                                     $ 1,217,288      $    191,479
                                                                                ============     =============
CASH PAID DURING THE PERIOD FOR:
              Interest                                                          $   164,514      $    177,984
                                                                                ============     =============
              Taxes                                                             $    33,483      $      4,087
                                                                                ============     =============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      -5-
<PAGE>




                            BLUE FISH CLOTHING, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    FOR THE PERIOD ENDING SEPTEMBER 30, 1998


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 and a discussion of the Company's ability to
continue as a going concern.

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 the Company. The results of
operations for the three months and nine months ended September 30, 1998 or any
other interim period, are not necessarily indicative of the results to be
expected for the full year.

The Company incurred losses in 1996, 1997, and for the first 9 months of 1998.
The net sales as of September 30, 1998 declined $2,335,775 as compared to the
nine months ending September 30, 1997. Wholesale sales are budgeted to be lower
in the fourth quarter of 1998 as compared to the same period in 1997. The
Company's existing financing structure is not deemed adequate to support the
projected 1998 cash flow needs. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern for a
reasonable period of time.

The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis to comply with the terms of its financing
agreements, to obtain equity investments, additional financing or increased
availability, as may be required and ultimately to attain successful operations.
Management is currently seeking equity investments, refining its operating
structure, reorganizing its marketing function and seeking additional financing
so that it can meet its obligations and sustain operations. There can be no
assurance, however, that Management's efforts will ultimately be successful.


                                      -6-
<PAGE>



NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES:
---------------------------------------------------------

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

                                       December 31,           September 30,
                                          1997                     1998
                                       -----------             ------------
         Raw materials                 $  296,700              $   590,974
         Work-in-process                  810,737                  715,347
         Finished goods, net            1,836,729                1,186,350
                                       -----------             ------------
                                       $ 2,944,166             $  2,492,671
                                       ===========             ============

Major Customers and Concentration of Credit Risk
------------------------------------------------
The Company has one significant customer that accounted for 17% and 9.1% of
total sales for the nine months ended September 30, 1997 and September 30, 1998,
respectively. This same customer accounted for 10.9% and 11.9% of net accounts
receivable at December 31, 1997 and September 30, 1998, respectively.

NOTE 3 - INCOME TAXES:
----------------------

Due to recurring losses, the Company has provided a full valuation for the tax
benefit associated with the 1998 loss.

NOTE 4 - FINANCING ARRANGEMENTS
-------------------------------

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 was
initially 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 and the Company agreed to maintain a minimum deposit account
with the bank in an amount not less than $500,000. This minimum deposit amount
was used for working capital needs during the first quarter of 1998.

At December 31, 1997, the Company had a line of credit of $500,000 subject to a
maximum outstanding amount not to exceed 50% of finished goods inventory plus
25% of work in process. This line of credit bears interest at the bank's prime
interest rate plus 0.75% payable on demand or monthly. In March 1998, the line
was increased to $1,000,000 subject to borrowing limits based on inventory and
extended to April 1999. These additional funds were borrowed on April 10, 1998.
The Company also has a receivable purchase line of credit agreement, which
provides for the assignment and processing of Company receivables with recourse
to a maximum outstanding assigned amount of $1,500,000 for a term of one year.
The Company assigns 100% of its wholesale credit sales. The Company can borrow
up to 90% of these assigned receivables, with the remaining 10% held in reserve
in the event of customer payment default. The receivable purchase line of credit
bears interest at 1.5% as a discount to all receivables assigned, and the



                                      -7-
<PAGE>

Company is responsible for reimbursing the bank for all uncollectible accounts.
In March 1998, the receivable purchase line of credit was renewed and extended
through March 1999, however, this line can be terminated by either party upon
notice, as defined. Subsequent to September 30, 1998 the Company initiated
discussions with the bank for borrowing under the receivable purchase line of
credit to include wholesale orders of up to $ 400,000 in the existing borrowing
base.

Both the line of credit and the receivable purchase line of credit are secured
by a stockholder guarantee and have a first lien on all accounts receivable,
inventory, equipment, fixtures and deposit accounts. Borrowings under the
receivable purchase line, the line of credit, and the note payable to a bank
contain cross-default and cross-collateralization provisions.

NOTE 5 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

Leases and Real Estate
----------------------
In December 1996, the Company entered into a lease for a new Corporate facility.
The lease was scheduled to commence in June 1998. In 1997, the lease was
amended, obligating the Company to purchase the Corporate facility and other
buildings in the complex for $3,800,000 during the sixth year after the Company
takes possession of the premises. In addition, the Company was obligated to make
payments of approximately $340,000 related primarily to building improvements at
this site of which $50,000 was paid as of September 30, 1998. In July 1998, this
lease was terminated, as were all commitments for rent and improvements, in
consideration of cash and stock valued in the aggregate at $252,000. The Company
is obligated to pay $102,000 in cash to the Lessor based on the following
payment schedule; $12,000 on each of July 6 and July 30, 1998 (both of which
were paid), $38,000 on or before September 30, 1999, and $40,000 on or before
September 30, 2000. The Company must pay interest at the rate of 8.5% per annum
on the then unpaid principal balance of the amount due on the first of each
month, commencing August 1, 1998. In addition, the Company issued to the Lessor
120,000 shares of Common Stock valued at $1.25 per share, the last sale price
for the Company's Common Stock prior to issuance. The shares are restricted as
they have not been registered under the Securities Act of 1933. With the
execution of the agreement terminating the lease, the Company's principal
stockholder executed and delivered a personal guaranty for $180,000, which will
be reduced to $142,000 when the payment due September 30, 1999 is made, and
shall terminate when the payment due September 30, 2000 is made. Expenses of
$302,000 are included in unusual items for the nine months ending September 30,
1998.

In 1997, the Company received an economic development grant of $200,000, the
proceeds of which were paid to the Lessor of the proposed Corporate facility for
certain renovation costs at the site and for which the Company received a credit
against the purchase price. After the termination of the lease, the granting
authority commenced a review of the use of the grant proceeds and has indicated
that the Company will receive a report on its findings. Management believes that
the grant proceeds were expended in accordance with the terms of the grant. No
assurance can be given, however, that the granting authority will accept
Management's position on these expenditures. If the granting authority requires
a return of some or all of the grant proceeds, the Company will record a
corresponding charge.


                                      -8-
<PAGE>

In April 1998, the Company entered into an Agreement to purchase its production
facility in Frenchtown, New Jersey for $375,000 and paid a deposit of $37,500
upon execution of the Agreement. The scheduled closing date was September 30,
1998, which coincided with the scheduled expiration date of the Company's lease
for the premises. On September 25, 1998, the Company entered into an Assignment
and Assumption of Agreement of Sale with a related party, pursuant to which the
Company assigned its right to purchase its production facility. Pursuant to the
Assignment, the $37,500 deposit for the Agreement of Sale was released to Seller
and credited against the purchase price, the Company was permitted to continue
to occupy its production facility in consideration of additional rent of $2,000
per month, to be withdrawn from a security deposit held by the Seller, and the
closing date was advanced by 30 days upon each payment to Seller of $10,000 on
July 1, August 1, and September 1, 1998. In September, 1998 the Company entered
into an agreement to lease its production factory in Frenchtown, NJ, from a
related party. An additional $7,500 was paid to the related party to establish a
$75,000 security fund to be refunded to Blue Fish Clothing upon completion of
the lease. All payments made to the Seller were credited to the Company by the
related party purchaser. The term of the lease is for seven years at a rate of
$75,600 per annum, subject to changes in the prime rate, beginning October 1,
1998 ending September 30, 2005.

In May 1998, the Company vacated the New York showroom. The Company is
negotiating with the landlord to determine a final lease termination settlement.
The original lease is scheduled to expire in December 2000.

In June 1998, the Company extended its existing lease for its second facility in
Frenchtown, NJ which expires on November 30, 1998. The term of the lease is for
three years beginning December 1, 1998 and ending November 30, 2001. The Company
will have the option for a two year lease extension.

Severance Obligations
---------------------
The Company recorded a charge in the first quarter of 1998 for severance to be
paid out to former employees of approximately $123,000, which is included in
unusual items in the accompanying financial statements.


Employment
----------
During the third quarter, the Company entered into employment agreements with
certain key employees providing for salary, stock options, performance bonuses
and severance in certain circumstances.


NOTE 6 - STOCK OPTION PLANS
---------------------------

During the quarter, the Company granted employees options, under the 1995 Stock
Option Plan, to purchase 370,500 shares of Common stock at the exercise prices
ranging from $ 1.00 to $2.00 per share,


                                      -9-
<PAGE>

which approximated fair value at the date of the grant. 

Effective September 1, 1998, the Company instituted the 1998 Stock Option Plan,
subject to shareholder approval. The Plan provides for the issuance of up to
1,200,000 shares of Common stock to employees and consultants under stock
options for a term not to exceed nine yeas from the date of grant. Qualified and
nonqualified stock options will be granted to employees at the discretion of the
Compensation Committee (subject to certain plan limitations) at exercise prices
at least equal to the fair market value of the Common stock for qualified
incentive stock options. Consultants shall only be eligible to receive grants of
nonqualified stock options. Stock options granted under the Plan shall vest in
accordance with the terms and conditions determined by the Compensation
Committee. During the third quarter of 1998, the Company granted options, under
the Plan, to purchase 70,710 shares of Common stock at exercise prices ranging
from $ 1.50 to $ 2.00 per share, which approximated the fair market value as of
the grant date.

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

THREE MONTHS ENDED SEPTEMBER 30, 1998 ("1998 QUARTER")  COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997 ("1997 QUARTER")

SALES. The Company's sales decreased by $437,363 or 12.1% to $3,199,876 in the
1998 quarter as compared to the 1997 quarter. The Company's wholesale sales
decreased by 46.1% from $2,250,609 in the 1997 quarter to $1,213,612 in the 1998
quarter, its retail sales increased by 27.5% from $1,104,670 in the 1997 quarter
to $1,408,217 in the 1998 quarter and craft fair sales increased by 105% from
$281,960 in the 1997 quarter to $578,047 in the 1998 quarter. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
decreased sales of the Fall 1998 line as compared to the Fall 1997 line. The
Company required customers to buy in prepack assortments and modified its
garment sizing structure beginning with the Spring 1998 line. These changes were
not received well by the customers. The Summer line was not received well by
customers in design concept, and the changes made in the Spring line also
negatively affected Summer and Fall sales. Boutique sales declined by 46.1% and
department store sales declined by 77% in the quarter as compared to the same
period in 1997. The retail sales increase was primarily due to a store which
opened in October 1997 generating sales during the entire 1998 quarter. Same
store sales decreased by 1.4% during the quarter primarily due to increased
markdowns of the Spring 1998 line and Summer 1998 line. Craft sales increased
due to the opening of three temporary outlet stores located in Reading, PA, St.
Michaels, MD, and Syracuse, NY. The three locations sold non-current inventory
from 1997 and prior. Sales from the stores during the quarter were $397,609. All
temporary outlet stores were closed as of September 7, 1998.

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 27.4 percentage
points from 57.7% in the 1997 period to


                                      -10-
<PAGE>

30.3% in the 1998 period.  This  decrease  was  primarily  due to the  increased
markdowns taken on current season items and the sale of non-current inventory at
reduced  prices at the  Company's  outlet  stores.  See  Liquidity  and  Capital
Resources for management actions in response to the decrease in gross margin.

UNUSUAL ITEMS. The Company incurred expenses of $302,000 in connection with the
termination of the Corporate facility lease in Palmer Township, Pennsylvania.
These expenses related to lost deposits, and cash and stock payments.

OPERATING EXPENSES. The Company's operating expenses increased by $144,616 or
7.6% from $1,894,081 in the 1997 period to $2,038,697 in the 1998 period. The
increase in operating expenses in the 1998 period was primarily due to expenses
of one new retail store which did not exist in the 1997 quarter, depreciation,
advertising and professional expenses. See Liquidity and Capital Resources for
management actions in response to the increased operating expenses.

INTEREST EXPENSE, NET. The Company's interest expense, net, increased by $2,152
or 3.5% from $61,088 in the 1997 period to $63,240 in the 1998 period. Interest
expense increased by $2,693 primarily due to an increased borrowings for the
Company's working capital needs offset by a decrease in assigned wholesale
credit receivables as a result of decreased wholesale sales.

PRE-TAX  INCOME (LOSS).  As a result of the foregoing,  income before income tax
provision  decreased  $1,273,558  from  $142,723  of pre-tax  income in the 1997
period to a pre-tax loss of $1,130,835 in the 1998 period.

INCOME TAX PROVISION. Due to recurring losses, no tax benefit has been recorded
in the 1998 period. During the 1997 period the effective tax rate was 51%
primarily due to Federal and state taxes and the impact of certain
non-deductible expenditures.

NINE MONTHS ENDED  SEPTEMBER  30, 1998 ("1998  PERIOD")  COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997 ("1997 PERIOD")

SALES. The Company's sales decreased by $2,335,775 or 21.3% to $8,644,326 in the
1998 period as compared to the 1997 period. The Company's wholesale sales
decreased by 47.7% from $7,208,817 in the 1997 period to $3,773,773 in the 1998
period, its retail sales increased by 20.6% from $3,054,607 in the 1997 period
to $3,682,980 in the 1998 period and craft fair sales increased by 65.7% from
$716,678 in the 1997 period to $1,187,573 in the 1998 period. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
decreased sales of the Spring and Summer 1998 line. The Company began requiring
customers to buy the Spring line in prepack assortments and modified its garment
sizing structure. These changes were not received well by the customers. The
Summer line was not received well by customers in design concept, and the
changes made in the Spring line also negatively affected Summer and Fall sales.
Boutique sales declined by 47.7% and department store sales declined by 63.9%.
The retail sales increase was primarily due to stores which opened in March 1997
and October 1997 generating sales during the entire 1998 period, partially
offset by a same store sales decrease of 5.1%. Same store sales decreased
primarily due to increased customer returns and a


                                      -11-
<PAGE>

sizing problem for larger customers who did not purchase goods during the 9
month period. Craft sales increased due to the opening of three temporary outlet
stores located in Reading, PA, St. Michaels, MD, and Syracuse, NY. The three
locations sold non-current inventory from 1997 and prior. Sales from the stores
during 1998 were $430,506. All temporary Outlet stores were closed as of
September 7, 1998.

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 15.5 percentage
points from 54.9% in the 1997 period to 39.4% in the 1998 period. This decrease
was primarily due to increased markdowns taken at the Company's retail stores,
non-current inventory sold at a reduced price at the Company's retail stores
during the second quarter and outlet stores during the third quarter.

UNUSUAL ITEMS. Unusual items consist of lease termination and severance costs.
The Company incurred expenses of $302,000 in connection with the termination of
the Corporate facility lease in Palmer Township, Pennsylvania. These expenses
related to lost deposits, and cash and stock payments. In connection with the
termination of certain employees, the Company incurred expenses of $123,000 for
severance during first quarter 1998.

OPERATING EXPENSES. The Company's operating expenses increased by $463,418 or
8.4% from $5,518,506 in the 1997 period to $5,981,924 in the 1998 period. The
increase in operating expenses in the 1998 period was primarily due to expenses
of two new retail stores which did not exist for the entire 1997 period,
depreciation, advertising and professional expenses. See Liquidity and Capital
Resources for management actions in response to the increased operating
expenses.

INTEREST EXPENSE, NET. The Company's interest expense, net, increased by $2,693
or 1.6% from $172,757 in the 1997 period to $175,450 in the 1998 period.
Interest expense decreased by $28,469 primarily due to a decrease in assigned
wholesale credit receivables resulting from decreased wholesale sales, partially
offset by increased borrowings for the Company's working capital needs. Interest
income decreased by $31,162 as a result of spending a portion of the Company's
initial public offering proceeds that were held in interest bearing instruments
in 1996.

PRE-TAX  INCOME (LOSS).  As a result of the foregoing,  income before income tax
provision  decreased  $3,507,230  from  $333,451  of pre-tax  income in the 1997
period to a pre-tax loss of $3,173,779 in the 1998 period.

INCOME TAX (BENEFIT) PROVISION. Due to recurring losses, no tax benefit has been
recorded in the 1998 period. 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.

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

At September 30, 1998, the Company had $191,479 in cash and cash equivalents (of
which $70,242 was restricted), a receivable purchase line of credit for up to
$1,500,000 (with $702,422


                                      -12-
<PAGE>

outstanding  and in transit),  a demand bank line of credit for up to $1,000,000
(with a  $1,000,000  outstanding  balance),  an $800,000  note payable to a bank
(with a $750,000  outstanding  balance) which requires a $300,000 certificate of
deposit as security,  and a $345,000 loan from a  shareholder.  At September 30,
1998,  the  Company had  negative  working  capital of  $565,280,  reflecting  a
decrease in working  capital of $2,775,412 from $2,210,132 on December 31, 1997.
Working  capital is defined as current assets less current  liabilities.  During
1998, the Company has funded its working capital  requirements  through the sale
of prior season  inventory at reduced  margins as well as extending its payments
to vendors.

Net cash used in operations was $768,419 during the nine months ended September
30, 1998, consisting primarily of the net loss before depreciation and
amortization of $2,793,948 partially offset by a decrease in accounts receivable
and inventory of $479,427 and $ 451,495 respectively and an increase in accounts
payable of $826,247. The decrease in accounts receivable and increase in
accounts payables are primarily due to lower wholesale sales. Net cash used in
operating activities during the same period for 1997 was $386,574, which
consisted primarily of increases in accounts receivable of $916,913 and
inventory of $269,842 offset by net income before depreciation and amortization
of $471,438 and increases in accounts payable and accrued expenses of $168,609
and $ 37,309 respectively.


Net cash provided by investing activities in the 1998 period was $477,154
consisting of proceeds from a certificate of deposit of $500,000, partially
offset by capital expenditures. Net cash used in investing activities in the
1997 period was $1,343,795 which consisted 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, and the ongoing implementation of
the Company's Management Information System.

Net cash used in financing activities in the 1998 period was $16,202, consisting
primarily of a increase in the Company's net borrowings of $474,428 offset by a
decrease in the receivable purchase line of credit of $458,226. Net cash
provided by financing activities in the 1997 period was $1,019,317, which
consisted primarily of an increase in the Company's receivable purchase line of
credit of $904,058 and additional net borrowings of $159,300.

On September 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 September 25, 1998 through September 25, 2001,
and one principal payment of $600,000 is to be paid on September 25, 2002. This
note was initially secured by an $842,000 certificate of deposit and guaranteed
by Jennifer Barclay, the principal stockholder. 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.
This minimum deposit amount was spent for working capital needs during the first
quarter of 1998.


                                      -13-
<PAGE>

At December 31, 1997, the Company had a line of credit of $500,000 subject to a
maximum outstanding amount not to exceed 50% of finished goods inventory plus
25% of work in process. This line of credit bears interest at the bank's prime
interest rate plus 0.75% payable on demand or monthly. In March 1998, the line
was increased to $1,000,000 subject to borrowing limits based on inventory and
extended to April 1999. These additional funds were borrowed on April 10, 1998.
The Company also has a receivable purchase line of credit agreement, which
provides for the assignment and processing of Company receivables with recourse
to a maximum outstanding assigned amount of $1,500,000 for a term of one year.
The Company assigns 100% of its wholesale credit sales. The Company can borrow
up to 90% of these assigned receivables, with the remaining 10% held in reserve
in the event of customer payment default. The receivable purchase line of credit
bears interest at 1.5% as a discount to all receivables assigned, and the
Company is responsible for reimbursing the bank for all uncollectible accounts.
In March 1998, the receivable purchase line of credit was renewed and extended
through March 1999, however, this line can be terminated by either party upon
notice, as defined. Subsequent to September 30, 1998 the company initiated
discussions with the bank for borrowing under the receivable purchase line of
credit to include wholesale order of up to $ 400,000 in the existing borrowing
base. As of November 16, 1998, the bank funded $ 400,000 based on existing
orders.

Both the line of credit and the receivable purchase line of credit are secured
by a stockholder guarantee and have a first lien on all accounts receivable,
inventory, equipment, fixtures and deposit accounts. Borrowings under the
receivable purchase line, the line of credit, and the note payable to a bank
contain cross-default and cross-collateralization provisions.

In December 1996, the Company entered into a lease for a new Corporate facility.
The lease was scheduled to commence in June 1998. Minimum lease payments were
due monthly and began at $267,120 per year and increased 3% per year throughout
the term plus a common area maintenance charge at the greater of $15,000 or 5%
of base rent. In 1997, the lease was amended, obligating the Company to purchase
the Corporate facility and other buildings in the complex for $3,800,000 during
the sixth year after the Company takes possession of the premises. In addition,
the Company was obligated to make payments of approximately $340,000 related
primarily to building improvements at this site of which $50,000 was paid as of
September 30, 1998. In July 1998, this lease was terminated, as were all
commitments for rent and improvements, in consideration of cash and stock valued
in the aggregate at $252,000. The Company is obligated to pay $102,000 in cash
to the Lessor based on the following payment schedule; $12,000 on each of July 6
and July 30, 1998 (both of which were paid), $38,000 on or before September 30,
1999, and $40,000 on or before September 30, 2000. The Company must pay interest
at the rate of 8.5% per annum on the then unpaid principal balance of the amount
due on the first of each month, commencing August 1, 1998. In addition, the
Company issued to the Lessor 120,000 shares of Common Stock valued at $1.25 per
share, the last sale price for the Company's Common Stock prior to issuance. The
shares are restricted as they have not been registered under the Securities Act
of 1933. With the execution of the agreement terminating the lease, the
Company's principal stockholder executed and delivered a personal guaranty for
$180,000, which will be reduced to $142,000 when the payment due September 30,
1999 is


                                      -14-
<PAGE>

made,  and shall  terminate  when the  payment due  September  30, 2000 is made.
Expenses of $302,000 are included in unusual  items in the first 9 months ending
September 30, 1998.

In 1997, the Company received an economic development grant of $200,000, the
proceeds of which were paid to the Lessor of the proposed Corporate facility for
certain renovation costs at the site and for which the Company received a credit
against the purchase price. After the termination of the lease, the granting
authority commenced a review of the use of the grant proceeds and has indicated
that the Company will receive a report on its findings. Management believes that
the grant proceeds were expended in accordance with the terms of the grant. No
assurance can be given, however, that the granting authority will accept
Management's position on these expenditures. If the granting authority requires
a return of some or all of the grant proceeds, the Company will record a
corresponding charge.

In April 1998, the Company entered into an Agreement to purchase its production
facility in Frenchtown, New Jersey for $375,000 and paid a deposit of $37,500
upon execution of the Agreement. The scheduled closing date was September 30,
1998, which coincided with the scheduled expiration date of the Company's lease
for the premises. On September 25, 1998, the Company entered into an Assignment
and Assumption of Agreement of Sale with a related party, pursuant to which the
Company assigned its right to purchase its production facility. Pursuant to the
Assignment, the $37,500 deposit for the Agreement of Sale was released to Seller
and credited against the purchase price, the Company was permitted to continue
to occupy its production facility in consideration of additional rent of $2,000
per month, to be withdrawn from a security deposit held by the Seller, and the
closing date was advanced by 30 days upon each payment to Seller of $10,000 on
July 1, August 1, and September 1, 1998. In September, 1998 the company entered
into an agreement to lease its production factory in Frenchtown, NJ, from a
related party. An additional $7,500 was paid to the related party to establish a
$75,000 security fund to be refunded to Blue Fish Clothing upon completion of
the lease. The term of the lease if for seven years at a rate of $75,600 per
annum, subject to changes in the prime rate, beginning October 1, 1998 ending
September 30, 2005.

In May 1998, the Company vacated the New York showroom. The Company is
negotiating with the landlord to determine a final lease termination settlement.
The original lease is scheduled to expire in December 2000.

In September 1998, the Company extended its existing lease for its second
facility in Frenchtown, NJ which expires on November 30, 1998. The term of the
lease is for three years beginning December 1, 1998 and ending November 30,
2001. The Company will have the option for a two year lease extension.

THE YEAR 2000
-------------

The Year 2000 issue is a result of computer programs being written using two
digits rather than four to define the applicable year. In other words, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of similar normal business activities.


                                      -15-
<PAGE>

     Unlike many businesses in the apparel  industry,  the Company is not highly
directly  reliant on  computer  technology  in its  day-to-day  operations.  The
Company does not believe that it has a material  exposure to the Year 2000 issue
with  respect to its own  information  systems.  The Company is currently in the
process,  which it expects to complete in the first quarter of 1999, of ensuring
that its own  information  systems  are Year 2000  compliant.  The  Company  has
projected total remediation expense related to this effort to be immaterial.  In
the event that the Company's efforts at remediation of the Year 2000 issue fail,
the Company will rely on  non-computerized  production and point of sale methods
to complete transactions and to carry on the Company's business.

Many of the purchases from the Company's stores are made with credit cards, and
the Company's operations may be materially adversely affected to the extent that
its customers are unable to use their credit cards due to Year 2000 issues that
are not rectified by their credit card vendor. The Company intends to conclude
an analysis in the first half of 1999 to determine the extent to which its major
customer's systems (insofar as they relate to the Company's business) are
subject to the Year 2000 issue. The Company is currently unable to predict the
extent to which the Year 2000 issue will affect its major customer, or the
extent to which it would be vulnerable to the customer's failure to remediate
any Year 2000 issues on a timely basis. If the major customer is subject to the
Year 2000 issue and fails to convert its systems on a timely basis, the Company
could be materially adversely affected.

The Company does not believe that it has a material exposure to the Year 2000
issue with respect to its suppliers' systems. Because the Company does not have
a single major supplier, but instead has a large number of small suppliers, the
Company believes that it will be able to make purchases from other replacement
suppliers if any of its current suppliers are unable to remediate any Year 2000
issues on a timely basis.

GOING CONCERN
-------------
During the first three quarters of 1998, the Company experienced diminishing
cash flow, due primarily to a significant drop in wholesale sales. The Company
experienced a reduction in net sales in the first three quarters of 1998, as
compared to the first three quarters of 1997, and expects to report a loss in
1998. In response to lower sales and revised budgets, the Company has undertaken
significant personnel and other cost reductions to realign the Company's
production and management functions to improve operational efficiencies. The
effects of these changes are expected to be realized in subsequent quarters. In
their report on the Company's financial statements for the year ended December
31, 1997, the Company's independent public accountants have included an
explanatory paragraph raising substantial doubt about the Company's ability to
continue as a going concern, unless the Company is able to secure additional
financing to meet its obligations on a timely basis and to increase sales.
Management intends to continue to make cost reductions where possible and to
initiate various management actions to address the sales shortfall, as well as
to pursue aggressively additional sources of financing and evaluate ways to sell
excess inventory. No assurance can be given that these management actions will
be successful.


                                      -16-
<PAGE>

FORWARD LOOKING INFORMATION
---------------------------
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "LIQUIDITY AND CAPITAL
RESOURCES." THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE
REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) UNCERTAIN FUTURE SALES GROWTH AND OPERATING
RESULTS; (2) COMPETITION; (3) SEASONALITY; (4) DEPENDENCE ON FOUNDER AND
EXECUTIVE OFFICERS; (5) RELIANCE ON AND POSSIBLE LIMITED APPEAL OF THE "BLUE
FISH CONCEPT"; (6) SENSITIVITY OF APPAREL DESIGN; (7) SIGNIFICANT WHOLESALE
CUSTOMERS; AND (8) FUTURE CAPITAL NEEDS. THE COMPANY HAS NO DUTY UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 TO UPDATE THE FORWARD LOOKING
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB AND THE COMPANY DOES NOT
INTEND TO PROVIDE SUCH UPDATES.


                                      -17
<PAGE>



                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS
         -----------------

         Not applicable


ITEM 2.  CHANGES IN SECURITIES
         ---------------------

         a-c.  Not applicable

         d. On November 13, 1995, the Registrant commenced a direct public
offering of 800,000 shares of Common Stock, $.001 par value per share,
registered under the Securities Act of 1993 on Form SB-2, Commission File No.
33-974218-NY, which was declared effective on that date. The offering was
conducted directly by the Registrant (with no underwriter) on a minimum/maximum
basis. On May 15, 1996, the Registrant sold 787,200 shares of its Common Stock
and the offering was terminated. After the deduction of offering expenses of
approximately $500,000, all of which were paid to non-affiliates of the
Registrant, the net proceeds of the offering were approximately $3,436,000.
There were no underwriting discounts and commissions, finders' fees, or expenses
paid to or for underwriters. As of September 30, 1998, approximately $921,000 of
the net proceeds was used for construction of plant, building and facilities;
approximately $700,000 was used for purchase and installation of machinery and
equipment, including management information systems hardware and software;
approximately $1,515,000 was used for working capital; and approximately
$300,000 was in temporary investments consisting of a certificate of deposit.
All payments of proceeds were to non-affiliates of the Registrant. The only
material changes from the use of proceeds listed in the Registrant's Prospectus
are that the Registrant used approximately $950,000 less for retail store
expansion, due to a change in the Registrant's plan for new store openings, and
approximately $640,000 more in working capital and general corporate purposes.
Previously, the Registrant reported the application of proceeds on Form
SR--"Report of Sales of Securities and Use of Proceeds Therefrom."

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         -------------------------------

         Not applicable


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

         Not applicable


                                      -18-
<PAGE>

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

         On August 7, 1998, the Registrant announced that Richard E. Swarttz,
Vice President of Finance and Chief Financial Officer, resigned effective
immediately to pursue other career opportunities. Then Acting Chief Executive
Officer Jeffrey L. Haims assumed the CFO function. On August 21, 1998, Mr. Haims
was appointed President and Chief Executive Officer and continues as Acting
Chief Financial Officer.


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

    (a)  EXHIBITS

              10.45.  1998 Stock Option Plan

              10.46.  Employment Agreement between Peter Meade and the
                      Registrant dated October 16, 1998

              27.     Financial Data Schedule

(b)      REPORTS ON FORM 8-K

         Not applicable


                                      -19-
<PAGE>


                                   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 23, 1998.


                                           BLUE FISH CLOTHING, INC.
                                           (Registrant)





DATE: November 23, 1998                    /s/ Jeffrey L. Haims
                                           -----------------------------
                                           Jeffrey L. Haims
                                           President and Chief Executive Officer
                                           and Acting Chief Financial Officer




                                      -20-
<PAGE>


                                  EXHIBIT INDEX


    10.45.            1998 Stock Option Plan

    10.46.            Employment Agreement between Peter Meade and the
                      Registrant dated October 16, 1998

    27.               Financial Data Schedule




                                      -21-