<PAGE>


                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
         OF 1934 
         For the fiscal year ended December 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: 333-22895

                    ---------------------------------------

                                 BLUEFLY, INC.
                 (Name of small business issuer in its charter)

           New York                                     13-3612110
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

   42 West 39th Street, New York, NY                      10018
(Address of principal executive offices)                (Zip Code)

                   Issuer's telephone number: (212)-944-8000

                    ---------------------------------------

Securities registered under Section 12(b) of the Exchange Act:   None

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.01 par value
                   Redeemable Common Stock Purchase Warrants

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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]

The issuer's gross revenues for its most recent fiscal year were:  $324,000

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 26, 1999 based upon the last sale price of such
equity reported on the National Associated of Securities Dealers Automated
Quotation SmallCap Market was approximately $45,618,085.

As of March 26, 1999, the issuer had outstanding 4,848,831 of shares of Common
Stock, $.01 par value.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]


<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

Bluefly, Inc. (the "Company" or "Bluefly"), a leading Internet retailer of
designer fashions at outlet store prices, opened its virtual doors to the
public on September 8, 1998. In its first four months of operations, sales
volume, membership and traffic to the Company's Web site, Bluefly.com, grew
significantly. The Company saw its monthly orders shipped increase by over
2,700% to a total of 2,733 orders shipped in the month of December 1998 from a
total of 96 orders in the month of September 1998. During this same period,
monthly traffic to the Web site grew by 2,200% to approximately 664,000 unique
visitors from approximately 28,000, and the total number of registered users
grew by 1,556% to 26,048 at the end of December from 1,573 at the end of
September.

The Company's growth has continued in the first quarter of 1999. As of March
30, 1999 the total number of registered users was approximately 48,000.
Although the first quarter is traditionally a significantly weaker retail
shopping period, traffic to the Web site held nearly constant in the month of
January at approximately 624,000 unique users and then reached higher levels in
February when approximately 702,000 unique users visited the Web site. The
Company is also encouraged by a preliminary estimate of its first quarter 1999
gross sales (prior to provisions for returns and credit card chargebacks) which
it expects to be at least 30% higher than its fourth quarter 1998 gross sales
of $324,000 (prior to provisions for returns and credit card chargebacks).
Because apparel sales in the first quarter are traditionally much weaker than
the fourth quarter, which spans the holiday season, the Company is very pleased
with these early results. Of course, there can be no assurance that actual net
sales will not be substantially lower or that these trends will continue.

In addition to its sales, membership and traffic growth, the Company believes
that an important measure of success on the Internet is the amount of time
customers are spending in the virtual store and the average number of pages
viewed during a user's session. For the month of February, the average visitor
was spending over 11 minutes in the store and viewing over 12 pages of content.
The Company believes that these statistics are significant not only because of
the Web site's limited period of operations but also in view of its
proprietary, sophisticated search functionality which allows customers to
determine quickly whether desired products are available in their sizes. The
Company has recently seen signs of growth in average minutes spent on the Web
site which it attributes, at least in part, to the expansion of its product
offerings. During the first three weeks of March, the average visitor stayed at
the online store for 14 minutes and viewed 14 pages of content. Of course, no
assurance can be given that these signs of growth will continue to improve or
that they will have a positive effect on the Company's business.

The Company believes that in its first seven months of operations Bluefly.com
has become a leader on the Internet for name brand off-price apparel and
fashion accessories. The Web site now offers approximately 3,400 styles of
products from over 90 different top, name brand designers. The Company has
entered into strategic marketing relationships which provides it with highly
targeted, prominent positioning on seven of the top twelve most visited Web
sites or portals (i.e. America Online, Excite, Go Network, Lycos, Netcenter,
Tripod and Yahoo!), and has been featured in numerous national publications and
several television reports.

While the Company is encouraged by its early results for Bluefly.com, it fully
recognizes that significant challenges lie ahead. Among the challenges the
Company will face in the coming months and years are raising additional capital
to finance its operations, hiring and retaining qualified personnel,
maintaining and developing its technological operations, expanding its
marketing efforts in a cost effective manner, improving its fulfillment and
customer service operations, managing potential growth, establishing its
control policies to reduce its potential exposure to fraudulent orders, and
expanding its existing base of suppliers. Moreover, it is aware that given
Bluefly.com's brief operating history, the start-up nature of the Internet
business and the Company's lack of experience in this business, its results of
operations must be viewed in context. See "Risk Factors"

Bluefly, Inc., a New York corporation, was incorporated under the laws of the
State of New York in 1991 as Pivot Corporation and in 1994 the Company changed
its name to Pivot Rules, Inc. and in 1998 changed its name to Bluefly, Inc.
Until June 1998, the Company designed, sourced and marketed a full collection
of golf sportswear for men under the Pivot Rules brand name. In June 1998, the
Company determined to discontinue the operations of its golf sportswear
division and devote all of the Company's energy and resources to building
Bluefly.com.


                                       2
<PAGE>



THE SIZE OF THE MARKET

THE ONLINE APPAREL OPPORTUNITY

The dramatic growth of e-commerce has been widely reported and is expected to
continue. This year Jupiter Communications ("Jupiter"), a leading Internet
research firm, is forecasting total online sales in the United States of $11.9
billion, up from $707 million in 1996. Jupiter is also predicting a dramatic
growth in the total number of online shoppers from 16 million in 1998 to over
60 million by 2002 as well as a substantial increase in the average amount
spent by an online shopper from $376 in 1998 to $671 in 2002. As a consequence,
Jupiter projects that online sales in the United States will reach $41.1
billion by 2002. The Company believes that a number of factors will contribute
to the growth of e-commerce, including (i) shoppers' growing familiarity and
comfort with shopping online; (ii) the proliferation of devices to access the
Internet, and (iii) technological advances that make navigating the Internet
faster and easier.

While online clothing and accessory purchases accounted for $103 million in
1997, Jupiter is forecasting that this figure will grow to $641 million in 1999
and $2.8 billion in 2002. This represents a compounded annual growth rate in
excess of 94%. The Company believes that the market for online sales of apparel
is benefiting disproportionately from a confluence of trends, including the
growth of women online, expansion of online traffic from technology oriented
users to users with mainstream demographics and the development of
sophisticated tools (such as the Company's MyCatalog) to search complex product
categories such as apparel.

In 1998, according to Jupiter, women comprised 39% of the online population.
According to Jupiter, by 2000, it is expected that women will represent 46% of
the online population. Since women, according to Jupiter, spend almost three
times as much as men on the remote purchase of apparel, the Company believes
that the increasing number of women online is likely to fuel the growth of
online apparel sales. In addition, as the online audience expands from
technology savvy pioneers to include mainstream consumers, demand for online
goods and services should more closely mimic the general population's demands.
In light of these factors, Jupiter projects that the apparel category will be
one of the fastest growing product categories online between 1998 and 2002. Of
course, there can be no assurance that such expectations will prove to be
correct or that they will have a positive effect on the Company's business.

CATALOG SALES AS A PREDICTOR OF FUTURE GROWTH

In many respects, shopping for apparel online is similar to purchasing apparel
through a print catalog. In both cases, the tactile experience is absent from
the transaction and shoppers must make purchase decisions on the basis of a
photograph and a textual description. While the Company believes that
sophisticated database technology, collaborative filtering, and the
interactivity of the Web make the Internet a far more compelling medium, it
also believes that the success of apparel sales via catalogs is a good
predictor of the future success of apparel sales via the Internet.

In this regard, it is worth noting that, according to a 1997 report by the
Direct Marketing Association, apparel and accessories was the largest product
category sold via catalogs and represented approximately $16 billion, or 34%,
of the industry's $48 billion of consumer sales. Brands such as J.Crew and
Land's End are perhaps the best evidence that people are prepared to purchase
clothing and accessories remotely despite the fact that no catalog can convey
the tactile element of clothing or provide a fitting room in which consumers
can try on clothing. In fact, nearly 23% of all adults in the United States
made at least one clothing purchase in 1995 through remote channels according
to Simmons Market Research.

In contrast, the direct-to-consumer book category, which has shown early
promise on the Internet, represents a market approximately one fifth of the
size of the direct-to-consumer apparel market. In 1996, the direct marketing of
books accounted for $2.75 billion of sales according to Maxwell Sroge Company.
The Company therefore believes that it is competing in a market which is
substantially larger than the one in which Amazon.com began. Of course,
differences in markets and products make comparisons difficult.

THE MARKET FOR OFF-PRICE APPAREL

According to Discount Store News, traditional retailers of off-price apparel
such as T.J. Maxx, Marshalls and Loehmanns, Inc. sold approximately $18.5
billion dollars worth of goods in 1997. In addition, the International Council
of Shopping Centers reported that factory outlet sales of apparel and
accessories equaled $8.3 billion dollars in 1997. The Company believes that
this $26.8 billion dollar market has generally failed to address a number of
consumer needs, including convenience and customer service. The Company
believes that this industry has grown, in part, because no better alternative
exists.


                                       3
<PAGE>


By offering competitively priced products in a more convenient format with a
high level of customer service, the Company intends to provide a meaningful
alternative to the consumer and revolutionize the off-price apparel industry.
By offering name brand products at significant discounts, a 90 day money back
guarantee, a high level of service and the convenience of 24/7 shopping, the
Company believes that it can provide an attractive alternative for consumers to
shop for apparel and fashion accessories.

THE BLUEFLY STRATEGY

The Company's objective is to become the preeminent Internet retailer of excess
and end-of-season apparel, fashion accessories, and home products. To achieve
this objective, the Company has focused its resources on pioneering the
direct-to-consumer name brand discount apparel market on the Internet. To date,
the Company is not aware of any business which has devoted substantial time and
resources to developing and promoting the direct-to-consumer market for
off-price name brand apparel and accessories. This could be because, until
recently, no medium existed that could accommodate both a high volume of
traffic and the logistical infrastructure necessary to sell end-of-season and
excess apparel inventory directly to customers in an efficient and economical
manner.

The direct marketing of excess inventory and end-of-season apparel requires a
cost effective medium that is capable of displaying a large number of products,
many of which are in limited supply and some of which are neither available in
all sizes nor easily replenished. The Company believes print catalogs are not
well suited to this task. The paper, printing, mailing, and other production
costs of a print catalog can be significant. To support these costs, a
traditional cataloger requires products that are replenishable, available in a
full range of sizes and in substantial quantities. Similarly, television is a
costly medium which requires substantial quantities of products that are
available in a full size scale in order for it to be an economical medium. In
addition, the number of items that can be displayed on television is limited,
and television cannot permit the viewer to search for products which interest
them.

The Internet, however, is a far less expensive and, in many ways, more
effective medium. Utilizing the Internet, the Company can display an almost
limitless number of items to a global audience without the high costs of
printing and mailing. With the Internet, the Company can automatically update
product images as new products arrive and other items sellout. By integrating a
sophisticated relational database with the power of the Internet, the Company
seeks to create a personalized shopping environment and allows its customers to
search for the products that interest them. Accordingly, the Company believes
that the Internet is a medium which will permit it to market its products
globally in a cost-effective manner.

MARKETING INITIATIVES

The Company believes that the Internet represents one of this century's most
significant new channels for commerce and presents the opportunity for
significant new brands to emerge. When the catalog industry emerged, it was a
new breed of merchants, such as J.Crew, Lands' End, and Victoria's Secret,
which succeeded at building the major new brands and not the traditional
retailers with their established infrastructures and proven economies of scale.
Similarly, when television became a new medium for shopping remotely, it was
new brands names, such as QVC and the Home Shopping Network, which emerged as
the dominant brands. The Company believes that the emergence of the Internet
provides similar opportunities. New, pure online brands such as Amazon, EBay,
CDNow have established early leads and the Company intends to seek to use its
first mover advantage to build a leading online brand in the off-price apparel
category.

In the first six months of the Web site's operations, the Company established
strategic marketing relationships with seven of the top twelve portals (i.e.
America Online, Excite, Go Network, Lycos, Netcenter, Tripod and Yahoo!). In
addition, the Company established a co-branded site with a leading broadband
portal, At Home Network. Under the terms of these agreements, the Company
receives highly targeted, prominent positioning on ten major Web sites,
including AOL.com, MailCity, and CompuServe. The Company believes that it has
been able to negotiate favorable rates and positioning on most of these Web
sites in part because the portals may have recognized that online consumers
will not be fully satisfied by the single brands offered by vertical retailers
such as Gap, Inc. J.Crew Group, Inc., Spiegel, Inc. (i.e. Eddie Bauer), and
Land's End, which have thus far dominated apparel sales in the online apparel
category's brief history. The Company believes that as an early leader in the
online multi-brand discounted apparel category, it has been able to leverage
its broad product offering, compelling value and distinctive shopping
experience for apparel to favorably position links to Bluefly.com on most of
the major portal Web sites. Because the Company believes that traffic to these
portals is increasing and thereby lowering the effective CPM rate (or cost per
thousand viewers rate) of the Company's fixed links, it also believes that the
value of the agreements it has negotiated is increasing.



                                       4
<PAGE>



In order to expand its customer base and establish its brand name, the Company
intends to expand its advertising and commerce relationships with the major Web
sites and develop an affiliate program. In addition, the Company plans to
conduct more promotions like the Company's "Hearts and Diamonds" Valentine's
Day contest in which users were asked to submit their best online pick-up line
that led to a relationship for a chance to win up to $18,000 worth of diamond
jewelry supplied by Hammerman Brothers, Inc. The Company also plans to launch
an e-mail notification option to alert customers to new products which match
their expressed interest. In addition, the Company is planning other customer
retention initiatives such as advising customers by e-mail of special sales
promotions and holiday gift ideas. The Company's marketing budget is subject to
a number of factors, including the Company's results of operations as well as
the Company's ability to raise additional capital. See "Financing Strategy" and
"Risk Factors -Limited Working Capital; Need for Additional Financing."

The Company has recently expanded its off-line advertising program. To coincide
with the launch of the Web site, and throughout the Fall 1998, the Company
placed full page advertisements in five major national publications, including
Business Week, Forbes and Yahoo! Internet Life. While the thrust of the
Company's 1998 print advertising campaign was to introduce the Company's new
business to the financial and technology community, the Company believes that
the campaign was also an effective tool in expanding its customer base. Based
on the success of the Company's Fall print advertising campaign, the Company
has decided to launch a national print advertising campaign in the second
quarter of 1999. The new campaign is expected to run in at least 17 major
national publications and will showcase the Company's first effort towards
building and a marketing a lifestyle brand.

MERCHANDISING

With over seven years' experience in the fashion industry, the Company is using
its industry relationships to establish an effective network of suppliers of
discount, name brand apparel and fashion accessories. The Company buys products
directly from manufacturers as well as from retailers and other third party
indirect resources. Presently, Bluefly.com offers approximately 3,400 styles of
products from over 90 different, top, name brand designers. And, unlike
traditional brick and mortar off-price retailers which must allocate their best
product over many stores which can lead to an inconsistent shopping experience,
customer dissatisfaction, and less than optimal inventory management, the
Company has but one virtual store to fill.

The Company believes that it offers the widest selection of name brand apparel
and fashion accessories at significant discounts to retail prices on the
Internet. The Company believes that even with its breadth of product offering
many visitors may not have found the product or size for which they were
looking. In the fourth quarter of 1998 and the first quarter of 1999, the
Company believes that its product assortment was depleted by better than
anticipated holiday sales. As a result, the Company believes that it has not
optimally converted its visitors to customers. However, the Company also
regarded Bluefly.com's first two quarters of operations primarily as an
opportunity to learn about its visitors' preferences and test which products
sell best on the Internet. Therefore, the Company regards its first two full
quarters of operations as a successful test and a meaningful provider of
information, which the Company believes should help grow revenues and traffic.

Armed with data from over 37,000 MyCatalogs, nearly seven months of purchase
data, and detailed information on the paths customers take in navigating
through the Company's virtual outlet store, the Company believes that it can
now acquire inventory more intelligently and efficiently than it could have
only a few months ago. While the Company knows that it will never be able to
satisfy all of its customers' needs all of the time, it is expanding its
offering of products from designers in which its customers have displayed an
interest and in the types of products which have been particularly successful.
In addition, it is continually testing new products to help fuel its sales
growth.

The Company is pleased by the number of supplier relationships it has been able
to establish, a fact which it attributes in part to its seven years' worth of
fashion industry experience. Based on its ability to find products thus far,
the Company does not foresee any major impediments in sourcing a wide variety
of name brand products. Between June 1998 and December 1998, the Company
acquired approximately 40.6% of its inventory from one supplier. In fact, the
off-price apparel industry is a $26 billion business in the United States alone
and therefore there is a considerable amount of product available in the
marketplace. However, no assurance can be given that the Company will be able
to obtain the quantity, selection or brand quality of items which the Company
believes is necessary to operate.

The Company takes title and delivery of its inventory prior to offering it
online because of the apparel industry's widespread practice to short ship
product and reallocate products after purchase orders are placed. This step is
taken to assure that customers' purchases are in-stock and available for
immediate shipment. Although several competitive online business models exist
which rely on suppliers to fill orders for Web stores, the Company believes
that its business model is superior. The Company's approach also significantly
increases the pool of potential suppliers since many major vendors will not
enter into a relationship with an online retailer if it obligates the vendor to
operate on a consignment basis or fulfill product directly. In several cases,
the Company has 


                                       5
<PAGE>

entered into, and will continue to enter into, consignment relationships with
certain of its suppliers where it is beneficial to the Company. The Company
does not anticipate that consignments will comprise a meaningful part of its
business in the near future.

For a number of reasons, the Company believes that its inventory risk is lower
than that of traditional retailers:

(i)      Unlike traditional brick and mortar retailers which have a limited
         amount of shelf space, significant rent payments and attendant sales
         personnel costs, the Company holds its inventory in a warehouse with a
         lower per square foot rental charge than that typically paid by brick
         and mortar retailers, minimal personnel costs and a vast amount of
         shelf space. It's inventory carrying costs are therefore lower.

(ii)     Unlike traditional brick and mortar retailers, the Company can change
         the pricing of its products almost instantaneously and can price
         products based on supply and demand. For example, if the Company has a
         relatively large amount of yellow men's polo shirts but few in the
         color blue, it can easily price the shirts differently and change the
         pricing quickly as supply levels change.

(iii)    The Internet is global and the Company sells to over 40 countries in
         the northern and southern hemisphere. In theory then, its inventory is
         never truly out of season and therefore seasonal markdowns should be
         less of an issue because as the northern hemisphere is entering its
         Summer the southern hemisphere is entering its Winter. In fact,
         although the Company has not targeted its marketing initiatives to
         attract foreign customers, in 1998 approximately 7% of its orders were
         from foreign countries.

(iv)     The Company has developed a system whereby it can receive a product
         into inventory and make it available for sale to the customer in as
         little as five business days. In contrast, many large, national
         off-price retail apparel chains have slow, cumbersome centralized
         distribution systems that result in merchandise taking up to four
         weeks to reach store shelves. In theory, the Company's inventory turn
         time can be much better.

(v)      The Company's Web site captures a tremendous amount of customer data
         that the Company intends to use to optimize its purchase of inventory.
         For example, as a customer navigates through the virtual store, the
         Company can track the customer's path and draw certain conclusions
         based on which departments, sizes, designers and product categories
         are clicked on as well as the products that are actually being
         purchased. This will significantly aid the Company in planning
         inventory purchases. In addition, the Company's MyCatalog feature also
         facilitates better inventory planning. Using this service, customers
         enter their sizes, favorite departments, product categories and
         designers to produce a personalized catalog of all the products
         currently in stock that match their interest. This wealth of customer
         data should in turn make for more informed, and therefore less risky
         inventory acquisitions.

(vi)     By centralizing its inventory, the Company believes it will be able to
         optimize its inventory turns because it is not forced to anticipate
         sales by region or allocate merchandise between multiple locations.

FULFILLMENT AND CUSTOMER SERVICE

The Company has entered into an exclusive agreement with a third party to
provide fulfillment and call center customer service. The third party was
selected for its technological sophistication, its online commerce experience,
its ability to integrate with the Company's information systems, and its
ability to scale rapidly if the Company's growth is significant. The Company
believes that despite its better than expected growth rates, it has been able
to ship over 85% of its orders within one business day of receipt and that it
has done very well in keeping to its promise to ship all orders within two
business days of their receipt. The Company also believes that its ability to
maintain long-term customer relationships, encourage repeat visits and increase
the average order size will depend, in part, on the customer service it
provides. The Company is committed to handling all customer service calls
quickly and efficiently. Its emphasis on providing quality customer service
reflects an effort to distinguish itself further from its off-line competitors
and advances its efforts to establish itself as the premier place to shop for
name brand apparel and fashion accessories at significant discounts to retail
prices. See "Risk Factors - Dependence on Third Parties and Certain
Relationships."

TECHNOLOGY

The Company has implemented a broad array of state-of-the-art technology that
facilitates Web site management, complex database search functionality,
customer interaction and personalization, transaction processing, fulfillment
and customer service functionality. Such technology includes a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, the
Company incorporates, for transmission of confidential personal information
between customers and the Company's Web server, Secure Socket Layer Technology
("SSL") such that all data is transmitted via a fully DES 128-bit encrypted
session. In the event that a customer's browser does not support SSL,
Bluefly.com instructs the customer to call the Company's Customer Service
Center to provide his or her credit card information over the phone.



                                       6
<PAGE>

The Company has entered into a definitive agreement with a major Internet
service provider to host Bluefly.com and provide certain hardware and software
as well as year round 24 hour systems support. The server and network
architecture is designed to provide high speed, reliable access 24 hours a day,
365 days a year and allow for rapid scaling of hardware and bandwidth to
accommodate sudden increases in site traffic.

COMPETITION

Electronic commerce generally, and, in particular, the online retail apparel
and fashion accessories market, is a new, dynamic, high growth market. To date,
the Company is not aware of any business which has devoted substantial time and
resources to developing and promoting the direct-to-consumer market for
off-price name brand apparel and accessories. This could be because, until
recently, no medium existed that could accommodate both a high volume of
traffic and the logistical infrastructure necessary to sell end-of-season and
excess apparel inventory directly to customers in an efficient and economical
manner.

The direct marketing of excess inventory and end-of-season apparel requires a
cost effective medium that is capable of displaying a large number of products,
many of which are in limited supply and some of which are not available in all
sizes or easily re-stocked. Print catalogs are not well suited to this task.
The paper, printing, mailing, and other production costs of a print catalog can
be significant. To support these costs, a traditional cataloger requires
products that are available in a full range of sizes, in substantial quantities
and replenishable from the vendor. Similarly, television is a costly medium
which requires substantial quantities of products that are available in a full
size scale in order for it to be an economical medium.

The Internet, however, is a far less expensive and, in many ways, more
effective medium. Utilizing the Internet, the Company can display an almost
limitless number of items without the high costs of printing and mailing. With
the Internet, the Company can automatically update product images as new
products arrive and other items sellout. By integrating a sophisticated
relational database with the power of the Internet, the Company can create a
personalized shopping environment and allow its customers to search for the
products that interest them. Accordingly, the Company believes that the
Internet is a medium which will permit it to market its products in a
cost-effective manner.

The Company's competition for online customers comes from a variety of sources
including, existing land-based retailers such as The Gap, Nordstrom, and Macy's
which are using the Internet to expand their channels of distribution and less
established companies such as Cybershop, Inc. and Designeroutlet.com which are
building their brands online. In addition, the Company's competition for
customers comes from traditional direct marketers such as Delia's, L.L. Bean, ,
Lands' End, J.Crew and Spiegel's, television direct marketers such as QVC, and
land-based off price retail stores, such as T.J. Maxx, Marshalls, and
Loehmanns, which may or may not use the Internet to grow their customer base.

The Company believes that any competitor which seeks to establish an electronic
commerce presence in the apparel and fashion accessory industry will confront a
number of challenges including, cost effectively addressing, among other
things, the need to incorporate legacy information and financial systems,
establish an efficient supply and logistics systems, develop and maintain a
user-friendly customer interface, create or adapt a brand name for Internet
commerce and exploit the technologies and opportunities made possible by the
Internet to create innovative new retailing services and features. The Company
believes that its ability to compete favorably is enhanced by its first mover
advantage as well as its knowledge of fashion trends, relationships with key
industry figures, in-house marketing talent, proprietary technology, and
sophisticated logistics and supply management systems. However, many
competitors have substantially more resources than the Company and there can be
no assurance that additional and formidable competition will not develop.

FINANCING STRATEGY

In December 1998 and in the first quarter of 1999, the Company raised a total
of $11,018,000 through the exercise of warrants and underwriter's unit purchase
options issued in connection with the Company's May, 1997 Initial Public
Offering. In order to achieve its objective of becoming the preeminent Internet
retailer of excess and end-of-season apparel, fashion accessories, and home
products, the Company will need to raise more capital. To this end, the Company
is currently meeting with a number of potential financing sources to determine
the most prudent financing strategy. As of March 30, 1999, the Company had a
total of $10,700,000 of cash and cash equivalents and funds deposited with its
factor.

INTELLECTUAL PROPERTY

The Company has created and intends to continue to develop trademarks, designs
and proprietary systems and trade secrets to create competitive advantages. As
a result, it relies on a combination of trademark, service mark, copyright and
trade secret laws, as


                                       7
<PAGE>

well as confidentiality agreements and technical measures to protect its
proprietary rights. The Company is pursuing the registration of the "Bluefly",
"The Outlet Store in Your Home", and "MyCatalog" service marks in the United
States and abroad and is considering the possibility of patenting its MyCatalog
proprietary technology.

The Company believes its service marks are uniquely valuable and critical to
the Company's brand strategy. To that end, the Company intends to vigorously
defend its rights to its service marks and in this regard has commenced
lawsuits against Fashionmall.com, Inc. in the U.S. District Court of the
Southern District of the State of New York and SaviShopper, Inc. in the U.S.
District Court of the Western District of Washington, Northern Division of
Seattle and their affiliates for their alleged infringement of the Bluefly
mark.

RESEARCH AND DEVELOPMENT

The Company incurred research and development costs of $347,000 in 1998
primarily relating to the design, development and construction of the Company's
Web site. The Company anticipates that it will incur additional research and
development costs in the future in its effort to improve its Web site and
become the dominant Internet retailer of excess and end-of-season apparel,
fashion accessories and home products.

GOVERNMENTAL APPROVALS AND REGULATIONS

The Company is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to online commerce.
Although the Company is not aware of any permits or licenses that are required
in order for it to sell apparel and fashion accessories on the Internet,
permits or licenses may be required from federal, state or local governmental
authorities to operate or to sell certain other products on the Internet. No
assurances can be given that such permits or licenses will be obtainable. The
Company may be required to comply with future national and/or international
legislation and statutes regarding conducting commerce on the Internet in all
or specific countries throughout the world. No assurance can be made that the
Company will be able to comply with such legislation or statutes. The Company's
Internet operations are not currently impacted by federal, state, local and
foreign environmental protection laws and regulations.

EMPLOYEES

As of March 24, 1999, the Company had 27 full-time employees and two part-time
employees, of whom eight are in management, nine are on the production team,
three are on the web site development team, three are on the buying team and
the remaining six employees work in the finance, public relations, and
marketing departments. None of the Company's employees is represented by a
labor union and the Company considers its relations with its employees to be
good.

RISK FACTORS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Annual Report contains
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue", "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties that may cause actual results to differ materially from the
forward-looking statements ("Cautionary Statements"). The risks and
uncertainties include, but are not limited to those matters addressed herein
under "Risk Factors." All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on the Company's
behalf are expressly qualified in their entirety by the Cautionary Statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

LACK OF OPERATING HISTORY OF INTERNET BUSINESS. The Company initiated the
planning of Bluefly.com in March 1998 and launched Bluefly.com on September 8,
1998. Accordingly, it has less than one year of operating history upon which to
base an evaluation of its Internet business and prospects.

START-UP RISKS. The Company has incurred and expects to continue to incur
significant expenditures in connection with the establishment, expansion and
maintenance of Bluefly.com. These expenses include advertising and marketing
expenses which are necessary to attract a high volume of traffic to
Bluefly.com, research and development costs and other infrastructure costs.

                                       8
<PAGE>

LIMITED WORKING CAPITAL; NEED FOR ADDITIONAL FINANCING. The Company's business
is capital intensive. The Company needs additional financing to effect its
business plan. See "Management's Discussion and Analysis or Plan of Operations
- Plan of Operations."

RECENT LOSSES; ANTICIPATED FUTURE LOSSES. The Company incurred a net loss from
continuing operations of $2,478,000 in 1998 and a net loss from continuing
operations of approximately $469,000 in 1997. The Company anticipates that
losses will continue for the foreseeable future as it incurs and expends
substantial amounts on the development, marketing, advertising and operations
of Bluefly.com to build recognition and market share.

COMPETITION. Electronic commerce generally and the online retail apparel and
fashion accessories market are new, rapidly changing and intensely competitive.
See "Competition."

RISK OF LITIGATION. The Company has taken steps to insure that it sells only
authentic, high quality name brand products and to avoid selling any
counterfeit or damaged goods. While the Company believes that its procedures
are effective, the possibility for error exists and therefore it faces
potential liability for the sale of unauthentic or damaged goods.

DEPENDENCE ON THIRD PARTIES AND CERTAIN RELATIONSHIPS. The Company will be
heavily dependent upon its relationships with its fulfillment and call center
customer service operations as well as delivery companies like United Parcel
Service of America, Inc. to service its customers needs. The Company's business
is also generally dependent upon its ability to obtain the services of
programmers and Web site designers and other persons and entities necessary for
the development and maintenance of Bluefly.com. The Company is presently
negotiating with its fulfillment center to renew its contract which is set to
expire on July 15, 1999. The failure of the Company to obtain the services of
any person or entity upon which it is dependent, including in particular its
fulfillment center, on satisfactory terms, or the inability to replace such
relationship would have a material adverse impact on the Company's business
prospects, financial condition and results of operations.

AVAILABILITY OF MERCHANDISE. Although the Company believes it can establish
relationships with vendors which will offer competitive sources of name brand
apparel and fashion accessories for Bluefly.com, there can be no assurance that
it will be able to obtain the quantity, selection or brand quality of items
which the Company believes is necessary to operate. See "Merchandising."

UNCERTAIN ACCEPTANCE OF BRAND. The Company believes that establishing,
maintaining and enhancing its brand is a critical aspect of its efforts to
attract and expand its online traffic. Promotion of Bluefly.com will depend
largely on the Company's success in providing a high-quality online experience
supported by a high level of customer service, which cannot be assured.
Establishing brand recognition will also require significant advertising and
marketing expenditures.

The Company's future success, and in particular its revenues and operating
results, depend upon its ability to successfully execute several key aspects of
its business plan. The Company must continually increase the dollar volume of
transactions booked through Bluefly.com, either by generating significantly
higher and continuously increasing levels of traffic to Bluefly.com or by
increasing the percentage of visitors to its online sites who purchase
products, or through some combination thereof. The Company must also achieve a
high level of repeat purchasers. In addition, the Company must deliver a high
level of customer service and compelling content. Although the Company has
established relationships with portal companies such as, America Online, At
Home Networks, Go Network, Lycos, and Yahoo!, there can be no assurance that
these relationships can be maintained.

RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM DEVELOPMENT RISKS. A key
element of the Company's strategy is to generate a high volume of traffic on,
and use of, Bluefly.com. Accordingly, the satisfactory performance, reliability
and availability of Bluefly.com and its transaction-processing systems and
network infrastructure are critical to the Company's reputation and its ability
to attract and retain customers.

INFRASTRUCTURE NECESSARY TO SUPPORT EXPLOSIVE GROWTH OF INTERNET. The Internet
and other online services may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet and other online services continue to experience significant growth in
their number of users, their frequency of use or an increase in their bandwidth
requirements, there can be no assurance that the infrastructure for the
Internet and other online services will be able to support the demands placed
upon them. In addition, the Internet or other online services could lose their
viability due to delays in the development or adoption of new standards and
protocols required to


                                       9
<PAGE>

handle increased levels of Internet or other online service activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and Bluefly.com in particular.

RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must continue to
enhance and improve the responsiveness, functionality and features of
Bluefly.com. The online commerce industry is characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies, and the emergence of new industry standards and practices.

DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE. The Company's future
revenues and any future profits will be dependent upon the widespread
acceptance and use of the Internet and other online services as an effective
medium of commerce by consumers.

UNCERTAINTIES IN APPAREL MARKET; UNEXPECTED CHANGES IN FASHION TRENDS. The
apparel industry historically has been subject to substantial cyclical
variations. The Company and other apparel vendors rely on the expenditure of
discretionary income for most, if not all, sales. Any downturn, whether real or
perceived, in economic conditions or prospects could adversely affect consumer
spending habits and the Company's business, financial condition and operating
results. Fashion trends can change rapidly, and the Company's business is
sensitive to such changes. There can be no assurance that the Company will
accurately anticipate shifts in fashion trends and adjust its merchandise mix
to appeal to changing consumer tastes in a timely manner. If the Company
misjudges the market for its products or is unsuccessful in responding to
changes in fashion trends or in market demand, it could experience insufficient
or excess inventory levels or higher markdowns, either of which would have a
material adverse effect on its business, financial condition and results of
operations.

RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS. The Company may choose to
expand its operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding its market presence through
relationships with third parties, adopting non-Internet based channels for
distributing its products, or consummating acquisitions or investments.
Expansion of the Company's operations in this manner would require significant
additional expenses and development, operations and editorial resources and
would strain the Company's management, financial and operational resources.
There can be no assurance that the Company would be able to expand its efforts
and operations in a cost-effective or timely manner or that any such efforts
would increase overall market acceptance. Furthermore, any new business or Web
site (including Bluefly.com) that is not favorably received by consumer or
trade customers could damage the Company's reputation.

RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS. International sales
are subject to inherent risks, including: unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, price controls, or other
restrictions on foreign currency and difficulties in obtaining export and
import licenses. To the extent the Company develops significant revenues from
international sales, gains and losses on the conversion of foreign payments
into U.S. dollars may contribute to fluctuations in the Company's results of
operations and fluctuating exchange rates could cause reduced gross revenues
and/or gross margins from dollar-denominated international sales.

SEASONALITY AND QUARTERLY FLUCTUATIONS; COST OF RETURNS. The Company expects
that its Internet business will be subject to seasonal fluctuations affecting
apparel vendors generally as well as to the slowdown of Internet usage during
the summer months. The Company recognizes that remote purchases of apparel and
fashion accessories may be subject to higher return rates than traditional
store bought merchandise. The Company has established a liberal return policy
in order to accommodate its customers and overcome any hesitancy they may have
with remote purchasing. If return rates are higher than expected, the Company's
business, prospects, financial condition and results of operations could be
materially adversely affected.

DEPENDENCE ON KEY PERSONNEL. The Company believes its success will depend to a
significant extent on the efforts and abilities of its Executive Officers. The
Company has entered into employment agreements with Mr. Seiff, Mr. Barry, and
Mr. Morris which expire on January 1, 2000, July 13, 2002 and July 31, 2002,
respectively. The Company maintains a $1.2 million key person life insurance
policy on the life of Mr. Seiff. The Company's operations will also depend to a
great extent on its ability to attract new key personnel with Internet
experience and retain existing key personnel in the future. The market for
personnel with Internet experience is extremely competitive.

                                      10
<PAGE>

ITEM 2.  PROPERTIES

The Company leases 9,000 square feet of office space in New York City. The
property is in good operating condition. The lease expires in May 2008. The
Company's total lease payments for 1999 will be approximately $81,000. The
Company is currently negotiating an amendment to its existing lease to add
approximately 8,000 square feet of office space in the same building.

ITEM 3.  LEGAL PROCEEDINGS

None.

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

None.

                                      11
<PAGE>


                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock, par value $.01 per share ("Common Stock") is quoted
on The Nasdaq SmallCap Market. Until January 21, 1999, the Company's Redeemable
Common Stock Purchase Warrants ("Warrants") were also quoted on The Nasdaq
SmallCap Market. On December 21, 1998, the Company elected to redeem the
Warrants by providing the 30-day written notice required. As of December 31,
1998 573,250 of such Warrants had been exercised and in the first quarter of
1999, 1,412,374 additional Warrants were exercised. In total, as of March 26,
1999, 1,985,624 or 99.3% of the total number of issued Warrants had been
exercised.

The following table sets forth the range of high and low bid price information
for the Common Stock based on quotations from the Nasdaq SmallCap Market for
the periods indicated:

         FISCAL 1997                     HIGH              LOW
         -----------                     ----              ---
         Third Quarter                  $3 1/8            $1 7/8
         Fourth Quarter                 $2 1/4            $1 1/2

         FISCAL 1998                     HIGH              LOW
         -----------                     ----              ---
         First Quarter                   $2.13            $1.94
         Second Quarter                  $6.59            $1.50
         Third Quarter                   $4.67            $1.94
         Fourth Quarter                 $24.19            $2.00

As of March 26, 1999, there were approximately 64 record holders of the Common
Stock. The Company believes there were substantially in excess of 300
beneficial holders of the Common Stock as of such date.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

OVERVIEW

On September 8, 1998, the Company publicly launched Bluefly.com, an Internet
retail store ("Bluefly.com") that sells a wide array of men's, women's and
children's name brand apparel and accessories at 25 to 75% off of retail
prices. The e-commerce store also provides information on current trends and
other fashion related content. This online outlet store is designed to combine
the best traditional retailing practices with innovative and convenient
features made possible by the Internet. Bluefly's objective is to become the
preeminent Internet retailer of excess end-of-season apparel, fashion
accessories and home products. To date, the Company is not aware of any
business which has devoted substantial time and resources to developing and
promoting the direct-to-consumer market for off-price name brand apparel and
accessories. This could be because, until recently, no medium existed that
could accommodate both a high volume of traffic and the logistical
infrastructure necessary to sell end-of-season and excess apparel inventory
directly to customers in an efficient and economical manner.

The Company believes that Bluefly.com differentiates itself from traditional
brick and mortar off-price retailers by providing what it believes is a higher
level of service, convenience and merchandising. The key strategies which
Bluefly.com is employing in its effort to offer this compelling and enjoyable
online shopping experience, include:

1. offering a broad and well merchandised selection of name brand
   products,
2. significant discounts to retail prices,
3. an intuitive shopping experience,
4. friendly and available customer service,
5. a graphically rich and pleasing environment,
6. a liberal return policy, and
7. Sophisticated search technology features which allow customers to
   locate quickly the items which interest them.





                                      12
<PAGE>



In its first four months of operations, sales volume, membership and traffic to
the Company's Web site, Bluefly.com, grew significantly. The Company saw its
monthly orders shipped increase by over 2,700% to a total of 2,733 orders
shipped in the month of December 1998 from a total of 96 orders in the month of
September 1998. During this same period, monthly traffic to the Web site grew
by 2,200% to approximately 664,000 unique visitors from approximately 28,000,
and the total number of registered users grew by 1,556% to 26,048 at the end of
December from 1,573 at the end of September.

The Company's growth has continued in the first quarter of 1999. As of March
30, 1999 the total number of registered users was approximately 48,000.
Although the first quarter is traditionally a significantly weaker retail
shopping period, traffic to the Web site held nearly constant in the month of
January at approximately 624,000 unique users and then reached higher levels in
February when approximately 702,000 unique users visited the Web site. The
Company is also encouraged by a estimate analysis of its first quarter 1999
gross sales (prior to provisions for returns and credit card chargebacks) which
it expects to be at least 30% higher than its fourth quarter 1998 gross sales
of $324,000 (prior to provisions for returns and credit card chargebacks).
Because sales in the first quarter are traditionally much weaker than the
fourth quarter, which spans the holiday season, the Company is very pleased
with these early results. Of course, there can be no assurance that these
trends will continue.

The Company believes that in its first seven months of operations, Bluefly.com
has become a leader on the Internet for name brand off-price apparel and
fashion accessories. The Web site now offers approximately 3,400 styles of
products from over 90 different top, name brand designers. The Company has
entered into strategic marketing relationships which provides it with a highly
targeted, prominent position on seven of the top twelve most visited Web sites
or portals (i.e. America Online, Excite, Go Network, Lycos, Netcenter, Tripod
and Yahoo!), and has been featured in numerous national publications and
several television reports.

In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and devote all of the Company's energy and resources to
building Bluefly.com. Until September 1998, the Company designed, sourced and
marketed a full collection of golf sportswear for men under the Pivot Rules
brand name.

The Company has restated its financial statements in order to reflect the
discontinued operations in accordance with generally accepted accounting
principles. Although the start-up phase of Bluefly.com did not begin until
April 1998 and the site was not launched until September 8, 1998, in
accordance with generally accepted accounting principles, the Company reflected
in continuing operations for 1997 (i) general and administrative expenses, (ii)
interest income, and (iii) related tax provisions, all of which relate to
on-going corporate expenses. Accordingly, net losses from continuing operations
in 1997, attributable to those aspects of the business which have continued
were $469,000, net of income tax benefits of $227,000.

RESULTS OF OPERATIONS

RESULTS FOR CONTINUING OPERATIONS

NET SALES: On September 8, 1998, the Company commenced commercial operations of
Bluefly.com. The results from continuing operations include four months of
operations of the Company's web site Bluefly.com. During the four month period
over one million unique user sessions were initiated with the Company's Web
site, resulting in the placement of 5,134 gross orders in 1998, of which 3,878
orders were processed and shipped to consumers resulting in $324,000 of gross
sales. The Company recorded a provision for returns and credit card chargebacks
of $81,000 or approximately 25% of gross sales. The reserve allowance is based
on actual experience to-date and takes into account the Company's 90-day return
policy, but may vary over time. After the necessary provisions for returns and
credit card chargebacks, the Company's net sales for 1998 were $243,000.

The noticeable discrepancy between the number of orders placed and the number
of orders shipped was a direct result of the Company's desire to screen out
those orders which were not authorized by the holder of credit card used to
place the order. In canceling over 24% of the orders, the Company inevitably
canceled many legitimate orders. However given the general concerns about
credit card security and commerce over the Internet, the Company believes that
its decision to err on the side of turning away legitimate orders in the
interest of reducing incidences of credit card fraud was prudent. In February
1999, the Company signed a licensing agreement with a third party service
provider to obtain real time credit card authorization and fraud screening. The
Company is working to implement this software in the near future. The Company
believes that with the use of this licensed software and process and the
knowledge gained in the first several months of operations, fewer legitimate
orders will be canceled and more fraudulent transactions will be canceled
before shipment. Of course, there can be no assurance that these steps will be
effective.

COST OF SALES: During the start-up phase of Bluefly.com, the Company prepaid
for a significant amount of inventory in an effort to get the product into
inventory for the Company's September launch. In some cases the Company was
shipped merchandise that did


                                      13
<PAGE>

not meet the high standards set by Bluefly and in other cases the Company
received less than the amount purchased. Included in the cost of sales was
$86,000 of inventory reserves, substantially all of which related to the
start-up of Bluefly.com. The Company is making all reasonable efforts to
recover any amounts due from vendors related to shortages and unwanted
merchandise. As a result, the Company had a negative gross profit of $54,000.
Gross margins, excluding inventory reserves relating to the start-up of
Bluefly.com, was $26,000 or 10.7% of net sales.

MARKETING AND ADVERTISING EXPENSES: Marketing and advertising expenses of
$601,000 represented costs associated with the media placement, public
relations efforts, press events and marketing staff costs. In the first four
months of the Web site's operations, the Company established strategic
marketing relationships with America Online, Lycos, Tripod and Yahoo!. In
addition, the Company established a co-branded site with a leading broadband
portal, At Home Network. Since December 31, 1998, the Company has established
additional strategic marketing relationships with Excite, Netcenter and GO
Network. Under the terms of these deals, the Company receives highly targeted,
prominent positioning on ten major Web sites, including AOL.com, MailCity, and
CompuServe. The Company believes that it has been able to negotiate favorable
rates for its positioning on most of these Web sites in part because the
portals may have recognized that online consumers have demands which are not
satisfied by the vertical retailers such as Gap, Inc., J.Crew Group, Inc.,
Spiegel, Inc. (i.e. Eddie Bauer), and Lands' End, which have thus far dominated
apparel sales in the online apparel category's brief history. In addition, the
Company placed full-page advertisements in five major national publications
during the fall of 1998, including Business Week, Forbes and Yahoo! Internet
Life. While the thrust of the Company's 1998 print advertising campaign was to
introduce the Company's new business to the financial and technology community,
the Company believes that the campaign was also an effective tool in expanding
its customer base. Based on the success of the Company's Fall print advertising
campaign, the Company has decided to launch a national print advertising
campaign in the second quarter of 1999. The new campaign is expected to run in
at least 17 major national publications and will showcase the Company's first
effort towards building and marketing a lifestyle brand.

OPERATING EXPENSES: In 1998, operating expenses consisted primarily of $62,000
of salaries and related expenses as well as $36,000 of costs associated with
maintaining and hosting of the Company's web site. Operating expenses also
consisted of costs relating to inventory management and fulfillment operations,
customer service expense, and web site image processing costs.

GENERAL AND ADMINISTRATIVE ("G&A"): G&A expenses increased to $1,166,000 in
1998 from $819,000 in 1997 or 42.4%. Included in G&A expenses are salaries and
related expenses, recruiting fees, insurance costs, accounting and legal fees,
depreciation and other office related expenses. The increase in 1998 in G&A
expenses was largely the result of an increase in costs, such as legal,
associated with filings with the Securities and Exchange Commission. The
Company incurred additional costs relating to the filing of the S-3
registration statement and other costs associated with the redemption of
outstanding Warrants (See "Liquidity and Capital Resources") by the Company. In
total the Company expensed $60,000 relating to the redemption of the Warrants.
In addition increases in depreciation, insurance and office expenses also
contributed to the increase which was partially offset by a decrease in G&A
related salaries and benefits.

START UP COSTS: The Company incurred start up costs of $332,000 related to the
launch of Bluefly.com. These costs were expensed as incurred. On September 8,
1998 the Web site was publicly launched, and therefore, the Company does not
anticipate any additional start up costs in the future.

RESEARCH AND DEVELOPMENT: The Company incurred research and development costs
of $347,000 in 1998 primarily relating to the design, development and
construction of the Company's Web site. The Company anticipates that it will
incur additional research and development costs in the future in its effort to
improve its Web site and become the dominant Internet retailer of excess and
end-of-season apparel, fashion accessories and home products.

RESULTS FOR DISCONTINUED OPERATIONS

In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform to this presentation. Discontinued operations for 1998 reflected a net
loss of $1,178,000, net of tax. The net loss was offset by income of $400,000,
which represents cash received from the sale of the golf sportswear trademarks.
The net sales of this division decreased by $6,409,000, or 62.1%, to $3,914,000
in 1998 from $10,323,000 in 1997. Gross profit decreased by $2,855,000 or
97.4%, to $76,000 in 1998 from $2,931,000 in 1997. This decrease resulted from
a decrease in sales volume as well as the lower gross margins resulting from
the liquidation of inventory of the discontinued operation.

                                      14
<PAGE>

In September 1998, the Company sold all of its trademarks related to the
discontinued golf sportswear division to Klear Knit Sales, Inc. Under the terms
of the agreement, the Company received $400,000 in cash and is entitled to
receive future payments for a period up to five years based on certain
performance measures. Total future payments to be made to the Company, if any,
during the five-year period, are capped at an aggregate amount of $290,000. A
non-employee, non-director shareholder of the Company acted as a broker on the
sale of the trademarks and is entitled to a broker's fee equal to 11.9% of
future payments received, if any, by the Company (a maximum of $34,500 in fees
may be due under the agreement).

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company's had $5,094,000 of liquid assets, of which
$2,830,000 were in the form of cash and cash equivalents and $2,264,000 of
which were funds deposited with its factor. As of March 30, 1999, the Company
had $10,700,000 in the form of cash and cash equivalents and funds deposited
with its factor.

On December 21, 1998, the Company elected to redeem all outstanding Warrants by
providing the 30-day written notice required. Included in the redemption were
1,500,000 outstanding Warrants that were issued in connection with the
Company's IPO in May, 1997, 363,000 outstanding Warrants that were issued in
connection with the Company's 1997 bridge financing, and, 135,250 Warrants that
were issued in connection with the exercise of Underwriter Unit Purchase
Options ("UPO"). Under the terms of the warrant agreement, each Warrant holder
was entitled to purchase one share of Common Stock for $5.00. Under the terms
of the UPO agreement, each holder of a UPO is entitled to purchase one share of
Common Stock and one Warrant for a total of $8.00. As of December 31, 1998,
573,250 Warrants had been exercised and in the first quarter of 1999, an
additional 1,412,374 Warrants were exercised. Such redemption resulted in
proceeds of $2,867,000 in December 1998 and additional proceeds of $7,062,000
in the first quarter of 1999, totaling gross proceeds of $9,929,000 to the
Company from the exercise of the Warrants.

In addition to the proceeds from the purchase of Common Stock by warrant
holders, the Company also raised $1,082,000 in December 1998 from the exercise
of 135,250 UPO's. In the first quarter of 1999, an additional 900 UPO's were
exercised resulting in proceeds of $7,000 to the Company. As of March 26, 1999,
the total proceeds from the exercise of the UPO's was $1,089,000.

As of March 26, 1999, the total proceeds to the Company from the conversion of
Warrants and the exercise of the UPO's was $11,018,000. The Company incurred
$60,000 in expenses relating to the redemption of the Warrants.

The Company also has a credit arrangement ("Letter of Credit Agreement") and
Retail Collection Factoring Agreement ("Factoring Agreement"), each dated April
28, 1992 and amended November 14, 1997 with Heller Financial, Inc. ("Heller"),
to whom the Company has granted a senior security interest in substantially all
of its assets. At December 31, 1998, there was approximately $2,264,000 in
funds invested with Heller under the Factoring Agreement and approximately
$170,000 in factored receivables, net of returns and allowances. As of March
31, 1999 the Company had no outstanding borrowings or receivables factored
through Heller. The Company anticipates that it will terminate its current
credit agreement with Heller in the second quarter of 1999.

The Company believes that if it is to achieve its objective of becoming the
preeminent Internet retailer of excess and end-of-season apparel, fashion
accessories, and home products, it will need to raise more capital. To this
end, the Company is meeting with a number of potential financing sources to
determine the most prudent financing strategy.

PLAN OF OPERATIONS

The Company anticipates, based on current plans and assumptions relating to its
operations, that the proceeds of redemption of the Warrants and the UPO,
together with existing resources and cash generated from operations, should be
sufficient to satisfy the Company's current cash requirements for approximately
12 months after the date of this report. The Company intends to seek additional
debt and/or equity financing through a public offering, private placement or
otherwise in order to achieve its objective of becoming the preeminent Internet
retailer of excess and end-of-season apparel, fashion accessories and home
products. There can be no assurance that any additional financing or other
sources of capital will be available to the Company upon acceptable terms, if
at all. The inability to obtain additional financing, when needed, would have a
material adverse effect on the Company's business, financial condition and
operating results and significantly slow the pace of both customer and revenue
growth.

As of December 31, 1998, the Company has marketing and advertising commitments
of $653,000. In addition, the Company believes that in order to grow the
business, the Company will need to make additional marketing and advertising
commitments in the future.



                                      15
<PAGE>

In order to expand its customer base and establish its brand name, the Company
intends over the next 12 months to expand its advertising and commerce
relationships with the major Web sites and develop an affiliate program. The
Company also plans to launch an e-mail notification option to alert customers
to new products which match their expressed interest. In addition, the Company
is planning other customer retention initiatives such as advising customers by
e-mail of special sales promotions and holiday gift ideas. The Company's
marketing budget is subject to a number of factors, including the Company's
results of operations as well as the Company's ability to raise additional
capital. See "Financing Strategy."

In order to expand its product offerings the Company intends to expand its
relationships with suppliers of discount, name brand apparel and fashion
accessories. The Company expects that its suppliers will include retail stores
and designers that sell excess inventory as well as third party end-of-season
apparel aggregators. See "Risk Factors-Limited Working Capital; Need for
Additional Financing." To achieve its goal of offering a wide selection of top
name brand designer clothing and fashion accessories, the Company may acquire
certain goods on consignment and will explore leasing or partnering select
departments such as fragrances, sunglasses and cosmetics with strategic
partners and distributors. See "Risk Factors-Availability of Merchandise."

The Company expects to hire and train additional employees for the operations,
marketing and advertising and development of Bluefly.com. The Company's ability
to hire such employees is subject to a number of factors, including the
Company's results of operations as well as the Company's ability to raise
additional capital. See "Financing Strategy"and "Risk Factors-Limited Working
Capital; Need for Additional Financing."

YEAR 2000 ISSUES

The Company will be interacting with certain computer programs in connection
with credit card transactions, fulfillment operations, and programs used by the
Company's vendors and suppliers. These programs may refer to annual dates only
by the last two digits (e.g., "97" for "1997"), and could lose functionality in
the Year 2000. The Company believes that its significant business, accounting
and operations software are Year 2000 compliant ("Compliant"). The Company
expects the costs it incurs, if any, to achieve Year 2000 compliance will be
immaterial. Given that the Company believes that it is currently Compliant, the
Company has not prepared a contingency plan and does not currently believe that
a contingency plan is necessary. However, the Company cannot guarantee that all
of the other companies with which the Company interacts have taken the Year
2000 problem into account or have otherwise updated their programs. The costs
of assessing such compliance are expected to be minimal. In the event that the
companies with which it interacts are unable to certify that they will be
Compliant by early 1999 or if such companies are unable to certify that their
failure to be Year 2000 compliant will not adversely affect the Company, the
Company will be reviewing its alternatives with respect to other companies.
There can be no assurance that the Company will be able to find other companies
with which to interact which are acceptable to the Company. In addition,
although the Company believes it is adequately addressing its Year 2000 issues,
there can be no assurance that unanticipated or undiscovered compliance
problems with regard to the Company or the companies with which it interacts
will not have a material adverse effect on the Company's business prospects,
financial condition and results of operations.

See "Risk Factors" and "Risk Factors - Forward-Looking Statements and
Associated Risks" for a discussion of forward-looking statements and the risks
associated therewith.





                                      16
<PAGE>



ITEM 7.  FINANCIAL STATEMENTS

(a) The following Financial Statements are attached hereto in response to 
    Item 7:

         Independent Auditors' Report                                     F-2
      
         Consolidated Balance Sheet - As of December 31, 1998             F-3
      
         Consolidated Statements of Operations -
                   Years ended December 31, 1998 and 1997                 F-4
      
         Consolidated Statements of Changes in Shareholders' Equity -
                   Years ended December 31, 1998 and 1997                 F-5
      
         Consolidated Statements of Cash Flows -
                   Years ended December 31, 1998 and 1997                 F-6
      
         Notes to Consolidated Financial Statements                       F-8
     
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.



                                      17
<PAGE>




                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The executive officers and directors of the Company, their ages and their
positions are as follows:

       NAME                          AGE    POSITION
       ----                          ---    --------
       E. Kenneth Seiff              34     Chairman of the Board of Directors, 
                                            Chief Executive Officer,
                                            President and Treasurer
       Patrick C. Barry              36     Chief Financial Officer and 
                                            Executive Vice President of 
                                            Operations
       Jonathan B. Morris            31     Executive Vice President and 
                                            Secretary
       Red Burns                     73     Director
       Martin Miller                 68     Director
       Robert G. Stevens             45     Director


E. KENNETH SEIFF, the founder of the Company, has served as the Company's
Chairman of the Board, Chief Executive Officer and Treasurer since its
inception in April 1991. He became President of the Company in October 1996.

PATRICK C. BARRY has served as Executive Vice President of the Company since
July 1998 and as Chief Financial Officer of the Company since August 1998. From
June 1996 to July 1998, Mr. Barry served as Chief Financial Officer and the
Vice President of Operations of Audible, Inc., an Internet commerce and content
provider. From March 1995 to June 1996, Mr. Barry served as Chief Financial
Officer of Time Warner Music Enterprises, a subsidiary of Time Warner, Inc.
From July 1993 and March 1995, Mr. Barry served as Controller of
Book-of-the-Month Club, a subsidiary of Time Warner, Inc.

JONATHAN B. MORRIS has served as Executive Vice President of the Company since
June 1998. From November 1995 to June 1998, Mr. Morris was an attorney with
Brown, Raysmann, Millstein, Felder & Steiner LLP, a New York based law firm
which specializes in Internet and technology law. From September 1993 to
November 1995, Mr. Morris was an attorney with Mudge, Rose, Guthrie, Alexander
& Ferdon, a New York based law firm.

GOLDIE BURNS (AKA RED BURNS) has served as a Director of the Company since
August 1998. Since September 1993, Ms. Burns has served as the Chairman of the
Interactive Telecommunications Program at New York University.

MARTIN MILLER has served as a Director of the Company since July 1991. Since
October 1997, Mr. Miller has been a partner in the Belvedere Fund, L.P., a fund
of hedge funds. From September 1986 to October 1997, Mr. Miller was President
and a director of Baxter International, Inc. ("Baxter"), a New York based
apparel wholesaler. From January 1990 to April 1996, Mr. Miller was Chairman of
Ocean Apparel, Inc., a Florida based sportswear firm.

ROBERT G. STEVENS has served as a Director of the Company since December 1996.
Since December 1994, Mr. Stevens has been a Vice President of Mercer Management
Consulting, Inc. ("Mercer"), a management consulting firm. From November 1992
to December 1994, Mr. Stevens was a Principal at Mercer.

The Board of Directors has established an Audit Committee ("Audit Committee")
comprised of Robert Stevens and Martin Miller. The Audit Committee is
responsible for recommending to the Board of Directors the appointment of the
Company's outside auditors, examining the results of audits, reviewing internal
accounting controls and reviewing related party transactions.

The Board of Directors has also established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Robert G.
Stevens and Martin Miller. Mr. Stevens serves as chairman of this committee.
The Option Plan/Compensation Committee administers the Company's 1997 Stock
Option Plan ("Plan"), establishes the compensation levels for executive
officers and key personnel and oversees the Company's bonus plans.



                                      18
<PAGE>

The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. All directors hold office until the next
annual meeting of the Company or until their successors have been duly elected
and qualified. There are no family relationships among any of the executive
officers or directors of the Company.

The Company maintains a "key person" life insurance policy in the amount of
$1.2 million on the life of Mr. Seiff.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors and executive officers and persons who
beneficially own more than ten percent of the Common Stock (collectively, the
"Reporting Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock. Reporting Persons are required to
furnish the Company with copies of all such reports. To the Company's
knowledge, based solely on a review of copies of such reports furnished to the
Company and certain representations of the Reporting Persons, the Company
believes that during the 1998 fiscal year all Reporting Persons complied with
all applicable Section 16(a) reporting requirements, except as set forth in the
following sentence. Jonathan Morris' initial statement of beneficial ownership
on Form 3 was inadvertently filed late but was filed on July 15, 1998.

ITEM 10.  EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

The Company's directors did not receive any cash compensation for their
services as members of the Board of Directors during 1998, although they were
reimbursed for expenses incurred on behalf of the Company. Effective February
1999, the Company's directors are paid $500 per board meeting attended (other
than telephonic meetings) and are reimbursed for expenses incurred on behalf of
the Company. Each current non-employee director has received options to
purchase 5,000 shares of Common Stock under the Plan and is automatically
granted annual option grants to purchase 3,750 shares of Common Stock under the
Plan. The Company's directors also received a one-time option grant of 2,000
shares each on January 27, 1999.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning the compensation paid by
the Company during the fiscal year ended December 31, 1998 to E. Kenneth Seiff,
the Company's Chief Executive Officer. No other executive officer of the
Company received a total compensation from the Company in excess of $100,000 in
1998.

<TABLE>
<CAPTION>
                                                                  ANNUAL COMPENSATION                     LONG TERM COMPENSATION
                                                      ---------------------------------------------    ----------------------------
                                                                                                                  AWARDS
                                                                                                                  ------
                                                                                                                        SECURITIES
                                                                                   OTHER ANNUAL          RESTRICTED     UNDERLYING
NAME AND PRINCIPAL POSITION                   YEAR      SALARY        BONUS        COMPENSATION         STOCK AWARDS    OPTIONS (1)
---------------------------                   ----      ------        -----        ------------         ------------    -----------
<S>                                           <C>      <C>           <C>              <C>                   <C>           <C>   
E. Kenneth Seiff                              1998     $165,000      $ 25,000         $1,235                $--           50,000
Chief Executive Officer, President and        1997     $164,461      $     --         $1,235                $--           25,000
     Treasurer                                1996     $ 89,115      $144,759         $   --                $--             --
</TABLE>

(1)      Options granted at an exercise price equal to 110% of the fair market
         value on the date of grant.





                                      19
<PAGE>



EMPLOYMENT AGREEMENTS

The Company has an employment contract, which was amended on May 21, 1997, with
its Chief Executive Officer ("CEO"). The amended employment agreement, which
expires on January 1, 2000, provides for a base salary of $165,000 subject to
increases by the Board of Directors, and an annual bonus to be determined by
the Board of Directors but not to exceed Mr. Seiff's annual salary for the year
in question. At the discretion of the Board of Directors, all or part of such
bonus may be paid through the issuance to Mr. Seiff of capital stock of the
Company or stock options issued pursuant to the Plan, provided that at the
request of Mr. Seiff a portion of such bonus sufficient to pay any income taxes
arising from such bonus will be paid in cash rather than in capital stock of
the Company. In addition, the Company maintains a $1.2 million key person life
insurance policy on the life of the CEO.

OPTIONS GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the grant of stock options
under the Plan to the named executives officers ("Named Executive Officers")
during the fiscal year ended December 31, 1998:

<TABLE>
<CAPTION>
                                          INDIVIDUAL GRANTS
                                          -----------------
                      NUMBER OF SECURITIES        % OF TOTAL OPTIONS                                            
                       UNDERLYING OPTIONS       GRANTED TO EMPLOYEES IN      EXERCISE OR                        
NAME                       GRANTED (#)              FISCAL YEAR (%)         BASE PRICE ($)    EXPIRATION DATE
----                       -----------              ---------------         --------------    ---------------
<S>                      <C>                         <C>                    <C>                 <C>
E. Kenneth Seiff             25,000                      11.3%                  $2.17             02/26/08
</TABLE>

For the fiscal year ended December 31, 1998, the Board of Directors awarded
Mr. Seiff a bonus consisting of 50,000 options exercisable at the 110% of the
fair market value on the date of grant, which were granted on January 22,
1999.

The Company does not currently grant stock appreciation rights.

OPTION HOLDINGS

The following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during the last fiscal year and
the unexercised options held at December 31, 1998. None of the Named Executive
Officers exercised any outstanding options during the fiscal year ended
December 31, 1998.

<TABLE>
<CAPTION>
                                SECURITIES UNDERLYING UNEXERCISED            VALUE OF UNEXERCISED IN-THE-MONEY
                                 OPTIONS AT DECEMBER 31, 1998 (#)             OPTIONS AT DECEMBER 31, 1998 ($)
                                 --------------------------------             --------------------------------
NAME                             EXERCISABLE         UNEXERCISABLE         EXERCISABLE           UNEXERCISABLE
                                 -----------         -------------         -----------           -------------
<S>                              <C>                 <C>                    <C>                 <C>
E. Kenneth Seiff                     n/a                25,000                 n/a                  $199,000
</TABLE>



                                      20
<PAGE>



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of the Company as of March 31, 1999,
for (i) each person who is known by the Company to own beneficially more than
5% of the capital stock, (ii) each of the Company's directors, (iii) the Named
Executive Officers, and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the address of all persons named in the table is
c/o the Company at 42 West 39th Street, New York, New York 10018.

<TABLE>
<CAPTION>
                                                               NUMBER OF SHARES                      
NAME                                                          BENEFICIALLY OWNED    PERCENTAGE (1)
----                                                          ------------------    --------------
<S>                                                                 <C>                  <C>  
E. Kenneth Seiff                                                    530,157(2)(3)        10.9%
Red Burns                                                               667(4)             *
Martin Miller                                                         8,167(5)             *
Robert G. Stevens                                                    23,106(5)             *
All directors and executive officers as a group (6 persons)         605,395(6)           12.5%
</TABLE>

*Less than 1%.

(1)      Beneficial ownership is determined in accordance with the rules of the
         Securities and Exchange Commission ("Commission") and generally
         includes voting or investment power with respect to securities. Shares
         of Common Stock issuable upon the exercise of options or warrants
         currently exercisable or exercisable within 60 days are deemed
         outstanding for computing the percentage ownership of the person
         holding such options or warrants but are not deemed outstanding for
         computing the percentage ownership of any other person.
(2)      Includes 3,000 shares of Common Stock issuable upon exercise of
         currently exercisable options granted under the Plan to Nicole Seiff,
         a consultant to the Company and the wife of E. Kenneth Seiff, as to
         which Mr. Seiff disclaims beneficial ownership.
(3)      Includes 25,000 shares of Common Stock issuable upon exercise of
         options granted under the Plan. 
(4)      Includes 667 shares of Common Stock issuable upon exercise of options
         granted under the Plan. 
(5)      Includes 8,167 shares of Common Stock issuable upon exercise of
         options granted under the Plan. 
(6)      Includes 75,436 shares of Common Stock issuable upon exercise of
         options.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.


                                      21
<PAGE>



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB:

EXHIBIT NO.        DESCRIPTION

  3.1 (a)          Restated Certificate of Incorporation of the Company.
  3.2 (a)          Amended and Restated By-Laws of the Company.
  3.3 (a)          Amendment to Amended and Restated By-Laws of the Company.
  3.4 (e)          Certificate of Amendment of the Company's Certificate of
                   Incorporation dated October 28, 1998.
  4.1 (a)          Specimen Common Stock certificate.
  4.2 (a)          Form of Unit Purchase Option.
  4.3 (a)          Specimen Redeemable Common Stock Purchase Warrant.
  4.4 (a)          Form of Warrant Agreement.
  10.1 (a)         Agreement, dated as of September 24, 1996, by and between
                   the Company, Leisure Wear Inc., David M. Goldblatt Inc. 
                   Profit Sharing Plan, David Goldblatt, Anita Goldblatt and
                   Jeffrey Goldstein.
  10.2 (a)         Factoring Agreement by and between the Company and Heller 
                   Financial, Inc. ("Heller"), dated April 1992.
  10.3 (a)         Letter of Credit Financing Agreement by and between the 
                   Company and Heller, dated as of April 28, 1992.
  10.4 (a)         Letter Agreement by and between the Company and Heller, 
                   dated December 18, 1996.
  10.5 (a)         Amended and Restated Employment Agreement by and between the
                   Company and E. Kenneth Seiff.
  10.6 (a)         1997 Stock Option Plan.
  10.7 (a)         Employment Agreement by and between the Company and David 
                   Lewis, dated as of March 1, 1997.
  10.8 (a)         Employment Agreement by and between the Company and William 
                   McLoone, dated as of March 17, 1997.
  10.9 (b)         Lease Agreement by and between the Company and John R. 
                   Perlman, et al., dated as of May 5, 1997.
  10.10 (c)        Employment Agreement, dated as of September 23, 1997 by and
                   between the Company and Bradley Erickson.
  10.11 (d)        Letter Agreement by and between the Company and Heller, 
                   dated November 14, 1997.
  10.12 (f)        Employment Agreement dated as of July 13, 1998 by and 
                   between Pivot Rules, Inc. and Patrick Barry.
  10.13 (f)        Employment Agreement dated as of June 15, 1998 by and 
                   between Pivot Rules, Inc. and Jonathan Morris.
  10.14 (f)        Agreement dated as of May 13, 1998 by and between Pivot 
                   Rules, Inc. and Kaufman Patricof Enterprises ("KPE").
  10.15 (f)        Amendment to Agreement dated August 17, 1998 between Pivot
                   Rules, Inc. and KPE.
  21.1             Subsidiaries of the Registrant.
  27               Financial Data Schedule.

   (a) - Incorporated by reference to the Company's Form SB-2 registration
         statement and amendments thereto (File No. 333-22895).

   (b) - Incorporated by reference to the Company's Quarterly report filed on
         Form 10-QSB for the quarterly period ended March 31, 1997.

   (c) - Incorporated by reference to the Company's Quarterly report filed on
         Form 10-QSB for the quarterly period ended September 30, 1997.

   (d) - Incorporated by reference to the Company's Annual report filed on
         Form 10-KSB for the year ended December 31, 1997. 

   (e) - Incorporated by reference to the Company's Quarterly report
         filed on Form 10-QSB/A for the quarterly period ended June 30, 1998.

   (f) - Incorporated by reference to the Company's Quarterly report filed on
         Form 10-QSB for the quarterly period ended September 30, 1998.

(b)      Reports on Form 8-K

The Company filed no reports on Form 8-K during the last quarter of the period
covered by this report.



                                      22
<PAGE>



                                   SIGNATURES

                In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                          BLUEFLY, INC.

                                          By: /s/ E. Kenneth Seiff        
                                             ------------------------------
                                              E. Kenneth Seiff
                                              President

March 31, 1999

                In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

Signature                Title                                  Date
---------                -----                                  ----
/s/ E. Kenneth Seiff    
-----------------------
E. Kenneth Seiff         Chairman of the Board of Directors,    March 31, 1999
                         Chief Executive Officer, President,
                         and Treasurer (Principal Executive 
                         Officer)

/s/ Patrick C. Barry    
-----------------------
Patrick C. Barry         Chief Financial Officer                March 31, 1999
                         (Principal Accounting Officer)

/s/ Red Burns           
-----------------------
Red Burns                Director                               March 31, 1999

/s/ Martin Miller       
-----------------------
Martin Miller            Director                               March 31, 1999

/s/ Robert G. Stevens   
-----------------------
Robert G. Stevens        Director                               March 31, 1999



                                      23
<PAGE>



                                 BLUEFLY, INC.
                               TABLE OF CONTENTS

                                                                        PAGE
                                                                        ----
Independent Auditors' Report                                             F-2

Consolidated Balance Sheet as of December 31, 1998                       F-3

Consolidated Statements of Operations for the years ended
   December 31, 1998 and 1997                                            F-4

Consolidated Statements of Changes in Shareholders' Equity for the
   years ended December 31, 1998 and 1997                                F-5

Consolidated Statements of Cash Flows for the years ended
   December 31, 1998 and 1997                                            F-6

Notes to Consolidated Financial Statements                               F-8


<PAGE>




                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Bluefly, Inc.

We have audited the accompanying consolidated balance sheet of Bluefly, Inc. as
of December 31, 1998 and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years ended December
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bluefly, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.

As more fully discussed in Notes A and C to the financial statements, on June
25, 1998, the Company's Board of Directors adopted a plan to discontinue its
golf sportswear division. Historical assets and operations of the golf
sportswear division have represented a substantial portion of the Company's
assets and results of operations.

/s/ M.R.Weiser&Co.LLP
Certified Public Accountants

March 26, 1999 
New York, N.Y.



                                      F-2
<PAGE>



                                 BLUEFLY, INC.
                           CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 1998

                                     ASSETS

Current assets

    Cash and cash equivalents                                      $ 2,830,000 
    Funds deposited with factor                                      2,264,000
    Inventories                                                        429,000
    Prepaid expenses and other current assets                          527,000
    Deferred income taxes                                               50,000
    Current assets of discontinued operations                          553,000
                                                                 -------------
          Total current assets                                       6,653,000

Property and equipment, net                                            497,000

Other assets                                                            15,000
                                                                 -------------
                                                                   $ 7,165,000
                                                                 =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
    Accounts payable, accrued expenses and other current                       
       liabilities                                                    $709,000

Deferred income taxes                                                   64,000
                                                                 -------------
                                                                       773,000
                                                                 -------------

Commitments and contingencies

Shareholders' equity
    Preferred stock -$.01 par value; 2,000,000 authorized and                  
      no shares issued                                                      --
    Common stock -$.01 par value; 15,000,000 authorized and                    
      3,433,255 issued and outstanding                                  34,000
    Additional paid-in capital                                      10,395,000
    Accumulated deficit                                             (4,037,000)
                                                                 -------------
                                                                     6,392,000
                                                                 -------------
                                                                   $ 7,165,000
                                                                 =============

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



                                      F-3
<PAGE>



                                 BLUEFLY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997

                                                  1998              1997
                                                  ----              ----
                                                               (As Restated) 
                                                                  (Note C)

Net sales                                     $    243,000      $         --
Cost of sales                                      297,000                --
                                              ------------      ------------ 
         Negative gross profit                     (54,000)               --

Marketing and advertising expenses                 601,000                --
Operating expenses                                 170,000                --
General and administrative expenses              1,166,000           819,000
Internet business start up costs                   332,000                --
Research and development                           347,000                --
                                              ------------      ------------ 

Operating loss from continuing operations       (2,670,000)         (819,000)

Interest income                                    142,000           123,000
                                              ------------      ------------

Loss from continuing operations before taxes    (2,528,000)         (696,000)

Income tax benefit                                  50,000           227,000
                                              ------------      ------------

Loss from continuing operations                 (2,478,000)         (469,000)
                                              ------------      ------------

Discontinued operations - Notes A and C
    (Loss) income from operations, net of 
      income tax provision of $105,000 
      and $45,000, respectively                 (1,178,000)           88,000
                                              ------------      ------------

Net loss                                      $ (3,656,000)     $   (381,000)
                                              ============      ============ 

Basic and diluted (loss) income per share
       Continuing operations                        $ (.89)           $ (.22)
       Discontinued operations                        (.43)              .04
                                                    ------            ------

       Net loss                                     $(1.32)           $ (.18)
                                                    ======            ======

Weighted average shares outstanding              2,770,869         2,149,315
                                                 =========         =========


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



                                      F-4
<PAGE>




                                 BLUEFLY, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                               Common Stock,       Common Stock,                            
                                               no par value       $.01 par value                            
                                            -----------------  -------------------
                                            Number of           Number of              Additional       Accumulated            
                                              shares   Amount     shares     Amount   Paid-in capital      deficit       Total
                                              ------   ------     ------     ------   ---------------      -------       -----
<S>                                          <C>       <C>      <C>         <C>         <C>             <C>           <C>        
Balance at December 31, 1996                     --    $   --   1,200,000   $12,000     $   397,000     $        --   $   409,000
Issuance of warrants - bridge financing                                                     138,000                       138,000
Cancellation of warrants - bridge financing                                                 (55,000)                      (55,000)
Sale of units - ($5.00 per share)                               1,500,000    15,000       5,924,000                     5,939,000
Net loss                                                                                                   (381,000)     (381,000)
                                              -----    ------   ---------   -------     -----------     ------------  ------------
Balance at December 31, 1997                     --    $   --   2,700,000   $27,000     $ 6,404,000     $  (381,000)  $ 6,050,000
Issuance of common stock for research and                                                                                          
   development                                                     24,755        --          49,000                        49,000
Issuance of common stock for exercise of                                                                                           
   warrants ($5.00 per share)                                     573,250     6,000       2,861,000                     2,867,000
Issuance of common stock for exercise of                                                                                           
   unit purchase options ($8.00 per share)                        135,250     1,000       1,081,000                     1,082,000
Net loss                                                                                                 (3,656,000)   (3,656,000)
                                              -----    ------   ---------   -------     -----------     ------------  ------------
Balance at December 31, 1998                     --    $   --   3,433,255   $34,000     $10,395,000     $(4,037,000)  $ 6,392,000
                                              =====    ======   =========   =======     ===========     ============  ============
</TABLE>




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


                                      F-5
<PAGE>

                                 BLUEFLY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                             1998           1997
                                                                                             ----           ----
                                                                                                        (As Restated)
                                                                                                          (Note C)
<S>                                                                                      <C>            <C>         
Cash flows from operating activities

  Loss from continuing operations                                                        $(2,478,000)   $  (469,000)
  Adjustments to reconcile loss from Continuing Operations to net cash (used in)
     provided by operating activities:
     Loss on equipment disposition                                                             7,000          7,000
     Depreciation and amortization                                                            84,000         31,000
     Common stock issued for research and development                                         49,000           --
     Deferred income taxes                                                                     5,000
     Changes in operating assets and liabilities
          Increase in
             Inventories                                                                    (429,000)          --
             Prepaid expenses and other current assets                                      (399,000)      (128,000)
          (Decrease) Increase in
             Accounts payable and accrued expenses                                          (381,000)       756,000
                                                                                         -----------    -----------
Net cash (used in) provided by operating activities - Continuing operations               (3,542,000)       197,000
                                                                                         -----------    -----------

  (Loss) income from Discontinued Operations                                              (1,178,000)        88,000
  Adjustments to reconcile income from Discontinued Operations to net cash provided by
     (used in) operating activities:
        Loss on equipment disposal                                                              --            3,000
        Write-down of property and equipment                                                 259,000           --
        Write-down of prepaid expenses and other current assets                              101,000           --
        Write-down of other assets                                                           119,000           --
        Amortization of deferred costs for bridge financing                                     --          293,000
        Amortization of debt discount                                                           --           83,000
        Depreciation and amortization                                                         44,000         45,000
        Deferred income taxes                                                                 94,000           --
        Changes in operating assets and liabilities
          (Increase) decrease in
             Inventories                                                                   1,413,000       (578,000)
             Non-factored receivables                                                       (136,000)       (10,000)
             Prepaid expenses and other current assets                                        70,000        (84,000)
          Increase (Decrease) in
             Income taxes receivable                                                           7,000       (315,000)
                                                                                         -----------    -----------
Net cash provided by (used in) operating activities - Discontinued Operations                793,000       (475,000)
                                                                                         -----------    -----------
Net cash used in operating activities                                                     (2,749,000)      (278,000)
                                                                                         -----------    -----------
</TABLE>

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


                                      F-6
<PAGE>



                                 BLUEFLY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                   1998           1997
                                                                                   ----           ----
                                                                                             (As Restated)
                                                                                                (Note C)
<S>                                                                             <C>           <C>      
Cash flows from investing activities - Continuing Operations
  Purchase of property and equipment                                                (88,000)      (519,000)
  Funds deposited with factor                                                      (960,000)    (4,920,000)
  Increase of funds deposited with factor                                           553,000      3,063,000
                                                                                -----------    -----------
Net cash used in investing activities - Continuing Operations                      (495,000)    (2,376,000)
                                                                                -----------    -----------

Cash flows from investing activities - Discontinued Operations
  Purchase of property and equipment                                                (22,000)      (236,000)
  Trademark costs                                                                    (1,000)        (7,000)
                                                                                -----------    -----------
Net cash used in investing activities - Discontinued Operations                     (23,000)      (243,000)
                                                                                -----------    -----------

Net cash used in investing activities                                              (518,000)    (2,619,000)
                                                                                -----------    -----------
Cash flows from financing activities - Continuing Operations
  Net proceeds from initial public offering                                            --        5,939,000
  Net proceeds from warrant redemption                                            2,867,000           --
  Net proceeds from unit purchase option exercise                                 1,082,000           --
  Deferred costs associated with initial public offering                               --           53,000
                                                                                -----------    -----------
Net cash provided by financing activities - Continuing Operations                 3,949,000      5,992,000
                                                                                -----------    -----------

Cash flows from financing activities - Discontinued Operations
  Deferred costs associated with bridge financing                                      --           75,000
  Net proceeds from bridge financing                                                   --        1,207,000
  Repayments of notes payable and short-term loan                                      --         (644,000)
  Repayments of bridge financing                                                       --       (1,500,000)
  Net change in due to/from factor                                                2,093,000     (2,211,000)
                                                                                -----------    -----------
Net cash provided by (used in) financing activities - Discontinued Operations     2,093,000     (3,073,000)
                                                                                -----------    -----------

Net cash provided by financing activities                                         6,042,000      2,919,000
                                                                                -----------    -----------

Net increase in cash                                                              2,775,000         22,000
Cash balance - January 1                                                             55,000         33,000
                                                                                -----------    -----------
Cash balance - December 31                                                      $ 2,830,000    $    55,000
                                                                                ===========    ===========

Supplemental disclosure of cash flow information: 
     Cash paid during the year for:
         Interest                                                               $     8,000    $    75,000
                                                                                ===========    ===========
         Income taxes                                                           $     5,000    $   125,000
                                                                                ===========    ===========
     Non-cash financing activities:
         Issuance of warrants in connection with bridge financing                       $--    $   138,000
                                                                                ===========    ===========
         Cancellation of warrants in connection with bridge financing                   $--    $    55,000
                                                                                ===========    ===========
</TABLE>


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


                                      F-7
<PAGE>



                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE A - THE COMPANY

On September 8, 1998, the Company publicly launched Bluefly.com ("Bluefly.com"
or "Web site"), an Internet retail store that sells a wide array of designer
and name brand apparel and accessories at 25 to 75 percent off of retail
prices. The e-commerce Web site also offers information on current trends and
other fashion related content.

On June 25, 1998, the Company's Board of Directors voted to discontinue the
operations of its golf sportswear division and to devote all of the Company's
energy and resources to building Bluefly.com. See Note C.

Effective October 29, 1998, the Company's shareholders approved a resolution to
change the name of the Company from Pivot Rules, Inc. to Bluefly, Inc.

NOTE B - SIGNIFICANT ACCOUNTING POLICIES

1. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.

2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

3. INVENTORIES

Inventories, which consist of finished goods, are valued at the lower of cost
or market. Cost is determined by the first-in, first-out ("FIFO") method.

4. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Equipment is depreciated on a
straight-line basis over five to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the term of the
lease. Maintenance and repairs are expensed as incurred.

5. LONG-LIVED ASSETS

The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets. The Company has not identified any such impairment of losses.


                                      F-8
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


6. START UP COSTS

In June 1998, the Company adopted Statement of Position ("SOP") 98-5 "Reporting
on the Costs of Start Up Activities". Start-up activities include (i) one-time
activities relating to the introduction of a new product or service, conducting
business in a new territory, conducting business with a new class of customer
or commencing a new operation and (ii) organization costs. Start-up activities
are expensed as incurred. During the year ending December 31, 1998, $332,000 of
start up costs relating to the formation of the Internet business were incurred
and expensed. The Company believes that there is no cumulative effect on the
amount of retained earnings at December 31, 1997 resulting from the adoption of
SOP 98-5.

7. RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred. During the year
ended December 31, 1998, amounts charged to research and development amounted
to $347,000.

8. INCOME TAXES

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

9. ADVERTISING EXPENSE

Advertising costs are expensed as incurred. Advertising expense for the year
ended December 31, 1998 amounted to approximately $443,000. For the year ended
December 31, 1997, the Company incurred approximately $908,000 in advertising
expense relating to the discontinued operations.

10. CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.

11. REVENUE RECOGNITION

Revenue is recognized when merchandise is shipped to a customer. Revenue
includes shipping and handling charged to the customer.

12. EARNINGS (LOSS) PER SHARE

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

Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period, adjusted to reflect potentially dilutive
securities. Options and warrants were not included in the computation of
diluted earnings per share because, in view of the loss from continuing
operations, the result of the exercise of such options would be antidilutive.


                                      F-9
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


13. STOCK BASED COMPENSATION

The Company applies SFAS 123 "Accounting for Stock Based Compensation" in
accounting for its stock based compensation plan. In accordance with SFAS 123,
the Company applies Accounting Principles Board opinion No. 25 and related
Interpretations for expense recognition. No compensation expense has been
recorded in 1998 and 1997, because the exercise price of employee stock options
equals or exceeds the market price of the underlying stock on the date of
grant.

14. NEW ACCOUNTING PRONOUNCEMENTS

In 1998, SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information" became effective.
These had no effect on the Company's financial position, results of operations
or cash flows.

In 1998, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement, which becomes effective in 1999, requires that
certain costs of developing or obtaining software for internal use be
capitalized. The Company does not expect the statement to have a material
effect on the Company's financial position, results of operations or cash
flows.

15. RECLASSIFICATION

The 1997 financial statements have been reclassified in order to conform with
the 1998 presentation. See Note C relating to the restatement of the financial
statements to reflect the discontinuation of the golf sportswear division.

NOTE C - DISCONTINUED OPERATIONS

The operating loss from discontinued operations of $1,178,000 includes a
$479,000 loss relating to the write down of the assets of the golf sportswear
division. The Company does not anticipate any future losses from its
discontinued operations.

In September 1998, the Company sold all of its trademarks related to the
discontinued golf sportswear division to Klear Knit Sales, Inc. Under the terms
of the agreement, the Company received $400,000 in cash and is entitled to
receive future payments for a period up to five years based on certain
performance measures. Total future payments to be made to the Company, if any,
during the five year period, are capped at an aggregate amount of $290,000. A
non-employee, non-director shareholder of the Company acted as a broker on the
sale of the trademarks and is entitled to a broker's fee equal to 11.9% of
future payments received, if any, by the Company (a maximum of $34,500 in fees
may be due under the agreement).


                                      F-10
<PAGE>


                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


The disposal of the golf sportswear division has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the accompanying consolidated balance sheet, and
its operating results are segregated and reported as discontinued operations in
the accompanying consolidated statements of operations and cash flows.
Information relating to the discontinued operations of the golf sportswear
division for the fiscal years ended December 31, 1998 and 1997 are as follows:

                                                    DECEMBER 31,  DECEMBER 31,
                                                        1998         1997
                                                        ----         ----
                                                                 (As Restated)

Net sales                                           $ 3,914,000   $ 10,323,000
Cost of sales                                         3,838,000      7,392,000
                                                    -----------   ------------
     Gross profit                                        76,000      2,931,000
Selling, marketing, design and administrative         1,155,000      2,200,000
Write down of property and equipment                    379,000             --
                                                    -----------   ------------
     Operating (loss) income                         (1,458,000)       731,000

Income from sale of trademarks                          400,000             --
Other expense                                           (15,000)      (305,000)
Amortization and write-off of deferred costs for             
  bridge financing                                           --       (293,000)
                                                    -----------   ------------
    (Loss) income before provision for income taxes  (1,073,000)       133,000

Provision for income taxes                             (105,000)       (45,000)
                                                    -----------   -------------

    Net (loss) income                               $(1,178,000)  $     88,000
                                                    ===========   ============

The net assets of the golf sportswear division included in the accompanying
balance sheet as of December 31, 1998 is as follows:

                                                          DECEMBER 31, 
                                                              1998

    Due from factor                                         $171,000
    Non-factored receivables                                 187,000
    Income taxes receivable                                  195,000
                                                          ----------
        Total current assets of discontinued                              
           operations                                      $ 553,000
                                                           =========

The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of discontinued
operations all liabilities are recorded as continuing operations.


                                     F-11
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997



NOTE D - BRIDGE FINANCING

On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured promissory note in the principal amount of
$100,000 per unit ("Note") and warrants to purchase 40,000 shares of common
stock of the Company, no par value, at an exercise price of $2.50 ("Bridge
Warrants"), for gross proceeds of $1,500,000. Net proceeds amounted to
$1,207,000 after agency expenses and brokerage fees, but before additional debt
issuance costs. A portion of the gross proceeds has been allocated to the
Bridge Warrants based on an estimate of their fair market value, resulting in
approximately $138,000 of original issue discount and a $138,000 increase in
paid-in capital.

The Notes bore interest at the rate of 10% per annum from January 2, 1997
through April 30, 1997, and thereafter at the rate of 12% per annum until such
notes were repaid from the proceeds of the Company's initial public offering
("IPO") in May 1997.

In May 1997, the Bridge Warrant holders surrendered 237,000 out of the 600,000
Bridge Warrants issued in connection with the bridge financing. The
cancellation of such Bridge Warrants resulted in a reduction of interest
expense and additional paid-in capital of $55,000. The remaining Bridge
Warrants were converted in May 1997 (on a one-for-one basis) into warrants with
the same terms as the warrants sold in the IPO.

NOTE E - PROPERTY AND EQUIPMENT

As of December 31, 1998, property and equipment for continuing operations
consist of the following:

       Leasehold improvements                             $287,000
       Office equipment                                    167,000
       Computer equipment and software                     142,000
                                                         ---------
                                                           596,000
       Less accumulated depreciation                        99,000
                                                         ---------
                                                          $497,000
                                                         =========

NOTE F - PREPAID EXPENSES AND OTHER CURRENT ASSETS

As of December 31, 1998, prepaid expenses and other current assets consist of
the following:

       Prepaid inventories                                $219,000
       Prepaid advertising and marketing                   124,000
       Income taxes receivable                              55,000
       Other prepaid expenses                               81,000
       Other current assets                                 48,000
                                                        ----------
                                                         $ 527,000
                                                        ==========

NOTE G - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of December 31, 1998, accounts payable, accrued expenses and other current
liabilities consist of the following:

       Accounts payable                                 $  594,000
       Salary and bonus accrual                            115,000
                                                        ----------
                                                         $ 709,000
                                                        ==========

                                     F-12
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


NOTE H - INCOME TAXES

Included in prepaid expenses and other current assets are income taxes
receivable which represents the anticipated refund from the carry back of the
current net operating loss. The Company has provided a full valuation allowance
on the deferred tax asset, relating to the net operating loss carryforwards,
because of uncertainty regarding its realizability. As of December 31, 1998,
the Company has a net operating loss of approximately $2,733,000, which is
available to be used through the year 2018.

The components of deferred tax assets and liabilities as of December 31, 1998
are as follows:

          Deferred tax asset
            Accounts receivable and inventory reserves       $ 50,000
          Deferred tax liability
            Tax over book depreciation                        (64,000)
                                                             --------
          Net deferred tax liability                         $(14,000)
                                                             ========


Differences between book and tax are primarily due to temporary differences
resulting from use of accelerated depreciation for income tax purposes and
using the direct write-off method for inventories and receivables for tax
purposes.

The provision (benefit) for income taxes is comprised of the following:

                                     CONTINUING OPERATIONS
                                     ---------------------
                                     1998             1997
                                     ----             ----
        Current
               Federal            $ (55,000)         $ 220,000
               State                     --              7,000
                                  ----------         ---------
                                    (55,000)           227,000
                                  ----------         ---------

        Deferred
               Federal                3,000             (1,000)
               State                  2,000              1,000
                                  ----------         ---------
                                      5,000                 --
                                  ----------         ---------
                                  $ (50,000)         $ 227,000 
                                  ==========         =========

                                    DISCONTINUED OPERATIONS
                                    -----------------------
                                    1998               1997
                                    ----               ----
        Current
               Federal            $ 11,000         $ (45,000)
               State                    --                --
                                  --------         ---------
                                    11,000           (45,000)
                                  --------         ---------

        Deferred
               Federal              81,000                --
               State                13,000                --
                                  --------         ---------
                                    94,000                --
                                  --------         ---------
                                  $105,000         $ (45,000)
                                  ========         =========


                                      F-13
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


The statutory Federal income tax rate and the effective rate of the provision
for income taxes for the years ended December 31, 1998 and December 31, 1997 is
reconciled as follows:

                                                      1998            1997
                                                      ----            ----
      Statutory Federal income tax rate               (34.0)%        (34.0)%
      State taxes, net of Federal tax benefit           0.4            1.7
      Valuation allowance on deferred tax asset        35.1             --
                                                      -----          -----
      Effective tax rate                                1.5%         (32.3)%
                                                      =====          =====


NOTE I - COMMITMENTS AND CONTINGENCIES

1. EMPLOYMENT CONTRACTS

The Company has entered into certain employment contracts which expire through
January 18, 2003. As of December 31, 1998, the Company's aggregate commitment
for future base salary is:

              1999                        $  779,000
              2000                           637,000
              2001                           486,000
              2002                           154,000
                                          ----------
              Total                       $2,056,000
                                          ==========

2. OPERATING LEASES

In May 1997, the Company signed a lease for a new office space. The term of the
lease is from September 1, 1997 through May 31, 2008. Rent expense aggregated
approximately $78,000 and $95,000 for the years ended December 31, 1998 and
1997.

As of December 31, 1998, future minimum rentals, excluding utilities, are as
follows:

              1999                          $ 81,000
              2000                            81,000
              2001                            81,000
              2002                            81,000
              2003                            86,000
              Thereafter                     398,000
                                            --------
              Total                         $808,000
                                            ========

3. MARKETING AND ADVERTISING COMMITMENTS

As of December 31, 1998, Company has advertising and marketing commitments of
$653,000.

NOTE J - SHAREHOLDERS' EQUITY

1. AUTHORIZED SHARES

In May 1997, the Company's Board of Directors authorized a new class of
2,000,000 shares of preferred stock, $.01 par value per share, and increased
the aggregate number of shares of Common Stock, $.01 par value per share
("Common Stock"), authorized for issuance from 10,000,000 shares to 15,000,000
shares.


                                     F-14
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


2. INITIAL PUBLIC OFFERING

In May 1997, the Company completed an initial public offering of 1,500,000
units ("Units"), each Unit consisting of one share of the Company's Common
Stock and one redeemable common stock purchase warrant ("Warrants"). The
Company received net proceeds of $5,939,000 (which are net of underwriting
costs and expenses), of which approximately $2,032,000 was used to repay
Company indebtedness, including the repayment of notes issued by the Company in
connection with the bridge financing. The funds from the IPO were deposited
with the Company's Factor and invested at a rate of 1.75% below prime. As a
result of the satisfaction of the bridge financing, the Company has written-off
$83,000 of unamortized debt discount and $256,000 of unamortized debt issuance
costs.

3. WARRANTS

As of December 31, 1998, the Company had 1,425,000 Warrants outstanding,
1,500,000 of which were issued in connection with the IPO, 363,000 of which
were issued in connection with the conversion from the bridge financing (see
Note D), and 135,250 of which were issued in connection with the exercise of
the Underwriter Unit Purchase Option (see Note 4 below). These Warrants
entitled the holders to purchase one share of Common Stock at $5.00 per share
during the four-year period commencing May 15, 1998; all Warrants became
exercisable on such date. The Company had the right to redeem the Warrants at
any time after they became exercisable, at a price of $.01 per Warrant,
provided that the market price of the stock exceeded 165% of the exercise price
of the Warrants for a specific period of time, and upon specific notice
provisions. On December 21, 1998, the Company elected to redeem the Warrants by
providing the 30-day written notice required. During December 1998, 573,250
of such Warrants were exercised. In the first quarter of 1999, 1,412,374
additional Warrants were exercised. Such redemption resulted in proceeds of
$2,867,000 in December 1998 and $7,062,000 in the first quarter of 1999. In
total, as of March 26, 1999, 1,985,624 or 99.3% of the total number of issued
Warrants have been exercised.

4. UNIT PURCHASE OPTION

In May 1997, the Company sold to the underwriter of the IPO, for an aggregate
purchase price of $100, a Unit Purchase Option ("UPO") consisting of the right
to purchase up to an aggregate of 150,000 Units (each Unit consists of one
share of Common Stock and one Warrant). The UPO is exercisable initially at a
per Unit price equal to 160% of $5.00 per share during the four-year period
commencing May 15, 1998. As of December 31, 1998, 135,250 Units were exercised.
In the first quarter of 1999, an additional 900 Units were exercised. The UPO
exercises resulted in total proceeds of $1,082,000 in December 1998 and $7,000
in the first quarter of 1999.

5. RESERVED SHARES

As of December 31, 1998, the Company has reserved an aggregate of 1,684,500
shares of Common Stock for the exercise of the Warrants, the UPO, and the Stock
Options.

6. STOCK OPTION PLAN

In May 1997, the Company's Board of Directors adopted a stock option plan (the
"Plan") for the purpose of encouraging key employees, consultants and directors
who are not employees to acquire a proprietary interest in the growth and
performance of the Company. In 1998, the Company amended the plan in order to
increase the maximum number of shares that may be granted under the Plan to
500,000.


                                     F-15
<PAGE>

                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997



Activity in the stock option plan is summarized as follows:

                                                 SHARES UNDER  WEIGHTED AVERAGE
                                                    OPTIONS     EXERCISE PRICE
                                                 ------------  ----------------
     Options granted                                117,000          $5.00
     Options canceled                               (24,500)          5.00
                                                    -------

     Balance at December 31, 1997                    92,500           5.00
     Options granted                                221,100           2.73
     Options canceled                               (53,625)          4.05
                                                    -------

     Balance at December 31, 1998                   259,975           3.27
                                                    =======

     Eligible for exercise at December 31, 1998      96,694           4.21
                                                    =======

The stock options are exercisable in different periods commencing in 1998
through 2007.

The following table summarizes information about options outstanding and
exercisable at December 31, 1998.

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
                     -------------------------------------------------------         -------------------------------  
                                        WEIGHTED AVERAGE                                                 WEIGHTED
    RANGE OF           OPTIONS             REMAINING        WEIGHTED AVERAGE           OPTIONS       AVERAGE OPTIONS
EXERCISE PRICES      OUTSTANDING        CONTRACTUAL LIFE     EXERCISE PRICE          EXERCISABLE       EXERCISABLE
---------------      -----------        ----------------    ----------------         -----------       -----------   
<S>                     <C>                <C>                    <C>                    <C>               <C>  
 $2.16 - $3.22          183,100            9.15 Years             $2.54                  27,444            $2.22
     $5.00               76,875            6.25 Years              5.00                  69,250             5.00
                        -------                                                          ------
 $2.16 - $5.00          259,975            8.29 Years              3.27                  96,694             4.21
                        =======                                                          ======
</TABLE>


The Company does not recognize compensation expense for stock options granted
at or above fair market value, as permitted by the accounting standards. The
fair value of options granted during 1998 and 1997 was $332,000 and $112,000,
respectively. Fair value is estimated based on the Black-Scholes option-pricing
model with the following assumptions for grants in 1998 and 1997: expected
volatility of 49% in 1998 and 40% in 1997; risk-free interest rates ranging
from 4.46% through 5.72% in 1998 and 5.98% through 6.67% in 1997 and expected
lives of 6 years in 1997 and 1998. Had compensation expense been determined
based on the fair value of the options on the grant dates, the Company's net
loss would have been increased by $332,000 ($.12 per share) in 1998 and
$112,000 ($.05 per share) in 1997.

NOTE K - CONCENTRATION

Between June 1998 and December 1998, the Company acquired approximately 40.6%
of its inventory from one supplier.


                                     F-16
<PAGE>


                                 BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997


NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

Cash and cash equivalents and Funds deposited with factor - the carrying amount
approximates fair value due to the short-term maturities of these instruments
as of December 31, 1998.

NOTE M - LEGAL PROCEEDINGS

The Company is, from time to time, a party to routine litigation arising in the
normal course of its business. The Company believes that none of these actions
will have a material adverse effect on the business, financial condition or
operating results of the Company.



                                      F-17