<PAGE>   1
                     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 March 31, 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 May 19, 1998,
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__

<PAGE>   2


                                                   
                            BLUE FISH CLOTHING, INC.

                                      INDEX

                                                                            Page
                                                                            ----
PART I - FINANCIAL INFORMATION

     ITEM 1.  FINANCIAL STATEMENTS

        Balance Sheets - December 31, 1997 and March 31, 1998                3

        Statements of Operations - For the Three Months Ended                4
                March 31, 1997 and March 31, 1998

        Statements of Cash Flows - For the Three Months Ended                5
                March 31, 1997 and March 31, 1998

        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 ON 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

 
                                        2




<PAGE>   3
<TABLE>
<CAPTION>

                                         Blue Fish Clothing, Inc.
                                              BALANCE SHEETS 
                                                (unaudited)

                                                                      December 31,             March 31,
     ASSETS                                                               1997                    1998
                                                                     ---------------        ----------------

<S>                                                                       <C>                     <C>     
CURRENT ASSETS
     Cash and cash equivalents                                            $ 350,477               $ 127,321
     Restricted cash                                                        116,065                  82,388
     Certificate of deposit                                                 500,000                       -
     Receivables, net of allowance of                                     1,180,962                 819,491
          $40,000 and $25,229
     Inventories, net                                                     2,944,166               3,378,605
     Other current assets                                                   175,736                 141,751 
               Total current assets                                       5,267,406               4,549,556

PROPERTY AND EQUIPMENT
     Property and equipment, net of accumulated                           1,898,489               1,826,748
          depreciation of $819,575 and $958,517

OTHER ASSETS:
     Restricted certificate of deposit                                      300,000                 300,000
     Security deposits                                                      254,551                 254,551 
                                                                        $ 7,720,446             $ 6,930,855
                                                                     ===============        ================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITES
     Line of credit                                                       $ 500,000               $ 500,000
     Current portion of long-term debt                                      222,786                 219,350
     Receivable purchase line of credit                                   1,160,648                 823,881
     Accounts payable                                                       808,893               1,121,915
     Accrued expenses                                                       364,947                 511,389 
               Total current liabilities                                  3,057,274               3,176,535 

DEFERRED RENT AND OTHER NON-CURRENT LIABILITIES                             267,553                 264,421 

LONG-TERM DEBT                                                            1,055,195               1,040,379 

COMMITMENTS AND CONTINGENCIES


STOCKHOLDERS' EQUITY:
     Common stock, $.001 par value, 11,000,000
          shares authorized, 4,599,200 shares
          issued and outstanding                                              4,599                   4,599
     Additional paid-in capital                                           3,799,815               3,799,815
     Retained (deficit)                                                    (463,990)             (1,354,894)
               Total stockholders' equity                                 3,340,424               2,449,520 

                                                                        $ 7,720,446             $ 6,930,855
                                                                     ===============        ================

        The accompanying notes are an integral part of these statements.


                                        3

</TABLE>

<PAGE>   4
<TABLE>
<CAPTION>
 
                                  Blue Fish Clothing, Inc.
                                  STATEMENTS OF OPERATIONS 
                                         (unaudited)


                                                                    Three Months Ended
                                                                        March 31,
                                                            -----------------------------------
                                                                 1997               1998


<S>                                                             <C>                <C>        
SALES                                                           $ 3,442,855        $ 2,337,299
COST OF GOODS SOLD                                                1,600,926          1,183,937 
          Gross margin                                            1,841,929          1,153,362


OPERATING EXPENSES                                                1,710,757          1,993,953 


          Income (loss) from operations                             131,172           (840,591)


INTEREST EXPENSE, NET                                                61,895             50,313 


INCOME (LOSS) BEFORE INCOME TAXES                                    69,277           (890,904)


INCOME TAX  EXPENSE                                                  32,283             ____-__

NET INCOME (LOSS)                                                  $ 36,994         $ (890,904)
                                                            ================   ================

Net income (loss) per share:
       Basic                                                         $ 0.01            $ (0.19)
                                                            ================   ================
       Diluted                                                       $ 0.01            $ (0.19)
                                                            ================   ================

Weighted Average Shares Outstanding:
       Basic                                                      4,599,200          4,599,200
                                                            ================   ================
       Diluted                                                    4,641,674          4,599,200
                                                            ================   ================




        The accompanying notes are an integral part of these statements.


                                        4

</TABLE>

<PAGE>   5
<TABLE>
<CAPTION>
                                          BLUE FISH CLOTHING, INC.
                                          STATEMENTS OF CASH FLOW
                                                (unaudited)

                                                                         Three Months Ended March 31,
                                                                  -------------------------------------------
                                                                           1997                       1998
<S>                                                                      <C>                      <C>     
OPERATING ACTIVITIES:
      Net income (loss)                                                  $ 36,994                 $ (890,904)
     Adjustments to reconcile net income (loss) to net cash
        used in operating activities -
          Provision for deferred rent                                      32,011                     (3,132)
          Depreciation and amortization                                    84,683                    138,942
          Provision for losses on accounts receivable                      12,501                      9,842
          (Increase) decrease in assets -
             Accounts receivable                                         (705,352)                   351,629
             Inventory                                                      5,156                   (434,439)
             Other assets                                                (126,383)                    33,985

          Increase (decrease) in liabilities -
             Accounts payable                                              75,964                    313,022
             Accrued expenses                                             (54,389)                   146,442 
                Net cash used in operating activities                    (638,815)                  (334,613)

INVESTING ACTIVITIES:
     Payments for purchases of property and equipment                    (420,440)                   (67,201)
     Proceeds from certificate of deposit                                      -                     500,000 
                 Net cash (used in) provided by investing activities     (420,440)                   432,799 
FINANCING ACTIVITIES:
     Receivable purchase line of credit, net                              704,519                   (336,767)
     Repayments on long-term debt                                         (43,356)                    (2,479)
     Payments on capital lease obligations                                (17,091)                   (15,773)
     S corporation distributions paid                                     (22,531)                        - 
                 Net cash provided by (used in) financing activities      621,541                   (355,019)

NET DECREASE IN CASH AND CASH EQUIVALENTS                                (437,714)                  (256,833)

CASH AND CASH EQUIVALENTS,
     BEGINNING OF PERIOD                                                1,928,340                    466,542 

CASH AND CASH EQUIVALENTS,
     END OF PERIOD                                                    $ 1,490,626                  $ 209,709
                                                                  ================            ===============
CASH PAID DURING THE PERIOD FOR:
     Interest                                                            $ 61,509                   $ 52,263
                                                                  ================            ===============
     Taxes                                                               $ 29,575                    $ 2,500
                                                                  ================            ===============

        The accompanying notes are an integral part of these statements.

                                        5


</TABLE>


<PAGE>   6


                                                   
                            BLUE FISH CLOTHING, INC.
                          NOTES TO FINANCIAL STATEMENTS
                      FOR THE PERIOD ENDING MARCH 31, 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 Blue Fish Clothing, Inc. The
results of operations for the three months ended March 31, 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 the first quarter of 1998. The net
sales in the first quarter of 1998 declined $1,105,556 as compared to the first
quarter of 1997. In addition, the Company has committed to capital and lease
obligations which require funding in 1998 (see Note 5). 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 has begun negotiations for
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>   7



NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES:

Inventories
The components of inventory as presented are as follows:

                                       December 31,               March 31,
                                           1997                    1998
                                        -----------            ------------
         Raw materials                 $    296,700           $     400,633
         Work-in-process                    810,737                 543,217
         Finished goods, net              1,836,729               2,434,755
                                        -----------            ------------
                                       $  2,944,166            $  3,378,605
                                        ===========            ============

Major Customers and Concentration of Credit Risk
The Company has one significant customer that accounted for 18.0% and 13.9% of
total sales for the three months ended March 31, 1997 and March 31, 1998,
respectively. This same customer accounted for 10.8% and 7.2% of net accounts
receivable at December 31, 1997 and March 31, 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 spent 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 

                                       7
<PAGE>   8


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.

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

Operating Leases
In December 1996, the Company entered into a lease for a new Corporate facility.
The lease is currently scheduled to commence in June 1998. It is estimated that
the building will be available for occupancy in August 1998. Minimum lease
payments are due monthly and begin at $267,120 per year and increase 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 and obligates 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. A deposit of
$200,000 was required which will be applied to the purchase price of the
property. This was funded through receipt of an economic development grant and
has been included in other non-current liabilities on the accompanying balance
sheet until all obligations related to the grant have been achieved. In
addition, the Company is obligated to make payments of approximately $340,000
related primarily to building improvements at this site of which $50,000 was
paid as of March 31, 1998. The lease will be accounted for as a capital lease
upon commencement. The Company is currently in the process of renegotiating this
lease; no assurance, however, can be given as to the eventual outcome.

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 is June 30, 1998,
and the Company's lease for the premises expires that same date. The Company
entered into this agreement to ensure that production continues uninterrupted
because it is not clear that the Company will be able to occupy its new
Corporate facility when the lease for its current facility expires June 30,
1998.

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.

                                       8
<PAGE>   9


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

THREE  MONTHS  ENDED MARCH 31, 1998 ("1998  PERIOD")  COMPARED TO THREE MONTHS 
ENDED MARCH 31, 1997 ("1997 ERIOD")

SALES. The Company's sales decreased by $1,105,556 or 32.1% to $2,337,299 in the
1998 period as compared to the 1997 period. The Company's wholesale sales
decreased by 50.0% from $2,605,495 in the 1997 period to $1,302,167 in the 1998
period, its retail sales increased by 7.8% from $741,076 in the 1997 period to
$799,241 in the 1998 period and craft fair sales increased by 145.0% from
$96,284 in the 1997 period to $235,891 in the 1998 period. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
decreased sales of the Spring 1998 line. The Company began requiring customers
to buy the Spring line in prepack assortments and modified its grading
structure. These changes were not received well by the customers. Boutique sales
declined by 25.2% and department store sales declined by 51.5%. The retail sales
increase was primarily due to stores which opened in March 1997 and October 1997
generating sales during the 1998 period partially offset by a same store sales
decrease of 25.4%. Same store sales decreased primarily due to increased
customer returns and a grading problem for larger size customers who did not
purchase goods in the period. Craft sales increased due to additional craft
shows being scheduled to sell prior season inventory as well as increased
revenues at existing venues.

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 4.2 percentage
points from 53.5% in the 1997 period to 49.3% in the 1998 period. This decrease
was primarily due to the writedown of inventory in the period and increased
markdowns taken at the Company's retail stores.

OPERATING EXPENSES. The Company's operating expenses increased by $283,196 or
16.6% from $1,710,757 in the 1997 period to $1,993,954 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 in the 1997 period, depreciation
and advertising expenses and the recording of severance charges (See Note 5 in
Notes to Financial Statements). See Liquidity and Capital Resources for
management actions in response to the increased operating expenses.

INTEREST EXPENSE, NET. The Company's interest expense, net, decreased by $11,582
or 18.7% from $61,895 in the 1997 period to $50,313 in the 1998 period. Interest
expense decreased by $20,128 primarily due to a decrease in assigned wholesale
credit receivables as a result of decreased wholesale sales partially offset by
increased borrowings for the Company's working capital needs. Interest income
decreased by $8,546 as a result of spending a portion of the Company's initial
investment of approximately $3.9 million 

                                       9

<PAGE>   10

of cash raised from the initial public offering which was held in intrest 
bearing instruments in 1996.

PRE-TAX INCOME (LOSS). As a result of the foregoing, income before income tax
provision decreased $960,181 from $69,277 of pre-tax income in the 1997 period
to a pre-tax loss of $890,904 in the 1998 period.

INCOME TAX (BENEFIT) PROVISION. Due to recurring losses, the tax benefit of the
net loss has been fully reserved 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 March 31, 1998, the Company had $209,709 in cash and cash equivalents (of
which $82,388 was restricted) a receivable purchase line of credit for up to
$1,500,000 (with $823,881 outstanding and in transit) and a demand bank line of
credit for up to $1,000,000 (with a $500,000 outstanding balance), an $800,000
note payable to a bank (with an $800,000 outstanding balance) which requires a
$300,000 certificate of deposit as security, and a $345,000 loan from a
shareholder. At March 31, 1998, the Company had working capital of $1,373,021,
reflecting a decrease in working capital of $837,111 from $2,210,132 on December
31, 1997. Working capital is defined as current assets less current liabilities.

Net cash used in operations was ($334,613) during the three months ended March
31, 1998, consisting primarily of a decrease in accounts receivable of $351,629
and an increase in accounts payable of $313,022, partially offset by net loss
before depreciation and amortization of $751,962 and an increase in inventory of
$434,439. The decrease in accounts receivable and increase in inventory are
primarily due to lower wholesale sales. Net cash used in operating activities
during the same period for 1997 was ($638,815), which consisted primarily of
increases in accounts receivable of $705,352 and other assets of $126,383
partially offset by net income before depreciation and amortization of $121,677.

Net cash provided by investing activities in the 1998 period was $432,799
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 ($420,440) 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 ($355,019),
consisting primarily of a decrease in the Company's receivable purchase line of
credit of $336,767. Net cash provided by financing activities in the 1997 period
was $621,541, which 

                                       10

<PAGE>   11


consisted primarily of an increase in the Company's receivable purchase line of 
credit of $704,519.

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 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. 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.

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.

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 agreement for a new corporate
headquarters and production facility in Palmer Township, Pennsylvania,
commencing in June 1998 at an annual rent of approximately $267,000 during the
first year, $275,000 during the second year, with a three percent (3%) escalator
per year thereafter, plus taxes and operating expenses. This rent, plus
anticipated moving expenses, constitutes a 

                                       11

<PAGE>   12

significant increase over the Company's current occupancy cost. In addition, the
Company has committed to pay approximately $340,000 related to building 
improvements at this site during 1998. If the Company is unable to generate 
sufficient funds from operations to finance these additional costs, the Company 
will require additional debt or equity financing. In addition, the lease 
agreement, as amended, provides that the Company must purchase the leased 
premises plus adjoining space and a building comprising a total of approximately
96,000 square feet and 7.5 acres of land during the sixth year after the Company
takes possession of the leased premises for $3,800,000. The Company plans to 
pursue mortgage financing for this purchase. The Company is currently in the 
process of renegotiating this lease; no assurance, however, can be given as to 
the eventual outcome.

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 is June 30, 1998,
and the Company's lease for the premises expires that same date. The Company
entered into this agreement to ensure that production continues uninterrupted
because it is not clear that the Company will be able to occupy its new
Corporate facility when the lease for its current facility expires June 30,
1998.

GOING CONCERN
During the first quarter 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 quarter of 1998 as compared to the first
quarter of 1997 and expects to report a loss in 1998. In response, the Company
has undertaken cost reductions, including personnel, and is negotiating with its
existing lender and potential lender(s) for an increased debt facility. No
assurance can be given that the Company will be successful in securing this
increased debt facility. 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.

In the month of April 1998, the Company generated revenues totaling
approximately $1,050,000 in part due to the sale of non-current inventory at its
own retail stores at reduced margins. The Company plans to pursue different
avenues to sell existing non-current inventory in order to generate additional
cash. The Company anticipates a significant decline in wholesale sales in the
second quarter of 1998 during its Summer selling season and reduced margins
throughout 1998 as cash flow is generated through the sale of excess
merchandise. No assurance can be given that the Company will be 

                                       12

<PAGE>   13

successful in this non-current inventory sales effort, or in otherwise 
addressing the Company's cash flow deficiencies.

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.





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<PAGE>   14


                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         Not applicable


ITEM 2.  CHANGES IN SECURITIES

         Not applicable


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable


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

         Not applicable


ITEM 5.  OTHER INFORMATION

         Not applicable


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  EXHIBITS
         10.40       Agreement of Sale dated as of April 16, 1998 by and among
                     Richard D. Krause, William P. Krause and the Registrant for
                     the premises at 3 Sixth Street, Frenchtown, New Jersey.

         27          Financial Data Schedule

    (b)  REPORTS ON FORM 8-K
         On March 27, 1998, the Company  announced that Marc Wallach, President,
         Chief Executive Officer and a Director of the Company had  resigned to 
         pursue other  interests  and that Jeffrey L. Haims had been appointed 
         as Acting Chief Executive Officer.


                                       14

<PAGE>   15


                                   SIGNATURES


         Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Frenchtown in the
State of New Jersey on May 20, 1998.


                                              BLUE FISH CLOTHING, INC.
                                              (Registrant)





DATE: May 20, 1998                            /s/ Jeffrey L. Haims
                                              --------------------
                                              Jeffrey L. Haims
                                              Acting Chief Executive Officer





DATE: May 20, 1998                            /s/ Richard E. Swarttz
                                              ----------------------
                                              Richard E. Swarttz
                                              Chief Financial Officer and
                                              Treasurer





                                       15