UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

     For the fiscal year ended December 31, 2004

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

     For the transition period from ______ to ______

                        Commission File Number: 001-14498

                                   ----------

                                  BLUEFLY, INC.
                (Name of registrant as specified in its charter)

              Delaware                              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)

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

                                   ----------

Securities registered under Section 12(b) of the Exchange Act: Common Stock, par
value $.01 per share

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.01 per share

Indicate by check mark whether the registrant (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 [ ]

Indicate by check mark whether disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

As of February 24, 2005, there were 15,329,097 shares of Common Stock, $.01 par
value, of the registrant outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates as of June 30, 2004, based
upon the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market, was approximately
$9,933,000.

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts up to 75% off
retail value. During 2004, we offered over 27,000 different styles for sale in
categories such as men's, women's and accessories as well as house and home
accessories. We launched the Bluefly.com Web site (the "Web site") in September
1998. Since its inception, www.bluefly.com has served over 640,000 customers and
shipped to over 20 countries.

Our common stock is listed on the Nasdaq SmallCap Market under the symbol "BFLY"
and on the Boston Stock Exchange under the symbol "BFL" and we are incorporated
in Delaware. Our executive offices are located at 42 West 39th Street, New York,
New York 10018, and our telephone number is (212) 944-8000. Our Internet address
is www.bluefly.com. We make available, free of charge, through our Web site, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.

In this report, the terms "we," "us," "Bluefly" and the "Company" refer to
Bluefly, Inc. and its predecessors and subsidiaries, unless the context
indicates otherwise.

RECENT DEVELOPMENTS

In February 2005, we extended the maturity dates on the Convertible Promissory
Notes issued to affiliates of Soros Private Equity Partners, LLC (collectively,
"Soros") that collectively own a majority of our capital stock in July and
October 2003 (the "Notes"). The maturity dates of the Notes were each extended
for one year, from May 1, 2005 to May 1, 2006. Also in February 2005, we renewed
our credit facility (the "Loan Facility") with Rosenthal & Rosenthal, Inc.
("Rosenthal") for an additional year, from March 30, 2005 to March 30, 2006.

BUSINESS STRATEGY

Our goal is to offer our customers the best designer brands, hottest fashion
trends and superior values. We strive to offer the same types of on trend and
in-season designer merchandise as are sold in luxury department stores such as
Saks Fifth Avenue and Bergdorf Goodman at discounts normally found only at
outlet stores and off-price stores such as T.J. Maxx and Ross Stores. We are
able to acquire our products at significantly lower prices than a luxury
department store (and pass these discounts on to our customers) because we
purchase our inventory slightly later in the season than a typical full price
retailer, at a time when vendors consider it to be excess inventory. Similarly,
we are able to offer an upscale shopping experience not available at off-price
stores or outlet malls because of our merchandise selection and the presentation
and product search capabilities offered by our Web site.

Our business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 350 top designer brands that we
offer on our Web site. We recognize that liquidating excess inventory can be a
"necessary evil" and that brand dilution can occur when a brand's product is
offered in a traditional discount environment. We would like to make the
liquidation of excess inventory a positive experience for our vendors rather
than a distasteful one. We intend to do this by treating our suppliers with
honesty and respect and by creating a high-end retail environment that offers
only the best designer brands and the most current trends. In doing so, we hope
to support our vendors' brands, rather than diluting them as traditional off-
price channels do.

We do not believe that we can accomplish these goals without using the Internet
as a platform. The direct marketing of products that are available in limited
quantities and sizes, and that are not replenishable, requires a cost-effective
medium that can display 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. We believe print catalogs are not well suited to this task. The
paper, printing, mailing and other production costs of a print catalog can be
significant and the lead times required to print a catalog make them
significantly inflexible in addressing inventory sell outs, price changes and
new styles. To work around these limitations, a traditional cataloger typically
requires products that are replenishable, available in a full range of sizes and
in substantial quantities. Similarly, retailing on television is costly and
requires substantial quantities of products that are available in all sizes in
order

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for it to be an economical medium. In addition, the number of items that can be
displayed on television is limited, and television does not allow viewers to
search for products that interest them.

The Internet, however, can be a far less expensive and far more effective
medium. By using the Internet as our platform, the number of items that we offer
is not limited by the high costs of printing and mailing catalogs. With the
Internet, we can automatically update product images as new products arrive and
other items sell out. By using a real-time inventory database, we can create a
personalized shopping environment and allow our customers to search for the
products that specifically interest them and are available in their size. In
addition, we believe that we are able to more economically and consistently
maintain an upscale environment through the design of a single online
storefront.

We believe that we have created a customer experience that is fundamentally
better than that offered by traditional off-price retailers. Similarly, we
believe that our upscale atmosphere, professional photography and premium
merchandise offering create a superior distribution channel for designers who
wish to liquidate their end-of-season and excess merchandise without suffering
the brand dilution inherent in traditional off-price channels.

E-COMMERCE AND THE ONLINE APPAREL MARKET

The dramatic growth of e-commerce has been widely reported and is expected to
continue. According to the ComScore Networks, online sales grew in 2004 by 26%
over the $93.2 billion spent in 2003. During the holiday shopping season alone,
consumers spent $23.6 billion, a 28% increase over the $18.3 billion spent in
the previous year, according to ComScore. We believe 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.

Forrester Research predicts that online sales of apparel will top $13.8 billion
in 2004, which makes it the single largest category of merchandise sold online.
According to Forrester, 12% of all apparel sales will be made online by 2010, up
from 7% in 2004. We believe that the market for online sales of apparel is
growing faster than many other retail categories as a result of a confluence of
trends, including (i) the growth of the number of women online, who account for
a larger share of retail apparel purchases, (ii) the expansion of online traffic
from technology oriented users to users with mainstream demographic, (iii) the
development of sophisticated tools to search complex product categories such as
apparel and (iv) the growing adoption of high speed access of cable modems and
DSL, which makes viewing large numbers of photos much faster. Of course, there
can be no assurance that such expectations will prove to be correct or that they
will have a positive effect on our business.

MARKETING

Our marketing efforts are focused both on acquiring new customers and retaining
existing customers. During the past several years, we have acquired new
customers primarily through online advertising, word-of-mouth, sweepstakes and
our affiliate program. Although we have not allocated significant resources to
branding or to more traditional advertising channels such as print during this
time, we may begin to do so as we seek to more aggressively promote the growth
of our business. A significant portion of our sales to existing customers are
driven by our customer emails, which highlight new promotions and products and
provide special previews to customers who have asked to be included in our email
list. In addition, we believe that our sales to existing customers are driven by
all aspects of our customer experience, including our Web site design,
packaging, delivery and customer service.

MERCHANDISING

We buy merchandise directly from designers as well as from retailers and other
third party, indirect resources. Currently, we offer products from more than 350
name brand designers, which we believe to be the widest selection of designers
available from any online store. We have established direct supply relationships
with over 200 such designers. We believe that we have been successful in opening
up over 200 direct supply relationships, in part because we have devoted
substantial resources to establishing Bluefly.com as a high-end retail
environment. We are committed to displaying all of our merchandise in an
attractive manner, offering superior customer service and gearing all aspects of
our business towards creating a better channel for top designers.

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During 2004, we re-focused our merchandising strategy to offer more in-season
merchandise and to cover the latest trends, while continuing to offer a premium
selection of brands. As a result of this merchandise strategy, we were able to
increase our gross margins to their highest levels ever - 37.5%, from 29.9%,
32.8% and 30.5% in 2003, 2002 and 2001, respectively.

WAREHOUSING AND FULFILLMENT

When we receive an order, the information is transmitted to our third party
warehouse and fulfillment center located in Virginia, where the items included
in the order are picked, packed and shipped directly to the customer. Our
inventory database is updated on a real-time basis, allowing us to display on
our Web site only those styles, sizes and colors of product available for sale.

We focus on customer satisfaction throughout our organization. In December 2004,
during our peak weeks of the holiday season, the vast majority of our orders
were shipped within one business day from receipt of the customer's order.

CUSTOMER SERVICE

We believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service effort starts
with our Web site, which is designed to provide an intuitive shopping
experience. An easy to use help center is available on the Web site and is
designed to answer many of our customers' most frequently asked questions. For
customers who prefer e-mail or telephone assistance, customer service
representatives are available seven days a week to provide assistance. We
utilize customer representatives from a third party call center that has a team
dedicated to our business. We also maintain a team of premiere representatives
in our New York office, who provide special services and assist in the training
and management of the other representatives. To insure that customers are
satisfied with their shopping experience, we generally allow returns for any
reason within 90 days of the sale for a full refund.

TECHNOLOGY

We have implemented a broad array of state-of-the-art technologies that
facilitate Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technologies include a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, we
incorporate, for transmission of confidential personal information between
customers and our Web server, Secure Socket Layer Technology ("SSL") such that
all data is transmitted via a 128-bit encrypted session. The computer and
communications equipment on which our Web site is hosted are currently located
at a single third party co-location facility in New Jersey. During the first
half of 2005 we intend to move to a new co-location facility owned by a
different third party located in New York.

COMPETITION

Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a relatively new, dynamic, high-growth market.
Our competition for online customers comes from a variety of sources, including
existing land-based retailers such as Neiman Marcus, Saks Fifth Avenue, Bergdorf
Goodman, The Gap, Nordstrom, and Macy's that are using the Internet to expand
their channels of distribution, established Internet companies such as
Amazon.com, Overstock.com and ebay.com and less established companies such as
eLuxury and Yoox. In addition, our competition for customers comes from
traditional direct marketers such as L.L. Bean, Lands' End, and J.Crew, designer
brands that may attempt to sell their products directly to consumers through the
Internet and land-based off-price retail stores, such as T.J. Maxx, Marshalls,
Filene's Basement and Loehmanns, which may or may not use the Internet in the
future to grow their customer base. Many of these competitors have longer
operating histories, significantly greater resources, greater brand recognition
and more firmly established supply relationships. Moreover, we expect additional
competitors to emerge in the future.

We believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance and site features. Although we believe that we compare
favorably with our competitors, we recognize that this market is relatively new
and is evolving rapidly, and, accordingly, there can be no assurance that this
will continue to be the case.

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INTELLECTUAL PROPERTY

We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in services and technology, including
confidentiality, invention assignment and nondisclosure agreements with
employees and contractors. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, we pursue the registration of our
trademarks and service marks in the U.S. and internationally and the
registration of our domain name and variations thereon. However, effective
intellectual property protection may not be available in every country in which
the services are made available online.

We rely on technologies that we license from third parties. These licenses may
not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of lower
quality or at greater cost, which could materially adversely effect our
business, financial condition, results of operations and cash flows.

We do not believe that our business, sales policies or technologies infringe the
proprietary rights of third parties. However, third parties have in the past and
may in the future claim that our business, sales policies or technologies
infringe their rights. We expect that participants in the e-commerce market will
be increasingly subject to infringement claims as the number of services and
competitors in the industry grows. Any such claim, with or without merit, could
be time consuming, result in costly litigation or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to us, or at all. As a result, any such claim
of infringement against us could have a material adverse effect upon our
business, financial condition, results of operations and cash flows.

GOVERNMENTAL APPROVALS AND REGULATIONS

We are 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. We are not aware
of any permits or licenses that are required in order for us, generally, to sell
apparel and fashion accessories on the Internet, although licenses are sometimes
required to sell products made from specific materials. In addition, permits or
licenses may be required from international, federal, state or local
governmental authorities to operate or to sell certain other products on the
Internet in the future. No assurances can be given that we will be able to
obtain such permits or licenses. We 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 we will be able to comply with such legislation or
statutes. Our Internet operations are not currently impacted by federal, state,
local and foreign environmental protection laws and regulations.

EMPLOYEES

As of February 18, 2005, we had 73 full-time employees and 4 part-time
employees, as compared to 89 full-time and 3 part-time employees as of February
18, 2004. None of our employees are represented by a labor union and we consider
our relations with our employees to be good.

RISK FACTORS

We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2004, we had an accumulated deficit of $96,127,000. We
incurred net losses of $3,791,000, $6,369,000 and $6,479,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. We have incurred substantial
costs to develop our Web site and infrastructure. In order to expand our
business, we intend to invest in sales, marketing, merchandising, operations,
information systems, site development and additional personnel to support these
activities. We therefore expect to continue to incur substantial operating
losses for the foreseeable future. Our ability to become profitable depends on
our ability to generate and sustain substantially higher net sales while
maintaining reasonable expense levels, both of which are uncertain. If we do
achieve profitability, we cannot be certain that we would be able to sustain or
increase profitability on a quarterly or annual basis in the future.

We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may need additional financing to effect our business plan
and accelerate our customer acquisition. The environment for raising investment

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capital has been difficult and there can be no assurance that additional
financing or other capital will be available upon terms acceptable to us, or at
all. In the event that we are unable to obtain additional financing, if needed,
we could be forced to decrease expenses that we believe are necessary for us to
realize on our long-term prospects for growth and profitability and/or liquidate
inventory in order to generate cash. Moreover, any additional equity financing
that we may raise could result in significant dilution of the existing holders
of common stock. See "Risk Factors - Certain Events Could Result In Significant
Dilution Of Your Ownership Of Common Stock."

Our Lenders Have Liens On Substantially All Of Our Assets And Could Foreclose In
The Event That We Default Under Our Loan Facility. Under the terms of the Loan
Facility, Rosenthal provides us with certain credit accommodations, including
loans and advances, factor-to-factor guarantees, letters of credit in favor of
suppliers or factors and purchases of payables owed to our suppliers. Pursuant
to the Loan Facility, we gave a first priority lien to Rosenthal on
substantially all of our assets, including our cash balances. If we default
under the Loan Facility, Rosenthal would be entitled, among other things, to
foreclose on our assets in order to satisfy our obligations under the Loan
Facility.

Our Ability To Comply With Our Financial Covenants And Pay Our Indebtedness
Under Our Loan Facility Is Dependent Upon Meeting Our Business Plan. We are
required to pay interest under our Loan Facility on a monthly basis. In
addition, we are required, under the facility, to maintain working capital of at
least $6.0 million and net tangible worth of at least $7.0 million as of the end
of each fiscal year. Assuming we meet our business plan, we will satisfy these
covenants. To a certain extent, however, our ability to meet our business plan,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control, and therefore we cannot assure
you that based on our business plan we will generate sufficient cash flow from
operations to enable us to pay our indebtedness under the Loan Facility and
maintain compliance with our net working capital covenant throughout the term of
the agreement or that we will be able to maintain compliance with the net worth
covenant. If we fall short of our business plan and are unable to raise
additional capital, we could default under our Loan Facility. In the event of a
default under the Loan Facility, Rosenthal would be entitled, among other
things, to foreclose on our assets (whether inside or outside a bankruptcy
proceeding) in order to satisfy our obligations under the Loan Facility. See
"Risk Factors - Our Lenders Have Liens On Substantially All Of Our Assets And
Could Foreclose In The Event That We Default Under Our Loan Facility."

Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. Stockholders could be subject to significant dilution to the
extent that we raise additional equity financing, as a result of both the
issuance of additional equity securities, the potential conversion of the
convertible promissory notes described below and the anti-dilution provisions of
our Series B, C, D and E preferred stock described below, which provide for the
issuance of additional securities to the holders thereof, under certain
circumstances, to the extent that the Preferred Stock is converted at any time
after a sale of Common Stock at less than $0.76 per share.

Moreover, as of February 18, 2005, there were outstanding options to purchase
8,750,680 shares of our Common Stock issued under our Stock Option Plans,
warrants to purchase 981,644 shares of our Common Stock issued to Soros, and
additional warrants and options to purchase 723,301 shares of our Common Stock.
In addition, as of such date, our outstanding Preferred Stock was convertible
into an aggregate of 43,323,430 shares of our Common Stock (plus any shares of
our Common Stock issued upon conversion in payment of any accrued and unpaid
dividends). The exercise of our outstanding options and warrants and/or the
conversion of our outstanding Preferred Stock would dilute the then existing
stockholders' percentage ownership of our common stock, and any sales in the
public market of our Common Stock underlying such securities, could adversely
affect prevailing market price of our Common Stock. In the event that all of the
securities described above were converted to Common Stock, the holders of the
Common Stock immediately prior to such conversion would own approximately 22% of
the outstanding Common Stock immediately after such conversion, excluding the
effect of accrued dividends on Preferred Stock.

As described above, our Series B, C, D and E Preferred Stock contain
anti-dilution provisions pursuant to which, subject to certain exceptions, in
the event that we issue or sell our Common Stock or new securities convertible
into our Common Stock in the future for less than $0.76 per share, the number of
shares of our Common Stock to be issued upon the conversion of such Preferred
Stock would be increased to a number equal to the face amount of such Preferred
Stock divided by the price at which such Common Stock or other new securities
are sold.

In addition, Soros owns $4 million of convertible promissory notes issued by us
that bear interest at the rate of 12% per annum and are convertible, at Soros'
option, into our equity securities sold in any subsequent round of financing at
a price that is equal

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to the lowest price per share accepted by any investor (including Soros or any
of its affiliates) in such subsequent round of financing.

Soros Owns A Majority Of Our Stock And Therefore Effectively Controls Our
Management And Policies. As of February 18, 2005, through its holdings of our
common stock, as well as our preferred stock, and warrants convertible into our
common stock, Soros beneficially owned, in the aggregate, approximately 84% of
our common stock. The holders of our preferred stock vote on an "as converted"
basis with the holders of our common stock. By virtue of its ownership of our
preferred stock, Soros has the right to appoint two designees to our Board of
Directors, each of whom has seven votes on any matter voted upon by our Board of
Directors. Collectively, these two designees have 14 out of 19 possible votes on
each matter voted upon by our Board of Directors. In addition, we are required
to obtain the approval of holders of our preferred stock prior to taking certain
actions. The holders of our preferred stock have certain pre-emptive rights to
participate in future equity financings and certain anti-dilution rights that
could result in the issuance of additional securities to such holders. In view
of their large percentage of ownership and rights as the holders of our
preferred stock, Soros effectively controls our management and policies, such as
the election of our directors, the appointment of new management and the
approval of any other action requiring the approval of our stockholders,
including any amendments to our certificate of incorporation, a sale of all or
substantially all of our assets or a merger. In addition, Soros has demand
registration rights with respect to the shares of our common stock that it
beneficially owns. Any decision by Soros to exercise such registration rights
and to sell a significant amount of our shares in the public market could have
an adverse effect on the price of our common stock. See "Risk Factors - Certain
Events Could Result In Significant Dilution of Your Ownership Of Common Stock."

If We Are Not Accurate In Forecasting Our Revenues, We May Be Unable To Adjust
Our Operating Plans In A Timely Manner. Because our business has not yet reached
a mature stage, it is difficult for us to forecast our revenues accurately. We
base our current and future expense levels and operating plans on expected
revenues, but in the short term a significant portion of our expenses are fixed.
Accordingly, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
operating results in some future quarter to fall below the expectations of
securities analysts and investors. In that event, the trading price of our
common stock could decline significantly. In addition any such unexpected
revenue shortfall could significantly affect our short-term cash flow and our
net worth, which could require us to seek additional financing and/or cause a
default under our credit facility. See "Risk Factors - We Are Making A
Substantial Investment In Our Business And May Need To Raise Additional Funds"
and "Risk Factors -Our Ability To Comply With Our Financial Covenants And Pay
Our Indebtedness Under Our Loan Facility Is Dependent Upon Meeting Our Business
Plan."

Unexpected Changes In Fashion Trends Could Cause Us To Have Either Excess or
Insufficient Inventory. Fashion trends can change rapidly, and our business is
sensitive to such changes. There can be no assurance that we will accurately
anticipate shifts in fashion trends and adjust our merchandise mix to appeal to
changing consumer tastes in a timely manner. If we misjudge the market for our
products or are unsuccessful in responding to changes in fashion trends or in
market demand, we could experience insufficient or excess inventory levels or
higher markdowns, either of which would have a material adverse effect on our
business, financial condition and results of operations.

We Will Be Subject To Cyclical Variations In The Apparel And E-Commerce Markets.
The apparel industry historically has been subject to substantial cyclical
variations. Furthermore, Internet usage slows down in the summer months. We and
other apparel vendors rely on the expenditure of discretionary income for most,
if not all, sales. In the first three quarters of 2003, the retail apparel
market experienced sluggish growth, requiring many retailers to significantly
reduce prices and discount merchandise. We lowered our prices during the first
quarter of 2003, in part, as the result of this sluggish growth, and maintained
lower pricing levels in the second and third quarters of 2003 in order to
generate cash from excess out-of-season inventory. While the retail apparel
market improved modestly during the fourth quarter of 2003 and the 2004 calendar
year, any future decrease in growth rates or downturn, whether real or
perceived, in economic conditions or prospects could adversely affect consumer
spending habits and, therefore, have a material adverse effect on our revenue,
cash flow and results of operations. Alternatively, any improvement, whether
real or perceived, in economic conditions or prospects could adversely impact
our ability to acquire merchandise and, therefore, have a material adverse
effect on our business, prospects, financial condition and results of
operations, as our supply of merchandise is dependent on the inability of
designers and retailers to sell their merchandise in full-price venues. See
"Risk Factors - We Do Not Have Long Term Contracts With The Majority Of Our
Vendors And Therefore The Availability of Merchandise Is At Risk."

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We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation Involving The Sale Of Non-Authentic Or Damaged Goods. We purchase
merchandise both directly from brand owners and indirectly from retailers and
third party distributors. The purchase of merchandise from parties other than
the brand owners increases the risk that we will mistakenly purchase and sell
non-authentic or damaged goods, which could result in potential liability under
applicable laws, regulations, agreements and orders. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of operations.

If Our Co-Location Facility, Third Party Distribution Center Or Third Party Call
Center Fails, Our Business Could Be Interrupted For A Significant Period Of
Time. Our ability to receive and fulfill orders successfully and provide
high-quality customer service, largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems and
fulfillment center. Substantially all of our computer and communications
hardware is located at a single co-location facility owned by a third party in
New Jersey, and during the first half of 2005, we intend to move to a new
co-location facility owned by a different third party in New York. Primarily all
of our inventory is held, and our customer orders are filled, at a third party
distribution center located in Virginia, and a large majority of our customer
service representatives are employees of a third party call center in Ohio.
These operations are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, terrorist attacks, acts of war,
break-ins, earthquake and similar events. We do not presently have redundant
systems in multiple locations or a formal disaster recovery plan. Accordingly, a
failure at one of these facilities could interrupt our business for a
significant period of time, and our business interruption insurance may be
insufficient to compensate us for losses that may occur. Any such interruption
would negatively impact our sales, results of operations and cash flows for the
period in which it occurred, and could have a long-term adverse effect on our
relationships with our customers and suppliers.

Security Breaches To Our Systems And Database Could Cause Interruptions to Our
Business And Impact Our Reputation With Customers, And We May Incur Significant
Expenses to Protect Against Such Breaches. A fundamental requirement for online
commerce and communications is the secure transmission of confidential
information over public networks. There can be no assurance that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
algorithms we use to protect customer transaction and personal data contained in
our customer database. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. If any such compromise of our security were to occur, it could have
a material adverse effect on our reputation with customers, thereby affecting
our long-term growth prospects. In addition, we may be required to expend
significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches.

Brand Owners Could Establish Procedures To Limit Our Ability To Purchase
Products Indirectly. Brand owners have implemented, and are likely to continue
to implement, procedures to limit or control off-price retailers' ability to
purchase products indirectly. In addition, several brand owners in the U.S. have
distinctive legal rights rendering them the only legal importer of their
respective brands into the U.S. If we acquire such product indirectly from
distributors and other third parties who may not have complied with applicable
customs laws and regulations, such goods could be subject to seizure from our
inventory by U.S. Customs Service, and the importer may have a civil action for
damages against us. See "Risk Factors - We Do Not Have Long Term Contracts With
The Majority of Our Vendors And Therefore The Availability Of Merchandise Is At
Risk."

Our Growth May Place A Significant Strain On Our Management And Administrative
Resources And Cause Disruptions In Our Business. Our historical growth has
placed, and any further growth is likely to continue to place, a significant
strain on our management and administrative resources. To be successful, we must
continue to implement information management systems and improve our operating,
administrative, financial and accounting systems and controls. We will also need
to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, merchandising, operations and technology
functions. Any failure to implement such systems and training, and to maintain
such coordination, could affect our ability to plan for, and react quickly to,
changes in our business and, accordingly, could cause an adverse impact on our
cash flow and results of operations in the periods during which such changes
occur. In addition, as our workforce grows, our exposure to potential employment
liability issues increases, and we will need to continue to improve our human
resources functions in order to protect against such increased exposure.
Moreover, our business is dependent upon our ability to expand our third-party
fulfillment operations, customer service operations, technology infrastructure,
and inventory levels to accommodate increases in demand, particularly during the
peak holiday selling season.

                                        8
<PAGE>

Our planned expansion efforts in these areas could cause disruptions in our
business. Any failure to expand our third-party fulfillment operations, customer
service operations, technology infrastructure or inventory levels at the pace
needed to support customer demand could have a material adverse effect on our
cash flow and results of operations during the period in which such failures
occur and could have a long-term effect on our reputation with our customers.

We Are Heavily Dependent On Third-Party Relationships, And Failures By A Third
Party Could Cause Interruptions To Our Business. We are heavily dependent upon
our relationships with our fulfillment operations provider, third party call
center and Web hosting provider, delivery companies like UPS and the United
States Postal Service, and credit card processing companies such as Paymentech
and Cybersource to service our customers' needs. To the extent that there is a
slowdown in mail service or package delivery services, whether as a result of
labor difficulties, terrorist activity or otherwise, our cash flow and results
of operations would be negatively impacted during such slowdown, and the results
of such slowdown could have a long-term negative effect on our reputation with
our customers. The failure of our fulfillment operations provider, third party
call center, credit card processors or Web hosting provider to properly perform
their services for us could cause similar effects. Our business is also
generally dependent upon our ability to obtain the services of other persons and
entities necessary for the development and maintenance of our business. If we
fail to obtain the services of any such person or entities upon which we are
dependent on satisfactory terms, or we are unable to replace such relationship,
we would have to expend additional resources to develop such capabilities
ourselves, which could have a material adverse impact on our short-term cash
flow and results of operations and our long-term prospects.

We Are In Competition With Companies Much Larger Than Ourselves. Electronic
commerce generally and, in particular, the online retail apparel and fashion
accessories market, is a new, dynamic, high-growth market and is rapidly
changing and intensely competitive. Our competition for customers comes from a
variety of sources including:

     .    existing land-based, full price retailers, such as Neiman Marcus, Saks
          Fifth Avenue, Bergdorf Goodman, Nordstrom, The Gap, and Macy's that
          are using the Internet to expand their channels of distribution;

     .    less established online companies, such as eLuxury and Yoox;

     .    internet sites such as Amazon.com, Overstock.com and ebay.com

     .    traditional direct marketers, such as L.L. Bean, Lands' End and J.
          Crew; and

     .    traditional off-price retail stores such as T.J. Maxx, Marshalls,
          Ross, Filene's Basement and Loehmanns, which may or may not use the
          Internet to grow their customer base.

We expect competition in our industry to intensify and believe that the list of
our competitors will grow. Many of our competitors and potential competitors
have longer operating histories, significantly greater resources, greater brand
name recognition and more firmly established supply relationships. We believe
that the principal competitive factors in our market include:

     .    brand recognition;

     .    merchandise selection;

     .    price;

     .    convenience;

     .    customer service;

     .    order delivery performance; and

     .    site features.

There can be no assurance that we will be able to compete successfully against
competitors and future competitors, and competitive pressures faced by us could
force us to increase expenses and/or decrease our prices at some point in the
future.

We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. We have few agreements controlling the
long-term availability of merchandise or the continuation of particular pricing

                                        9
<PAGE>

practices. Our contracts with suppliers typically do not restrict such suppliers
from selling products to other buyers. There can be no assurance that our
current suppliers will continue to sell products to us on current terms or that
we will be able to establish new or otherwise extend current supply
relationships to ensure product acquisitions in a timely and efficient manner
and on acceptable commercial terms. Our ability to develop and maintain
relationships with reputable suppliers and obtain high quality merchandise is
critical to our success. If we are unable to develop and maintain relationships
with suppliers that would allow us to obtain a sufficient amount and variety of
quality merchandise on acceptable commercial terms, our ability to satisfy our
customer's needs, and therefore our long-term growth prospects, would be
materially adversely affected. See "Risk Factors - Brand Owners Could Establish
Procedures to Limit Our Ability to Purchase Products Indirectly."

We Need To Further Establish Brand Name Recognition. We believe that further
establishing, maintaining and enhancing our brand is a critical aspect of our
efforts to attract and expand our online traffic. The number of Internet sites
that offer competing services, many of which already have well established
brands in online services or the retail apparel industry generally, increases
the importance of establishing and maintaining brand name recognition. Promotion
of Bluefly.com will depend largely on our success in providing a high quality
online experience supported by a high level of customer service, which cannot be
assured. In addition, to attract and retain online users, and to promote and
maintain Bluefly.com in response to competitive pressures, we may find it
necessary to increase substantially our advertising and marketing expenditures.
If we are unable to provide high quality online services or customer support, or
otherwise fail to promote and maintain Bluefly.com, or if we incur excessive
expenses in an attempt to promote and maintain Bluefly.com, our long-term growth
prospects, would be materially adversely affected.

There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic; Implementation Of Changes To Web Site. A key element of our
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, transaction processing systems and network infrastructure are
critical to our reputation and our ability to attract and retain customers, as
well as maintain adequate customer service levels. Our revenues will depend on
the number of visitors who shop on Bluefly.com and the volume of orders we can
handle. Unavailability of our Web site or reduced order fulfillment performance
would reduce the volume of goods sold and could also adversely affect consumer
perception of our brand name. We may experience periodic system interruptions
from time to time. If there is a substantial increase in the volume of traffic
on Bluefly.com or the number of orders placed by customers, we will be required
to expand and upgrade further our technology, transaction processing systems and
network infrastructure. There can be no assurance that we will be able to
accurately project the rate or timing of increases, if any, in the use of
Bluefly.com or expand and upgrade our systems and infrastructure to accommodate
such increases on a timely basis. In order to remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com, which is particularly challenging given the rapid rate at which
new technologies, customer preferences and expectations and industry standards
and practices are evolving in the online commerce industry. Accordingly, we
redesign and enhance various functions on our Web site on a regular basis, and
we may experience instability and performance issues as a result of these
changes. In addition, during the first half of 2005, we plan to move to a new
co-location facility and in connection with the move will need to rebuild our
systems with new hardware at the new co-location facility. This move may also
result in short-term instability and performance issues, although in the long
term we believe that it will provide us a more robust and stable environment.

We May Be Subject To Higher Return Rates. We recognize that purchases of apparel
and fashion accessories over the Internet may be subject to higher return rates
than traditional store bought merchandise. We have established a liberal return
policy in order to accommodate our customers and overcome any hesitancy they may
have with shopping via the Internet. If return rates are higher than expected,
our business, prospects, financial condition, cash flows and results of
operations could be materially adversely affected.

Our Success Is Largely Dependent Upon Our Executive Personnel. We believe our
success will depend to a significant extent on the efforts and abilities of our
executive personnel. In particular, we rely upon their strategic guidance, their
relationships and credibility in the vendor and financial communities and their
ability to recruit key operating personnel. The loss of the services of any of
our executive officers could have a material adverse effect on our credibility
in the vendor communities and our ability to recruit new key operating
personnel.

Our Success Is Dependent Upon Our Ability To Attract New Key Personnel. Our
operations will also depend to a great extent on our ability to attract new key
personnel with relevant experience and retain existing key personnel in the
future. The

                                       10
<PAGE>

market for qualified personnel is extremely competitive. Our failure to attract
additional qualified employees could have a material adverse effect on our
prospects for long-term growth.

There Are Inherent Risks Involved In Expanding Our Operations. We may choose to
expand our 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 our market presence through
relationships with third parties, adopting non-Internet based channels for
distributing our products, or consummating acquisitions or investments.
Expansion of our operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
our management, financial and operational resources. For example, we have
historically expended significant internal resources in connection with the
redesign of our Web site and the implementation of our online strategic
alliances. Moreover, in the event that we expand upon our efforts to open
brick-and-mortar outlet stores, we will be required to devote significant
internal resources and capital to such efforts. There can be no assurance that
we would be able to expand our 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 that is not favorably received by
consumer or trade customers could damage our reputation.

We May Be Liable For Infringing The Intellectual Property Rights Of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been, and we expect to continue to be,
subject to claims alleging infringement of the trademarks and other intellectual
property rights of third parties. These claims and any resulting litigation, if
it occurs, could subject us to significant liability for damages. In addition,
even if we prevail, litigation could be time-consuming and expensive and could
result in the diversion of our time and attention. Any claims from third parties
may also result in limitations on our ability to use the intellectual property
subject to these claims unless we are able to enter into agreements with the
third parties making these claims.

We May Be Liable for Product Liability Claims. We sell products manufactured by
third parties, some of which may be defective. If any product that we sell were
to cause physical injury or injury to property, the injured party or parties
could bring claims against us as the retailer of the product. Our insurance
coverage may not be adequate to cover every claim that could be asserted. If a
successful claim were brought against the Company in excess of our insurance
coverage, it could have a material adverse effect on our cash flow and on our
reputation with customers. Unsuccessful claims could result in the expenditure
of funds and management time and could have a negative impact on our business.

We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, domain names and trade secret protection to protect our proprietary
rights. Third parties may infringe or misappropriate our trademarks or other
proprietary rights, which could have a material adverse effect on our business,
prospects, results of operations or financial condition. While we enter into
confidentiality agreements with our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We are pursuing registration of various trademarks,
service marks and domain names in the United States and abroad. Effective
trademark, copyright and trade secret protection may not be available in every
country, and there can be no assurance that the United States or foreign
jurisdictions will afford us any protection for our intellectual property. There
also can be no assurance that any of our intellectual property rights will not
be challenged, invalidated or circumvented. In addition, we do not know whether
we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is uncertain and still evolving. Moreover, even to the extent that we
are successful in defending our rights, we could incur substantial costs in
doing so.

Our Business Could Be Harmed By Consumers' Concerns About The Security Of
Transactions Over The Internet. Concerns over the security of transactions
conducted on the Internet and commercial online services, the increase in
identity theft and the privacy of users may also inhibit the growth of the
Internet and commercial online services, especially as a means of conducting
commercial transactions. Moreover, although we have developed systems and
processes that are designed to protect consumer information and prevent
fraudulent credit card transactions and other security breaches, failure to
mitigate such fraud or breaches could have a material adverse effect on our
business, prospects, financial condition and results of operations.

We Face Legal Uncertainties Relating To The Internet In General And To Our
Industry In Particular And May Become Subject To Costly Government Regulation.
We are 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

                                       11
<PAGE>

online commerce. However, it is possible that laws and regulations may be
adopted that would apply to the Internet and other online services. Furthermore,
the growth and development of the market for online commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on those companies conducting business online. The adoption of any additional
laws or regulations may increase our cost of doing business and/or decrease the
demand for our products and services and increase our cost of doing business.

The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could also increase our cost of doing business. In addition, if we were alleged
to have violated federal, state or foreign, civil or criminal law, we could face
material liability and damage to our reputation and, even if we successfully
defend any such claim, we incur significant costs in connection with such
defense.

We Face Uncertainties Relating To Sales And Other Taxes. We are not currently
required to pay sales or other similar taxes in respect of shipments of goods
into states other than Virginia, Ohio, New Jersey and New York. However, one or
more states may seek to impose sales tax collection obligations on out-of-state
companies such as our company that engage in online commerce. In addition, any
new operation in states outside Virginia, Ohio, New Jersey and New York could
subject shipments into such states to state sales taxes under current or future
laws. A successful assertion by one or more states or any foreign country that
the sale of merchandise by us is subject to sales or other taxes, could subject
us to material liabilities and, to the extent that we pass such costs on to our
customers, could decrease our sales.

Change Of Control Covenant And Liquidation Preference Of Preferred Stock. We
have agreed with Soros, that for so long as any shares of their Preferred Stock
are outstanding, we will not take any action to approve or otherwise facilitate
any merger, consolidation or change of control, unless provisions have been made
for the holders of such Preferred Stock to receive from the acquirer an amount
in cash equal to the respective aggregate liquidation preferences of such
Preferred Stock. The aggregate liquidation preference of the Preferred Stock is
equal to the greater of (i) approximately $49,100,000 (plus any accrued and
unpaid dividends) and (ii) the amount that the holders of shares of Preferred
Stock would receive if they were to convert such shares of Common Stock
immediately prior to liquidation.

The Holders Of Our Common Stock May Be Adversely Affected By The Rights Of
Holders Of Preferred Stock That May Be Issued In The Future. Our certificate of
incorporation and by-laws, as amended, contain certain provisions that may
delay, defer or prevent a takeover. Our Board of Directors has the authority to
issue up to 15,486,250 additional shares of preferred stock, and to determine
the price, rights, preferences and restrictions, including voting rights, of
those shares, without any further vote or action by the stockholders.
Accordingly, our Board of Directors is empowered, without approval of the
holders of Common Stock, to issue preferred stock, for any reason and at any
time, with such rates of dividends, redemption provisions, liquidation
preferences, voting rights, conversion privileges and other characteristics as
they may deem necessary. The rights of holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future.

We Rely On The Effectiveness Of Our Internal Controls. Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate
internal control structure and procedures for financial reporting and assess on
an on-going basis the design and operating effectiveness of our internal control
structure and procedures for financial reporting. Our independent registered
accounting firm will be required to audit both the design and operating
effectiveness of our internal controls and management's assessment of the design
and the effectiveness of its internal controls for the year ended December 31,
2005. It is possible that, in preparation for this audit, we could discover
certain deficiencies in the design and/or operation of our internal controls
that could adversely affect our ability to record, process, summarize and report
financial data. We have invested and will continue to invest significant
resources in this process. Because management's assessment of internal controls
has not been required to be reported in the past, we are uncertain as to what
impact a conclusion that deficiencies exist in our internal controls over
financial reporting would have on the trading price of our common stock.

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

                                       12
<PAGE>

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.

ITEM 2. PROPERTIES

We lease approximately 26,000 square feet of office space in New York City. The
property is in good operating condition. The lease expires in 2010. Our total
lease expense for the current office space during 2004 was approximately
$442,000.

ITEM 3. LEGAL PROCEEDINGS

We currently, and from time to time, are involved in litigation incidental to
the conduct of our business. However, we are not party to any lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's common stock, par value $.01 per share ("Common Stock"), is quoted
on The Nasdaq SmallCap Market and the Boston Stock Exchange. The following table
sets forth the high and low bid prices for the Common Stock for the periods
indicated, as reported by the Nasdaq SmallCap Market:

           FISCAL 2004              HIGH        LOW
           --------------          ------      ------
           First Quarter           $ 4.93      $ 3.07
           Second Quarter          $ 3.44      $ 1.92
           Third Quarter           $ 2.30      $ 1.40
           Fourth Quarter          $ 3.56      $ 1.75

           FISCAL 2003              HIGH        LOW
           --------------          ------      ------
           First Quarter           $ 1.69      $ 0.67
           Second Quarter          $ 1.60      $ 0.72
           Third Quarter           $ 1.80      $ 0.76
           Fourth Quarter          $ 5.96      $ 1.20

HOLDERS

As of February 18, 2005, there were approximately 109 holders of record of the
Common Stock. We believe that there were more than 5,000 beneficial holders of
the Common Stock as of such date.

DIVIDENDS

We have never declared or paid cash dividends on our Common Stock. We currently
intend to retain any future earnings to finance future growth and, therefore, do
not anticipate paying any cash dividends in the foreseeable future.

                                       13
<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2004)

<TABLE>
<CAPTION>
                                                                                           NUMBER OF SECURITIES
                                                                                           REMAINING AVAILABLE FOR
                                                                                           FUTURE ISSUANCE UNDER
                                 NUMBER OF SECURITIES TO BE   WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                 ISSUED UPON EXERCISE OF      PRICE OF OUTSTANDING         (EXCLUDING SECURITIES
                                 OUTSTANDING OPTIONS,         OPTIONS, WARRANTS AND        REFLECTED IN COLUMN (a))
PLAN CATEGORY                    WARRANTS AND RIGHTS(a)       RIGHTS (b)                   (c)
-----------------------------    --------------------------   -------------------------    -------------------------
<S>                                      <C>                         <C>                         <C>
Equity compensation plans                8,911,789                   $ 2.35                      2,877,431
 approved by security holders

Equity compensation plans not              901,590                   $ 1.60                        294,922
 approved by security holders

Total                                    9,813,379                   $ 2.28                      3,172,353
</TABLE>

The following is a summary of the material provisions of the Bluefly, Inc. 2000
Plan Stock Option Plan (the "2000 Plan"), our only equity compensation plan that
has not been approved by our stockholders.

Eligibility. Key employees of the Company who are not officers or directors of
the Company and its affiliates and consultants to the Company are eligible to be
granted options.

Administration of the 2000 Plan. The Option Plan/Compensation Committee
administers the 2000 Plan. The Option Plan/Compensation Committee has the full
power and authority, subject to the provisions of the 2000 Plan, to designate
participants, grant options and determine the terms of all options. The 2000
Plan provides that no participant may be granted options to purchase more than
1,000,000 shares of Common Stock in a fiscal year. The Option Plan/Compensation
Committee is required to make adjustments with respect to options granted under
the 2000 Plan in order to prevent dilution or expansion of the rights of any
holder. The 2000 Plan requires that the Option Plan/Compensation Committee be
composed of at least two directors.

Amendment. The 2000 Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Board
of Directors, but no amendment without the approval of our stockholders shall be
made if stockholder approval would be required under any law or rule of any
governmental authority, stock exchange or other self-regulatory organization to
which we are subject. Neither the amendment, suspension or termination of the
2000 Plan shall, without the consent of the holder of an option under the 2000
Plan, alter or impair any rights or obligations under any option theretofore
granted.

Options Issued Under 2000 Plan. The Option Plan/Compensation Committee
determines the term and exercise price of each option under the 2000 Plan and
the time or times at which such option may be exercised in whole or in part, and
the method or methods by which, and the form or forms in which, payment of the
exercise price may be paid.

Upon the exercise of an option under the 2000 Plan, the option holder shall pay
us the exercise price plus the amount of the required federal and state
withholding taxes, if any. The 2000 Plan also allows participants to elect to
have shares withheld upon exercise for the payment of withholding taxes.

The unexercised portion of any option granted to a key employee under the 2000
Plan generally will be terminated (i) 30 days after the date on which the
optionee's employment is terminated for any reason other than (a) Cause (as
defined in the 2000 Plan), (b) retirement or mental or physical disability, or
(c) death; (ii) immediately upon the termination of the optionee's employment
for Cause; (iii) three months after the date on which the optionee's employment
is terminated by reason of retirement or mental or physical disability; or (iv)
(A) 12 months after the date on which the optionee's employment is terminated by
reason of his death or (B) three months after the date on which the optionee
shall die if such death occurs during the three-month period following the
termination of the optionee's employment by reason of retirement or mental or
physical

                                       14
<PAGE>

disability. The Option Plan/Compensation Committee has in the past, and may in
the future, extend the period of time during which an optionee may exercise
options following the termination of his or her employment.

Under the 2000 Plan, an option generally may not be transferred by the optionee
other than by will or by the laws of descent and distribution. During the
lifetime of an optionee, an option under the 2000 Plan may be exercised only by
the optionee or, in certain instances, by the optionee's guardian or legal
representative, if any.

                                       15
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results. All data is in thousands, except share
data:

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                 -------------------------------------------------------------------------------
                                                     2004               2003            2002            2001            2000
                                                 ------------       ------------    ------------    ------------    ------------
<S>                                              <C>                <C>             <C>             <C>             <C>
Net sales                                        $     43,799       $     37,928    $     30,606    $     22,950    $     17,512
Cost of sales                                          27,393             26,603          20,571          15,954          14,018
                                                 ------------       ------------    ------------    ------------    ------------
  Gross profit                                         16,406             11,325          10,035           6,996           3,494

Selling, marketing and fulfillment expenses            13,996             12,061          11,547          13,765          18,797
General and administrative expenses                     6,333              5,239           4,686           5,098           5,296
                                                 ------------       ------------    ------------    ------------    ------------
  Total operating expenses                             20,329             17,300          16,233          18,863          24,093

Operating loss                                         (3,923)            (5,975)         (6,198)        (11,867)        (20,599)
Interest (expense)/other income                           132               (394)           (281)        (13,139)           (510)
  Net loss                                             (3,791)            (6,369)         (6,479)        (25,006)        (21,109)
Basic and diluted loss per share:                $      (0.55)      $      (0.88)   $      (2.44)   $      (3.41)   $      (4.45)

Basic and diluted weighted average number of
 common shares outstanding available to common
 stockholders                                      14,586,752         11,171,018       9,927,027       8,185,065       4,924,906
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                               As of December 31,
                                                 -------------------------------------------------------------------------------
                                                     2004               2003            2002            2001            2000
                                                 ------------       ------------    ------------    ------------    ------------
<S>                                              <C>                <C>             <C>             <C>             <C>
Cash and cash equivalents                        $      7,938/(1)/  $      7,721    $      1,749    $      5,419    $      5,350
Inventories, net                                       12,958             11,340          10,868           6,388           7,294
Other current assets                                    2,559              1,863           1,159           1,417           1,510
Total assets                                           25,541             22,998          16,595          14,572          15,674
Current liabilities                                     9,413              8,459           7,072           5,988           5,937
Short-term convertible notes payable, net                                      -               -               -          19,698
Long term liabilities                                   4,739              4,260           2,439             182               -
Redeemable preferred stock                                  -                  -               -               -          11,088
Shareholders' equity (deficit)                         11,389             10,279           7,084           8,402         (21,049)
</TABLE>

/(1)/ Includes restricted cash of $1,253

                                       16
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. However, our actual results could
differ materially from those discussed herein as a result of the risks that we
face, including but not limited to those risks stated in "Risk Factors," or
faulty assumptions on our part. In addition, the following discussion should be
read in conjunction with the audited consolidated financial statements and the
related notes thereto included elsewhere in this report.

OVERVIEW

We are a leading Internet retailer that sells over 350 brands of designer
apparel, accessories and home products at discounts up to 75% off retail value.
The Bluefly.com Web site was launched in September 1998.

Our gross profit increased by approximately 45% to $16,406,000 in 2004, from
$11,325,000 in 2003. This growth was driven by increases in both net sales and
gross margins, and allowed us to decrease our net loss by approximately 40%, to
$3,791,000 in 2004, from $6,369,000 in 2003.

Our net sales increased approximately 15% to $43,799,000 for the year ended
December 31, 2004 from $37,928,000 for the year ended December 31, 2003. For the
first three quarters of 2004, our net sales increased by approximately 35%, 27%
and 6%, respectively, as compared to the same periods in 2003. For the entire
fourth quarter of 2004, our net sales increased by approximately 4% to
$14,515,000 from $13,993,000 in the fourth quarter of 2003. Our net sales
actually decreased in October 2004, but rebounded strongly in November and
December 2004, which resulted in net sales growth for the quarter.

Net sales attributable to the Company's Web site increased by approximately 7%
during the quarter, to $14,230,000 in the fourth quarter of 2004 from
$13,356,000 in the fourth quarter of 2003, while net sales attributable to the
Company's temporary Manhattan store, which opened in late November, decreased to
approximately $251,000 compared to $465,000 for the same period in 2003.

Our gross margin increased to 37.5% from 29.9% in 2003, 32.8% in 2002 and 30.5%
in 2001. The increase in 2004 was driven by a merchandising strategy that
focused on negotiating better prices with vendors as well as selling more
in-season product which has more value to our customer and therefore demands
higher margins. In 2003 the lower margins resulted from our decision to turn
more of our out-of-season merchandise, as well as inventory items that we were
particularly deep in, into cash that could be used to purchase new inventory,
rather than holding the inventory for the next season.

For the fourth quarter of 2004, we had net income of $7,000 as compared to net
income of $111,000 in the fourth quarter of 2003. The decrease in net income was
partly the result of the Company's temporary Manhattan store, which contributed
significantly to our profitability during the fourth quarter of 2003, but did
not contribute to our profit in any material respect during the fourth quarter
of 2004. We believe that the store did not perform as well financially in 2004
as it did in 2003 because we tested pricing and branding strategies that were
more in line with those of our Web site. While the performance of the store was
not as strong during 2004 as it was during 2003, we believe that the relatively
small investment provided us with valuable experience that we can use in the
future in an effort to build a store strategy that is in line with our brand
strategy and offers stronger financial performance.

Our reserve for returns and credit card chargebacks decreased slightly to 36.6%
in 2004 from 37.1% in 2003 and it had been 35.5% in 2002. We believe that the
slight improvement in the return rate is attributable to more detailed analysis
on customer purchase and return habits as well as initiatives related to the way
we photograph and describe our product and improved buying by the merchant team.
The increase in return rates in prior years was primarily driven by shifts in
our merchandise mix towards products that generate higher return rates, but also
higher gross margins and average order sizes. While we are testing initiatives
to reduce our return rates, we believe that the overall shift in merchandise mix
has been beneficial to the overall gross profit realized per order. Accordingly,
we do not expect return rates to decrease to 2002 levels in the near term.

At December 31, 2004, we had an accumulated deficit of $96,127,000. The net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site, building our infrastructure and non-cash
charges in connection with automatic decreases in the conversion price of our
Preferred Stock. In order to expand our business,

                                       17
<PAGE>

we intend to invest in sales, marketing, merchandising, operations, information
systems, site development and additional personnel to support these activities.
We therefore expect to continue to incur substantial operating losses for the
foreseeable future. Although we have experienced revenue growth in recent years,
this growth may not be sustainable and therefore should not be considered
indicative of future performance.

CRITICAL ACCOUNTING POLICIES

MANAGEMENT ESTIMATES

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 the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for sales returns, recoverability of inventories, useful lives of
property and equipment and the realization of deferred tax assets. Actual
amounts could differ significantly from these estimates.

REVENUE RECOGNITION

We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in the Financial Statements" as amended. Gross sales
consists primarily of revenue from product sales and shipping and handling
charges and is net of promotional discounts. Net sales represent gross sales,
less provisions for returns, credit card chargebacks, and adjustments for
uncollected sales taxes. Revenue is recognized when all the following criteria
are met:

     .    A customer executes an order.

     .    The product price and the shipping and handling fee have been
          determined.

     .    Credit card authorization has occurred and collection is reasonably
          assured.

     .    The product has been shipped and received by the customer.

Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task Force's
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" ("EITF No. 00-10").

PROVISION FOR RETURNS AND DOUBTFUL ACCOUNTS

We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. We perform credit card
authorizations and check the verification of our customers prior to shipment of
merchandise. However, our future return and bad debt rates could differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business, prospects, cash flows,
financial condition and results of operations.

INVENTORY VALUATION

Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and
establish a reserve for such merchandise.

DEFERRED TAX VALUATION ALLOWANCE

We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
realized in income or loss in the period that included the enactment date. We
have assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event

                                       18
<PAGE>

that we were to determine that we would be able to realize our deferred tax
assets, an adjustment to the deferred tax valuation allowance would increase
income in the period such determination is made.

RESULTS OF OPERATIONS

The following table sets forth our statement of operations data for the years
ended December 31st. All data is in thousands except as indicated below:

<TABLE>
<CAPTION>
                                                       2004                      2003                      2002
                                              -----------------------   -----------------------   -----------------------
                                                            AS A % OF                 AS A % OF                 AS A % OF
                                                            NET SALES                 NET SALES                 NET SALES
                                              -----------------------   -----------------------   -----------------------
<S>                                           <C>               <C>     <C>               <C>     <C>               <C>
Net sales                                     $   43,799        100.0%  $   37,928        100.0%  $   30,606        100.0%
Cost of sales                                     27,393         62.5%      26,603         70.1%      20,571         67.2%
                                              ----------                ----------                ----------
  Gross profit                                    16,406         37.5%      11,325         29.9%      10,035         32.8%

Selling, marketing and fulfillment expenses       13,996         32.0%      12,061         31.8%      11,547         37.7%
General and administrative expenses                6,333         14.4%       5,239         13.8%       4,686         15.3%
                                              ----------                ----------                ----------
  Total operating expenses                        20,329         46.4%      17,300         45.7%      16,233         53.0%

Operating loss                                    (3,923)        (8.9)%     (5,975)       (15.8)%     (6,198)       (20.2)%
Interest (expense) other income                      132          0.3%        (394)        (1.0)%       (281)        (0.9)%
                                              ----------                ----------                ----------
  Net loss                                    $   (3,791)        (8.6)% $   (6,369)       (16.8)% $   (6,479)       (21.1)%
</TABLE>

We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the years ended December 31st, as indicated below:

<TABLE>
<CAPTION>
                                                                              2004           2003           2002
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Average Order Size (including shipping & handling)                        $     188.51   $     174.99   $     167.20
Average Order Size Per New Customer (including shipping & handling)       $     159.38   $     158.38   $     149.74
Average Order Size Per Repeat Customer  (including shipping & handling)   $     205.10   $     184.95   $     177.31

Total Customers                                                                640,125        512,948        388,700
Customers Added during the Year                                                127,177        124,248        101,063
Revenue from Repeat Customers as a % of total Revenue                               70%            66%            67%
Customer Acquisition Costs                                                $      11.41   $      10.22   $      17.04
</TABLE>

We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.

FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31,
2003

Net sales: Gross sales for the year ended December 31, 2004 increased by
approximately 15% to $69,032,000, from $60,279,000 for the year ended December
31, 2003. The provision for returns and credit card chargebacks and other
discounts was approximately 37% for both 2004 and 2003, resulting in a provision
of $25,233,000 for the year ended December 31, 2004 and $22,351,000 for the year
ended December 31, 2003.

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2004 were $43,799,000. This represents an increase of approximately
15% compared to the year ended

                                       19
<PAGE>

December 31, 2003, in which net sales totaled $37,928,000. The growth in net
sales was largely driven by the increase in gross average order size
(approximately 8% higher than the full year 2003) and a slight increase in the
number of new customers acquired (approximately 2% higher than the full year
2003). Shipping and handling revenue (which is included in net sales) increased
by 14% to $3,353,000 for the year ended December 31, 2004, from $2,939,000 for
the year ended December 31, 2003.

Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the year ended December 31, 2004 totaled
$27,393,000, resulting in gross margin of approximately 38%. Cost of sales for
the year ended December 31, 2003 totaled $26,603,000, resulting in gross margin
of 30%. The increase in gross margin was driven by a merchandising strategy that
focused on negotiating better prices with vendors as well as selling more
in-season product, which has more value to our customer and therefore demands
higher margins. The gross margin in 2003 was impacted negatively by our decision
to reduce our product margin during the first three quarters of 2003 on certain
merchandise in an effort to reduce prior season inventory levels.

Gross Profit: As a result of the increases in net sales and gross margin, gross
profit increased by 45%, to $16,406,000 for the year ended December 31, 2004,
from $11,325,000 for the year ended December 31, 2003.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 16% for the year 2004 compared to the year
ended 2003. As a percentage of net sales, our selling, marketing and fulfillment
expenses remained relatively unchanged at approximately 32% for both 2004 and
2003. The selling, marketing and fulfillment expenses were comprised of the
following:

                    YEAR ENDED          YEAR ENDED      PERCENTAGE DIFFERENCE
                DECEMBER 31, 2004   DECEMBER 31, 2003     INCREASE (DECREASE)
                -----------------   -----------------   ---------------------
Marketing            $  2,213,000        $  1,898,000                    16.6%
Operating               5,848,000           5,223,000                    12.0%
Technology              4,086,000           3,420,000                    19.5%
E-Commerce              1,849,000           1,520,000                    21.6%
                     ------------        ------------
                     $ 13,996,000        $ 12,061,000                    16.0%

Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The increase in marketing
expenses of approximately 17% was primarily driven by the donation of the net
proceeds from the sale of "hope." collection products to St. Jude Children's
Research Hospital ("St. Jude"). Pursuant to a charitable program with St. Jude,
we were the exclusive retailer of the "hope." t-shirt and agreed to donate the
net proceeds (i.e., the revenue less the cost of goods sold and the costs of
processing and filling the orders) from the sale of all "hope." collection
products on our Web site to St. Jude. For the year ended December 31, 2004,
approximately $141,000 was donated and has been recorded as a marketing expense
in our financial statements. A portion of the increase also resulted from
increased consulting expenses, which were offset slightly by a decrease in staff
related expenses. In the event that we attempt to accelerate revenue growth, it
may be necessary to utilize less cost efficient methods of customer acquisition,
and accordingly there can be no assurance that customer acquisition costs will
not increase further in the future.

Operating expenses include all costs related to inventory management,
fulfillment, customer service, credit card processing and during the fourth
quarters, the costs associated with the Company's temporary Manhattan store.
Operating expenses increased in 2004 by approximately 12% compared to 2003 as a
result of variable costs associated with the increased sales volume (e.g.,
picking and packing orders, processing returns and credit card fees) as well as
the overhead costs associated with the store.

Technology expenses consist primarily of Web site hosting and staff related
costs. For the year ended December 31, 2004, technology expenses increased by
approximately 20% compared to the year ended December 31, 2003. This increase
was related to an increase in headcount, overall web hosting costs and
consulting costs and was slightly offset by a decrease in depreciation expense.
The department employed an average of 18 people per month in 2004 compared to 12
people per month in 2003.

E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the year ended December 31, 2004, this
amount increased by approximately 22% as compared to the year ended December 31,
2003. This increase is to the result of an increase in staff related costs,
temporary help and the purchase of licenses for new search functionality and Web
site analytics.

                                       20
<PAGE>

General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2004 increased by approximately 21% to $6,333,000 as compared to
$5,239,000 for the year ended December 31, 2003. As a percentage of net sales,
general and administrative expenses increased to 14.4% in 2004 from 13.8% in
2003. The increase in general and administrative expenses was the result of
increased salary and benefit expenses of approximately 45% (including $325,000
of expenses incurred in connection with the Separation Agreement that we entered
into with our former CEO) as well as an increase in public company fees. These
increases were slightly offset by a reduction in consulting and professional
fees. Due to the cost of compliance of Sarbanes-Oxley we anticipate that
professional and public company fees will continue to increase in 2005.

Loss from operations: Operating loss decreased by approximately 34% in 2004, to
$3,923,000 from $5,975,000 in 2003 as a result of the increase in gross profit.

Interest expense and Interest and other income, net: Interest and other income
for year ended December 31, 2004 increased to $847,000 from $38,000 for the year
ended December 31, 2003. The increase resulted from $564,000 recognized to
adjust a liability associated with warrants issued by us to their fair value as
of June 17, 2004 (at which time the warrants were re-classified as equity as
described in Note 3 to our financial statements), the $169,000 realized in
connection with the judgment we received in the Breider Moore litigation and an
increase in interest income earned on our cash balance.

Interest expense for the year ended 2004 totaled $715,000, and related primarily
to fees paid in connection with the Loan Facility and interest expense on
Convertible Notes held by Soros. Interest expense for the year ended December
31, 2003 totaled $432,000, and related to fees paid in connection with our Loan
Facility as well as amortization of warrants issued in connection with the
January 2003 Financing.

FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31,
2002

Net sales: Gross sales for the year ended December 31, 2003 increased by
approximately 27% to $60,279,000, from $47,491,000 for the year ended December
31, 2002. For the year ended December 31, 2003, we recorded a provision for
returns and credit card chargebacks and other discounts of $22,351,000, or
approximately 37% of gross sales. For the year ended December 31, 2002, the
provision for returns and credit card chargebacks and other discounts was
$16,885,000, or approximately 36% of gross sales. The increase in this provision
as a percentage of gross sales was related primarily to an increase in the
return rate. We believe that the increase in return rate was partly the result
of a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates, but also higher gross margins
and average order size.

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2003 were $37,928,000. This represents an increase of approximately
24% compared to the year ended December 31, 2002, in which net sales totaled
$30,606,000. The growth in net sales was largely driven by the increase in the
numbers of new customers acquired (approximately 23% higher than the full year
2002) and the increase in gross average order size (approximately 5% higher than
the full year 2002). In addition, our shipping and handling revenue increased as
we raised our standard shipping rate from $5.95 per order to $7.95 per order in
the first quarter of 2003. For the year ended December 31, 2003, revenue from
shipping and handling (which is included in net sales) increased by 44% to
$2,939,000 from $2,048,000 for the year ended December 31, 2002.

Cost of sales: Cost of sales for the year ended December 31, 2003 totaled
$26,603,000, resulting in gross margin of approximately 30%. Cost of sales for
the year ended December 30, 2002 totaled $20,571,000, resulting in gross margin
of 33%. The decrease in gross margin resulted primarily from our decision to
reduce our product margin during the first three quarters of 2003 on certain
merchandise in an effort to reduce prior season inventory levels.

Gross Profit: Gross profit increased by 13%, to $11,325,000 for the year ended
December 31, 2003, compared to $10,035,000 for the year ended December 31, 2002.
The increase in gross profit was the result of net sales growth, partially
offset by the decrease in gross margin.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 5% for the year 2003 compared to the year
ended 2002. As a percentage of net sales, our selling, marketing and fulfillment
expenses

                                       21
<PAGE>

decreased to 32% in 2003 from approximately 37.7% in 2002. The decrease resulted
primarily from refinements to our marketing strategy that allowed us to better
target potential new customers and convert repeat customers, as well as the cost
savings we derived from our move to a new web hosting facility. Selling,
marketing and fulfillment expenses were comprised of the following:

                    YEAR ENDED          YEAR ENDED      PERCENTAGE DIFFERENCE
                DECEMBER 31, 2003   DECEMBER 31, 2002     INCREASE (DECREASE)
                -----------------   -----------------   ---------------------
Marketing            $  1,898,000        $  2,275,000                   (16.6)%
Operating               5,223,000           4,533,000                    15.2%
Technology              3,420,000           3,552,000                    (3.7)%
E-Commerce              1,520,000           1,187,000                    28.1%
                     ------------        ------------
                     $ 12,061,000        $ 11,547,000                     4.5%

Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The decrease in marketing
expenses of approximately 17% was largely related to a shift in our customer
acquisition strategy. We reduced our advertising expenditures and focused more
on email, affiliate programs and other performance based programs. Primarily as
a result of this shift, we were able to decrease our customer acquisition costs
for the year ended December 31, 2003 by approximately 40% to $10.22 per new
customer from $17.04 per new customer for the year ended December 31, 2002.

Operating expenses include all costs related to inventory management,
fulfillment, customer service, credit card processing and during the fourth
quarter of 2003, the costs associated with the Company's temporary Manhattan
store. Operating expenses increased in 2003 by approximately 15% compared to
2002 as a result of variable costs associated with the increased sales volume
(e.g., picking and packing orders, processing returns and credit card fees).

Technology expenses consist primarily of Web site hosting and staff related
costs. For the year ended December 31, 2003, technology expenses decreased by
approximately 4% compared to the year ended December 31, 2002. This decrease was
related to a decrease in overall web hosting costs offset by accelerated
depreciation of equipment acquired under a capital lease due to a change in the
estimated useful life, along with increased amortization expense incurred as a
result of capitalized costs incurred in connection with the upgraded version of
the Web Site. Depreciation and amortization for the year ended December 31, 2003
represented approximately 40% of the total technology expense, while
depreciation and amortization for the year ended December 31, 2002 represented
approximately 17% of the total technology expense. These amounts were partially
offset by a reduction of approximately 61% in our Web Site hosting costs in
connection with our move to a new web hosting facility.

E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the year ended December 31, 2003, this
amount increased by approximately 28% as compared to the year ended December 31,
2002, primarily due to the creation of an Online Retail Group within the
E-Commerce department. The department employed an average of 17 employees per
month in 2003, compared to an average of 13 per month in 2002. The Online Retail
Group is, among other things, responsible for leveraging the Web Site technology
to improve the on-site customer experience. In September 2003, we launched a
redesigned Web Site. The redesigned Web Site provided a new look and, we
believe, more intuitive navigation. The costs of the new site were primarily
included in E-Commerce and expensed as incurred.

General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2003 increased by approximately 12% to $5,239,000 as compared to
$4,686,000 for the year ended December 31, 2002. As a percentage of net sales,
general and administrative expenses decreased to 13.8% in 2003 from 15.3% in
2002. The increase in general and administrative expenses was the result of
increased salary and benefit expenses of approximately 7% as well as an increase
in professional fees of 50%.

Loss from operations: Operating loss decreased by approximately 4% in 2003, to
$5,975,000 from $6,198,000 in 2002 as a result of the increase in sales and
gross margin dollars and decreases in selling, marketing and fulfillment
expenses and general and administrative expenses as a percentage of net sales.

Interest expense and other income, net: Interest expense for the year ended
December 31, 2003 totaled $432,000, and related to fees paid in connection with
our Loan Facility, amortization of warrants issued in connection with the
January 2003

                                       22
<PAGE>

Financing, and interest on the notes issued in connection with the July 2003
Financing. For the year ended December 31, 2002, interest expense totaled
$349,000, and related primarily to fees paid in connection with the Loan
Facility.

Interest income for the year ended December 31, 2003 decreased to $38,000 from
$68,000 for the year ended December 31, 2002. The decrease is related to the
decrease in our cash balance as interest income primarily represents interest
earned on our cash balance.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

At December 31, 2004, we had approximately $6.7 million of liquid assets,
entirely in the form of cash and cash equivalents, and working capital of
approximately $12.8 million (both amounts exclude the $1.25 million of
restricted cash). In addition, as of December 31, 2004, we had approximately
$2.3 million of borrowings committed under the Loan Facility, leaving
approximately $1.2 million of availability. At December 31, 2003, we had
approximately $2.3 million of borrowings committed, leaving $2.1 million of
availability.

In February 2005, we extended the maturity dates on the Convertible Promissory
Notes issued to Soros in July and October 2003. The maturity dates of the Notes,
which were originally January and April 2004, respectively, were each extended
for one year, from May 1, 2005 to May 1, 2006. Also in February 2005, we renewed
the Loan Facility with Rosenthal for an additional year, from March 30, 2005 to
March 30, 2006.

We fund our operations through cash on hand, operating cash flow, as well as the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance on these financial measures would have a negative impact on
our liquidity. Total availability under the Loan Facility is based upon our
inventory levels and is dependent, among other things, on the Company having at
least $7.0 million of tangible net worth and $6.0 million of working capital and
cash balances of at least $750,000 (exclusive of the $1.25 million cash
collateral pledged to Rosenthal to secure our obligations under the Loan
Facility). In addition, both availability under the Loan Facility and our
operating cash flows are affected by the payment terms that we receive from
suppliers and service providers, and the extent to which suppliers require us to
request Rosenthal to provide credit support under the Loan Facility. We believe
that our suppliers' decision-making with respect to payment terms and/or the
type of credit support requested is largely driven by their perception of our
credit rating, which is affected by information reported in the industry and
financial press and elsewhere as to our financial strength. Accordingly,
negative perceptions as to our financial strength could have a negative impact
on our liquidity.

We anticipate that our existing resources and working capital should be
sufficient to satisfy our cash requirements through the end of fiscal 2005. Of
course, there can be no assurance that such expectations will prove to be
correct. If we do not achieve our operating plan, and additional financing is
not available, future operations may need to be modified, scaled back or
discontinued. Moreover, we may seek additional debt and/or equity financing in
order to maximize the growth of our business and accelerate customer
acquisition. There can be no assurance that any additional financing or other
sources of capital will be available to us upon acceptable terms, or at all.

LOAN FACILITY

Pursuant to the Loan Facility, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers. The Rosenthal Financing Agreement was amended in April
2004 to: (i) extend the term until March 30, 2005 (later extended further, as
described below); (ii) substitute $1.25 million of cash collateral pledged by
the Company for the $2.0 million standby letter of credit previously provided by
Soros as collateral security for the Company's obligations under the Loan
Facility; (iii) decrease the maximum amount available under the Loan Facility
from $4.5 million to $4.0 million; (iv) increase the tangible net worth
requirement to $7.0 million; (v) increase the working capital requirement to
$6.0 million; and (vi) increase the minimum cash balance that the Company is
required to maintain to $750,000 (exclusive of the $1.25 million in cash
collateral). Because we removed the requirement that Soros provide a standby
letter of credit to secure the Loan Facility, we are no longer subject to an
agreement with Soros that previously required us to issue additional warrants to
Soros with an exercise price equal to 75% of

                                       23
<PAGE>

market price in the event that Rosenthal were to draw on Soros' letter of
credit. In February 2005, the Rosenthal Financing Agreement was further extended
to March 30, 2006. All other terms of the Rosenthal Financing Agreement remained
the same.

Interest accrues monthly on the average daily amount outstanding under the Loan
Facility during the preceding month at a per annum rate equal to the prime rate
plus 1%. We pay an annual facility fee equal to 1.5% of the portion of the Loan
Facility that is provided on the basis of our inventory level. This formula
currently results in an annual facility fee of $33,750. We also pay Rosenthal
certain fees to open letters of credit and guarantees in an amount equal to a
certain percentage of the face amount of the letter of credit for each thirty
(30) days such letter of credit, or a portion thereof, remains open.

In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts (including the $1.25 million of cash
collateral, which has been placed in a segregated, restricted account) upon an
event of default and certain of our cash accounts in the event that the total
amount of funded debt loaned to us under the Loan Facility exceeds 90% of the
maximum amount available under the Loan Facility for more than 10 days.

Under the terms of the Loan Facility, Soros has the right to purchase all of our
obligations from Rosenthal at any time during its term.

COMMITMENTS AND LONG TERM OBLIGATIONS

As of December 31, 2004, we had the following commitments and long term
obligations:

<TABLE>
<CAPTION>
                                    2005           2006           2007           2008        THEREAFTER        TOTAL
                                ------------   ------------   ------------   ------------   ------------   ------------
<S>                             <C>            <C>            <C>            <C>            <C>            <C>
Marketing and Advertising       $    150,000             --             --             --             --   $    150,000
Operating Leases                     462,000        469,000        481,000        441,000        476,000   $  2,329,000
Capital Leases                       139,000         54,000         27,000             --             --   $    220,000
Employment Contracts               1,219,000      1,030,000        324,000             --             --   $  2,573,000
Notes payable to shareholders             --      4,000,000 *           --             --             --   $  4,000,000
                                ------------   ------------   ------------   ------------   ------------   ------------
  Grand total                   $  1,970,000   $  5,553,000   $    832,000   $    441,000   $    476,000   $  9,272,000
</TABLE>

* Notes were reclassified to long term in February 2005, See "Recent
Developments"

We believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. In addition, we expect to
hire and train additional employees for the operations and development of
Bluefly.com. However, our marketing budget and our ability to hire such
employees is subject to a number of factors, including our results of operations
as well as the amount of additional capital that we raise.

In order to continue to expand our product offerings, we intend to expand our
relationships with suppliers of end-of-season and excess name brand apparel and
fashion accessories. We expect that our suppliers will continue to include
designers and retail stores that sell excess inventory as well as third-party
end-of-season apparel aggregators. To achieve our goal of offering a wide
selection of top name brand designer clothing and fashion accessories, we may
acquire certain goods on consignment and may explore leasing or partnering
select departments with strategic partners and distributors,

RECENT ACCOUNTING PRONOUNCEMENTS

In March, 2004, the Emerging Issues Task Force issued EITF 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128". This
statement provides additional guidance on the calculation and disclosure
requirements for earnings per share. The FASB concluded in EITF 03-6 that
companies with multiple classes of common stock or participating securities, as
defined by SFAS No. 128, calculate and disclose earnings per share based on the
two-class method. The adoption of this statement does not have an impact to the
Company's financial statement presentation as the Company is currently in a loss
position.

In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS 123 and supersedes APB No. 25. Under
the new standard, companies will no longer be able to account for stock-based
compensation transactions using the intrinsic value method in accordance with
APB No. 25. Instead, companies will be

                                       24
<PAGE>

required to account for such transactions using a fair-value method and to
recognize the expense in the statements of income. The adoption of SFAS 123R
will also require additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. SFAS 123R will be effective for periods beginning after
June 15, 2005 and allows, but does not require, companies to restate prior
periods. We are evaluating the impact of adopting SFAS 123R and expect that we
will record substantial non-cash stock compensation expenses. The adoption of
SFAS 123R is not expected to have a significant effect on our financial
condition or cash flows but the non-cash charges associated therewith are
expected to have a significant, adverse effect on our results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our notes payable. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.

ITEM 8. FINANCIAL STATEMENTS

(a) Index to the Financial Statements

      Report of Independent Registered Public Accounting Firm             F-1

      Consolidated Balance Sheets as of December 31, 2004 and 2003        F-2

      Consolidated Statements of Operations for the three years
       ended December 31, 2004, 2003 and 2002                             F-3

      Consolidated Statements of Changes in Shareholders' Equity
       for the three years ended December 31, 2004, 2003 and 2002         F-4

      Consolidated Statements of Cash Flows for the three years
       ended December 31, 2004, 2003 and 2002                             F-5

      Notes to Consolidated Financial Statements                          F-6

      Schedule II - Valuation and Qualifying Accounts                     S-1

                                       25
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Bluefly, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Bluefly, Inc. and its subsidiary at December 31, 2004 and December 31, 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

New York, New York
February 18, 2005

                                       F-1
<PAGE>

BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                         2004              2003
                                                                                   ---------------   ---------------
<S>                                                                                <C>               <C>
ASSETS
Current assets
  Cash and cash equivalents                                                        $     6,685,000   $     7,721,000
  Restricted cash                                                                        1,253,000                 -
  Inventories, net                                                                      12,958,000        11,340,000
  Accounts receivable, net of allowance for doubtful accounts                            1,206,000         1,157,000
  Prepaid expenses and other current assets                                              1,353,000           706,000
                                                                                   ---------------   ---------------
        Total current assets                                                            23,455,000        20,924,000
Property and equipment, net                                                              1,933,000         1,659,000
Other assets                                                                               153,000           415,000
                                                                                   ---------------   ---------------
        Total assets                                                               $    25,541,000   $    22,998,000
                                                                                   ===============   ===============
LIABILITIES AND SHAREHOLDERS'  EQUITY
Current liabilities
  Accounts payable                                                                 $     4,190,000   $     3,122,000
  Accrued expenses and other current liabilities                                         3,526,000         3,869,000
  Deferred revenue                                                                       1,697,000         1,252,000
  Notes payable to related party shareholders                                                    -           216,000
                                                                                   ---------------   ---------------
        Total current liabilities                                                        9,413,000         8,459,000
Notes payable to related party shareholders                                              4,000,000         4,000,000
Long-term interest payable to related party shareholders                                   658,000           159,000
Long-term obligations under capital lease                                                   81,000           101,000
                                                                                   ---------------   ---------------
        Total liabilities                                                               14,152,000        12,719,000
                                                                                   ===============   ===============
Commitments and contingencies (Note 8)

Shareholders' equity
Series A Preferred Stock - $.01 par value; 500,000 shares authorized,
  460,000 shares issued and outstanding as of December 31,
  2004 and 2003, respectively (liquidation preference: $9.2 million plus
  accrued dividends of $5.0 million)                                                         5,000             5,000
Series B Preferred Stock - $.01 par value; 9,000,000 shares authorized,
  8,889,414 shares issued and outstanding as of December 31, 2004 and 2003,
  respectively (liquidation preference: $30 million plus accrued dividends of
  $7.3 million)                                                                             89,000            89,000
Series C Preferred Stock - $.01 par value; 3,500 shares authorized, 1,000 shares
  issued and outstanding as of December 31, 2004 and 2003,
  respectively (liquidation preference: $1 million plus accrued dividends of
  $191,000)                                                                                      -                 -
Series D Preferred Stock - $.01 par value; 7,150 shares authorized, 7,136.548
  shares issued and outstanding as of December 31, 2004 and 2003,
  respectively (liquidation preference: $7.1 million plus accrued dividends of
  $1.6 million)                                                                                  -                 -
Series E Preferred Stock - $.01 par value; 1,000 shares authorized, issued and
  outstanding as of December 31, 2004 and 2003, respectively (liquidation
  preference: $1.0 million plus accrued dividends of $202,000)
Common Stock - $.01 par value; 92,000,000 shares authorized, 15,241,756 and
  12,894,166 shares issued and outstanding as of December 31, 2004 and 2003,
  respectively                                                                             152,000           129,000
Additional paid-in capital                                                             107,270,000       102,392,000
Accumulated deficit                                                                    (96,127,000)      (92,336,000)
                                                                                   ---------------   ---------------
        Total shareholders' equity                                                      11,389,000        10,279,000
                                                                                   ---------------   ---------------
        Total liabilities and shareholders' equity                                 $    25,541,000   $    22,998,000
                                                                                   ===============   ===============
</TABLE>

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

                                       F-2
<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004, 2003 and 2002
(dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                2004             2003             2002
                                                           --------------   --------------   --------------
<S>                                                        <C>              <C>              <C>
Net sales                                                  $   43,799,000   $   37,928,000   $   30,606,000
Cost of sales                                                  27,393,000       26,603,000       20,571,000
                                                           --------------   --------------   --------------
        Gross profit                                           16,406,000       11,325,000       10,035,000

Selling, marketing and fulfillment expenses                    13,996,000       12,061,000       11,547,000
General and administrative expenses                             6,333,000        5,239,000        4,686,000
                                                           --------------   --------------   --------------
        Total operating expenses                               20,329,000       17,300,000       16,233,000
                                                           --------------   --------------   --------------
        Operating loss                                         (3,923,000)      (5,975,000)      (6,198,000)

Interest expense                                                 (715,000)        (432,000)        (349,000)

Interest income                                                   114,000           38,000           68,000

Other income (Note 6)                                             733,000                -                -
                                                           --------------   --------------   --------------
        Net loss                                               (3,791,000)      (6,369,000)      (6,479,000)
                                                           --------------   --------------   --------------
Preferred stock dividends                                      (4,275,000)      (3,225,000)      (2,489,000)
Deemed dividend related to beneficial conversion feature
 on Series B and C Preferred Stock                                      -         (225,000)     (15,295,000)
                                                           --------------   --------------   --------------
        Net loss available to common shareholders          $   (8,066,000)  $   (9,819,000)  $  (24,263,000)
                                                           ==============   ==============   ==============
        Basic and diluted loss per common share            $        (0.55)  $        (0.88)  $        (2.44)
                                                           ==============   ==============   ==============
Weighted average number of shares outstanding used in
 calculating basic and diluted loss per common share           14,586,752       11,171,018        9,927,027
                                                           ==============   ==============   ==============
</TABLE>

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

                                       F-3
<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
(Dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                  SERIES A PREFERRED STOCK          SERIES B PREFERRED STOCK
                                                                      $.01 PAR VALUE                    $.01 PAR VALUE
                                                              -------------------------------   -------------------------------
                                                                 NUMBER OF                         NUMBER OF
                                                                  SHARES           AMOUNT           SHARES           AMOUNT
                                                              --------------   --------------   --------------   --------------
<S>                                                                  <C>       <C>                   <C>         <C>
BALANCE AT JANUARY 1, 2002                                           500,000   $        5,000        8,910,782   $       89,000
Sale of common stock in connection
 with the Standby Commitment
 Agreement ($1.57 per share)
 net of $75,000 of expenses                                                -                -                -                -
Sale of Series 2002 Preferred Stock
 in connection with the Standby
 Agreement ($1,000 per share)
 net of $115,000 of expenses                                               -                -                -                -
Sale of Series C Preferred Stock
 ($1,000 per share) net of $23,000
 of expenses                                                               -                -                -                -
Sale of warrants to investor in
 connection with the Standby
 Agreement                                                                 -                -                -                -
Deemed dividend related to
 beneficial conversion
 feature on Series B
 Preferred Stock                                                           -                -                -                -
Issuance of warrants to lender                                             -                -                -                -
Issuance of warrants to shareholders                                       -                -                -                -
Issuance of warrants in exchange
 for services                                                              -                -                -                -
Net loss                                                                   -                -                -                -
                                                              --------------   --------------   --------------   --------------
BALANCE AT DECEMBER 31, 2002                                         500,000            5,000        8,910,782           89,000
                                                              --------------   --------------   --------------   --------------
Sale of Series D Preferred Stock
 ($1,000 per share)                                                        -                -                -                -
Exchange of note for Series D Preferred
 Stock ($1,000 per share)                                                  -                -                -                -
Conversion of January 2003 Note to
 Series D Preferred Stock                                                  -                -                -                -
Sale of Series E Preferred Stock
 ($1,000 per share)                                                        -                -                -                -
Deemed dividend related to
 beneficial conversion
 feature on Series C
 Preferred Stock                                                           -                -                -                -
Exercise of Employee Stock
 Options and Warrants                                                      -                -                -                -
Conversion of Series 2002 Preferred
 Stock to Series D Preferred Stock                                         -                -                -                -
Conversion of Series A Preferred
 Stock and Series B Preferred Stock
 to Common Stock                                                     (40,000)               -          (21,368)               -
Issuance of warrants to supplier                                           -                -                -                -
Issuance of warrants to shareholders                                       -                -                -                -
Issuance of warrants in exchange
 for obligations                                                           -                -                -                -
Net loss                                                                   -                -                -                -
                                                              --------------   --------------   --------------   --------------
BALANCE AT DECEMBER 31, 2003                                         460,000            5,000        8,889,414           89,000
                                                              --------------   --------------   --------------   --------------
Sale of Common Stock and Warrants in connection with the
 January 2004 financing (net of issuance costs of $423,000)                -                -                -                -

Change in Value of Warrants                                                -                -                -                -

Exercise of Employee Stock Options                                         -                -                -                -

Expense recognized in connection with Issuance of Options                  -                -                -                -

Net loss                                                                   -                -                -                -
                                                              ==============   ==============   ==============   ==============
BALANCE AT DECEMBER 31, 2004                                         460,000   $        5,000        8,889,414   $       89,000
                                                              ==============   ==============   ==============   ==============

<CAPTION>
                                                                  SERIES C PREFERRED STOCK          SERIES D PREFERRED STOCK
                                                                      $.01 PAR VALUE                    $.01 PAR VALUE
                                                              -------------------------------   -------------------------------
                                                                 NUMBER OF                         NUMBER OF
                                                                  SHARES          AMOUNT            SHARES           AMOUNT
                                                              --------------   --------------   --------------   --------------
<S>                                                                    <C>     <C>                       <C>     <C>
BALANCE AT JANUARY 1, 2002                                                 -   $            -                -   $            -
Sale of common stock in connection
 with the Standby Commitment
 Agreement ($1.57 per share)
 net of $75,000 of expenses                                                -                -                -                -
Sale of Series 2002 Preferred Stock
 in connection with the Standby
 Agreement ($1,000 per share)
 net of $115,000 of expenses                                               -                -                -                -
Sale of Series C Preferred Stock
 ($1,000 per share) net of $23,000
 of expenses                                                           1,000                -                -                -
Sale of warrants to investor in
 connection with the Standby
 Agreement                                                                 -                -                -                -
Deemed dividend related to
 beneficial conversion
 feature on Series B
 Preferred Stock                                                           -                -                -                -
Issuance of warrants to lender                                             -                -                -                -
Issuance of warrants to shareholders                                       -                -                -                -
Issuance of warrants in exchange
 for services                                                              -                -                -                -
Net loss                                                                   -                -                -                -
                                                              --------------   --------------   --------------   --------------
BALANCE AT DECEMBER 31, 2002                                           1,000                -                -                -
                                                              --------------   --------------   --------------   --------------
Sale of Series D Preferred Stock
 ($1,000 per share)                                                        -                -            2,000                -
Exchange of note for Series D Preferred
 Stock ($1,000 per share)                                                  -                -            2,027                -
Conversion of January 2003 Note to
 Series D Preferred Stock                                                  -                -            1,009                -
Sale of Series E Preferred Stock
 ($1,000 per share)                                                        -                -                -                -
Deemed dividend related to
 beneficial conversion
 feature on Series C
 Preferred Stock                                                           -                -                -                -
Exercise of Employee Stock
 Options and Warrants                                                      -                -                -                -
Conversion of Series 2002 Preferred
 Stock to Series D Preferred Stock                                         -                -            2,100                -
Conversion of Series A Preferred
 Stock and Series B Preferred Stock
 to Common Stock                                                           -                -                -                -
Issuance of warrants to supplier                                           -                -                -                -
Issuance of warrants to shareholders                                       -                -                -                -
Issuance of warrants in exchange
 for obligations                                                           -                -                -                -
Net loss                                                                   -                -                -                -
                                                              --------------   --------------   --------------   --------------
BALANCE AT DECEMBER 31, 2003                                           1,000                -            7,136                -
                                                              --------------   --------------   --------------   --------------
Sale of Common Stock and Warrants in connection with the
 January 2004 financing (net of issuance costs of $423,000)                -                -                -                -

Change in Value of Warrants                                                -                -                -                -

Exercise of Employee Stock Options                                         -                -                -                -

Expense recognized in connection with Issuance of Options                  -                -                -                -

Net loss                                                                   -                -                -                -
                                                              ==============   ==============   ==============   ==============
BALANCE AT DECEMBER 31, 2004                                           1,000   $            -            7,136   $            -
                                                              ==============   ==============   ==============   ==============

<CAPTION>
                                                                                                          SERIES 2002
                                                                  SERIES E PREFERRED STOCK              PREFERRED STOCK
                                                                      $.01 PAR VALUE                    $.01 PAR VALUE
                                                              -------------------------------   -------------------------------
                                                                 NUMBER OF                         NUMBER OF
                                                                   SHARES          AMOUNT           SHARES           AMOUNT
                                                              --------------   --------------   --------------   --------------
<S>                                                                    <C>     <C>                      <C>      <C>
BALANCE AT JANUARY 1, 2002                                                 -   $            -                -   $            -
Sale of common stock in connection
 with the Standby Commitment
 Agreement ($1.57 per share)
 net of $75,000 of expenses                                                -                -                -                -
Sale of Series 2002 Preferred Stock
 in connection with the Standby
 Agreement ($1,000 per share)
 net of $115,000 of expenses                                               -                -            2,100                -
Sale of Series C Preferred Stock
 ($1,000 per share) net of $23,000
 of expenses                                                               -                -                -                -
Sale of warrants to investor in
 connection with the Standby
 Agreement                                                                 -                -                -                -
Deemed dividend related to
 beneficial conversion
 feature on Series B
 Preferred Stock                                                           -                -                -                -
Issuance of warrants to lender                                             -                -                -                -
Issuance of warrants to shareholders                                       -                -                -                -
Issuance of warrants in exchange
 for services                                                              -                -                -                -
Net loss                                                                   -                -                -                -
                                                              --------------   --------------   --------------   --------------
BALANCE AT DECEMBER 31, 2002                                               -                -            2,100                -
                                                              --------------   --------------   --------------   --------------
Sale of Series D Preferred Stock
 ($1,000 per share)                                                        -                -                -                -
Exchange of note for Series D Preferred
 Stock ($1,000 per share)                                                  -                -                -                -
Conversion of January 2003 Note to
 Series D Preferred Stock                                                  -                -                -                -
Sale of Series E Preferred Stock
 ($1,000 per share)                                                    1,000                -                -                -
Deemed dividend related to
 beneficial conversion
 feature on Series C
 Preferred Stock                                                           -                -                -                -
Exercise of Employee Stock
 Options and Warrants                                                      -                -                -                -
Conversion of Series 2002 Preferred
 Stock to Series D Preferred Stock                                         -                -           (2,100)               -
Conversion of Series A Preferred
 Stock and Series B Preferred Stock
 to Common Stock                                                           -                -                -                -
Issuance of warrants to supplier                                           -                -                -                -
Issuance of warrants to shareholders                                       -                -                -                -
Issuance of warrants in exchange
 for obligations                                                           -                -                -                -
Net loss                                                                   -                -                -                -
                                                              --------------   --------------   --------------   --------------
BALANCE AT DECEMBER 31, 2003                                           1,000                -                -                -
                                                              --------------   --------------   --------------   --------------
Sale of Common Stock and Warrants in connection with the
 January 2004 financing (net of issuance costs of $423,000)                -                -                -                -

Change in Value of Warrants                                                -                -                -                -

Exercise of Employee Stock Options                                         -                -                -                -

Expense recognized in connection with Issuance of Options                  -                -                -                -

Net loss                                                                   -                -                -                -
                                                              ==============   ==============   ==============   ==============
BALANCE AT DECEMBER 31, 2004                                           1,000   $            -                -   $            -
                                                              ==============   ==============   ==============   ==============

<CAPTION>
                                                                       COMMON STOCK
                                                                      $.01 PAR VALUE
                                                             ---------------------------------      ADDITIONAL
                                                                NUMBER OF                            PAID-IN
                                                                 SHARES            AMOUNT            CAPITAL
                                                             ---------------   ---------------   ---------------
<S>                                                               <C>          <C>               <C>
BALANCE AT JANUARY 1, 2002                                         9,205,331   $        92,000        72,184,000
Sale of common stock in connection
 with the Standby Commitment
 Agreement ($1.57 per share)
 net of $75,000 of expenses                                        1,186,573            12,000         1,776,000
Sale of Series 2002 Preferred Stock
 in connection with the Standby
 Agreement ($1,000 per share)
 net of $115,000 of expenses                                               -                 -         1,985,000
Sale of Series C Preferred Stock
 ($1,000 per share) net of $23,000
 of expenses                                                               -                 -           977,000
Sale of warrants to investor in
 connection with the Standby
 Agreement                                                                 -                 -            37,000
Deemed dividend related to
 beneficial conversion
 feature on Series B
 Preferred Stock                                                           -                 -        15,295,000
Issuance of warrants to lender                                             -                 -            80,000
Issuance of warrants to shareholders                                       -                 -           255,000
Issuance of warrants in exchange
 for services                                                              -                 -            39,000
Net loss                                                                   -                 -                 -
                                                             ---------------   ---------------   ---------------
BALANCE AT DECEMBER 31, 2002                                      10,391,904           104,000        92,628,000
                                                             ---------------   ---------------   ---------------
Sale of Series D Preferred Stock
 ($1,000 per share)                                                        -                 -         2,000,000
Exchange of note for Series D Preferred
 Stock ($1,000 per share)                                                  -                 -         2,027,000
Conversion of January 2003 Note to
 Series D Preferred Stock                                                  -                 -         1,009,000
Sale of Series E Preferred Stock
 ($1,000 per share)                                                        -                 -         1,000,000
Deemed dividend related to
 beneficial conversion
 feature on Series C
 Preferred Stock                                                           -                 -           225,000
Exercise of Employee Stock
 Options and Warrants                                              1,869,598            19,000         2,947,000
Conversion of Series 2002 Preferred
 Stock to Series D Preferred Stock                                         -                 -                 -
Conversion of Series A Preferred
 Stock and Series B Preferred Stock
 to Common Stock                                                     632,664             6,000            (6,000)
Issuance of warrants to supplier                                           -                 -           503,000
Issuance of warrants to shareholders                                       -                 -            42,000
Issuance of warrants in exchange
 for obligations                                                           -                 -            17,000
Net loss                                                                   -                 -                 -
                                                             ---------------   ---------------   ---------------
BALANCE AT DECEMBER 31, 2003                                      12,894,166           129,000       102,392,000
                                                             ---------------   ---------------   ---------------
Sale of Common Stock and Warrants in connection with the
 January 2004 financing (net of issuance costs of $423,000)        1,543,209            15,000         4,562,000

Change in Value of Warrants                                                -                 -          (564,000)

Exercise of Employee Stock Options                                   804,381             8,000           733,000

Expense recognized in connection with Issuance of Options                  -                 -           147,000

Net loss                                                                   -                 -                 -
                                                             ===============   ===============   ===============
BALANCE AT DECEMBER 31, 2004                                      15,241,756   $       152,000   $   107,270,000
                                                             ===============   ===============   ===============

<CAPTION>
                                                                                    TOTAL
                                                               ACCUMULATED      SHAREHOLDERS'
                                                                 DEFICIT           EQUITY
                                                             ---------------   ---------------
<S>                                                          <C>               <C>
BALANCE AT JANUARY 1, 2002                                   $   (63,968,000)  $     8,402,000
Sale of common stock in connection
 with the Standby Commitment
 Agreement ($1.57 per share)
 net of $75,000 of expenses                                                -         1,788,000
Sale of Series 2002 Preferred Stock
 in connection with the Standby
 Agreement ($1,000 per share)
 net of $115,000 of expenses                                               -         1,985,000
Sale of Series C Preferred Stock
 ($1,000 per share) net of $23,000
 of expenses                                                               -           977,000
Sale of warrants to investor in
 connection with the Standby
 Agreement                                                                 -            37,000
Deemed dividend related to
 beneficial conversion
 feature on Series B
 Preferred Stock                                                 (15,295,000)                -
Issuance of warrants to lender                                             -            80,000
Issuance of warrants to shareholders                                       -           255,000
Issuance of warrants in exchange
 for services                                                              -            39,000
Net loss                                                          (6,479,000)       (6,479,000)
                                                             ---------------   ---------------
BALANCE AT DECEMBER 31, 2002                                     (85,742,000)        7,084,000
                                                             ---------------   ---------------
Sale of Series D Preferred Stock
 ($1,000 per share)                                                        -         2,000,000
Exchange of note for Series D Preferred
 Stock ($1,000 per share)                                                  -         2,027,000
Conversion of January 2003 Note to
 Series D Preferred Stock                                                  -         1,009,000
Sale of Series E Preferred Stock
 ($1,000 per share)                                                        -         1,000,000
Deemed dividend related to
 beneficial conversion
 feature on Series C
 Preferred Stock                                                    (225,000)                -
Exercise of Employee Stock
 Options and Warrants                                                      -         2,966,000
Conversion of Series 2002 Preferred
 Stock to Series D Preferred Stock                                         -                 -
Conversion of Series A Preferred
 Stock and Series B Preferred Stock
 to Common Stock                                                           -                 -
Issuance of warrants to supplier                                           -           503,000
Issuance of warrants to shareholders                                       -            42,000
Issuance of warrants in exchange
 for obligations                                                           -            17,000
Net loss                                                          (6,369,000)       (6,369,000)
                                                             ---------------   ---------------
BALANCE AT DECEMBER 31, 2003                                     (92,336,000)       10,279,000
                                                             ---------------   ---------------
Sale of Common Stock and Warrants in connection with the
 January 2004 financing (net of issuance costs of $423,000)                -         4,577,000

Change in Value of Warrants                                                -          (564,000)

Exercise of Employee Stock Options                                         -           741,000

Expense recognized in connection with Issuance of Options                  -           147,000

Net loss                                                          (3,791,000)       (3,791,000)
                                                             ===============   ===============
BALANCE AT DECEMBER 31, 2004                                 $   (96,127,000)  $    11,389,000
                                                             ===============   ===============
</TABLE>

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

                                       F-4
<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        2004              2003              2002
                                                                   --------------    --------------    --------------
<S>                                                                <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                           $   (3,791,000)   $   (6,369,000)   $   (6,479,000)
Adjustments to reconcile net loss to net cash used in
 operating activities
  Depreciation and amortization                                         1,342,000         1,744,000         1,167,000
  Loss on disposal of assets                                               35,000                 -                 -
  Non-cash expense related to warrants issued to supplier                 264,000                 -            39,000
  Change in value of warrants                                            (564,000)                -                 -
  Provision for returns                                                  (354,000)          803,000           350,000
  Allowance for doubtful accounts                                         237,000           131,000           241,000
  Reserve for inventory obsolesence                                       100,000           484,000            17,000
  Stock option expense                                                    147,000                 -                 -
  Changes in operating assets and liabilities
    (Increase) decrease in
       Inventories                                                     (1,982,000)         (956,000)       (4,497,000)
       Accounts receivable                                               (289,000)         (455,000)         (131,000)
       Other current assets                                              (269,000)         (124,000)          127,000
       Prepaid expenses                                                  (127,000)           (5,000)          (29,000)
       Other assets                                                             -                 -            39,000
    (Decrease) increase in:
       Accounts payable                                                 1,068,000            61,000             3,000
       Accrued expenses                                                   186,000          (124,000)          314,000
       Short term interest payable to related party
        shareholders                                                       20,000            28,000            33,000
       Deferred revenue                                                   445,000           367,000           194,000
       Long-term interest payable to related party
        shareholders                                                      499,000           159,000                 -
                                                                   --------------    --------------    --------------
         Net cash used in operating activities                         (3,033,000)       (4,256,000)       (8,612,000)
                                                                   --------------    --------------    --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash collateral in connection with Rosenthal Pledge Agreement          (1,250,000)                -                 -
Purchase of property and equipment                                     (1,486,000)         (481,000)       (1,788,000)
                                                                   --------------    --------------    --------------
         Net cash used in investing activities                         (2,736,000)         (481,000)       (1,788,000)
                                                                   --------------    --------------    --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from January 2004 financing                                4,577,000                 -                 -
Net proceeds from exercise of Stock Options                               741,000         2,966,000                 -
Payments of capital lease obligation                                     (349,000)         (257,000)         (214,000)
Repayment of related party notes                                         (236,000)                -                 -
Proceeds from issuance of Notes Payable (October 2003 Financing)                -         2,000,000                 -
Proceeds from issuance of Notes Payable (July 2003 Financing)                   -         2,000,000                 -
Proceeds from sale of Series D Preferred Stock                                  -         2,000,000                 -
Proceeds from issuance of Notes Payable (January 2003 Financing)                -         1,000,000                 -
Proceeds from sale of Series E Preferred Stock                                  -         1,000,000                 -
Net proceeds from sale of Series 2002 Preferred Stock                           -                 -         2,045,000
Proceeds from issuance of Notes Payable (September 2002
 Financing)                                                                     -                 -         2,000,000
Net proceeds from sale of Common Stock and Warrants                             -                 -         1,899,000
Net proceeds from sale of Series C Preferred Stock                              -                 -         1,000,000
                                                                   --------------    --------------    --------------
         Net cash provided by financing activities                      4,733,000        10,709,000         6,730,000
                                                                   --------------    --------------    --------------
         Net increase (decrease) in cash and cash equivalents          (1,036,000)        5,972,000        (3,670,000)

CASH AND CASH EQUIVALENTS
Beginning of year                                                       7,721,000         1,749,000         5,419,000
                                                                   --------------    --------------    --------------
End of year                                                        $    6,685,000    $    7,721,000    $    1,749,000
                                                                   ==============    ==============    ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for Interest                             $      175,000    $       85,000    $       94,000
Non-cash investing and financing activites
  Equipment acquired under capital lease                                  153,000           224,000           661,000
  Exchange of note for equity                                                   -         2,027,000                 -
  Conversion of debt to equity                                                  -         1,009,000                 -
  Warrants issued to supplier                                                   -           503,000                 -
  Deemed dividend related to beneficial conversion feature on
   Series C Preferred Stock                                                     -           225,000                 -
  Warrants issued to related party shareholders                                 -            42,000            98,000
  Deemed dividend related to beneficial conversion feature on
   Series B Preferred Stock                                                     -                 -        15,295,000
  Warrant issued in exchange for obligation                                     -                 -            17,000
  Warrant issued to lender                                                      -                 -            80,000
</TABLE>

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

                                       F-5
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

1.      THE COMPANY

        Bluefly, Inc., a Delaware corporation, (the "Company"), is a leading
        Internet retailer that sells over 350 brands of designer apparel,
        accessories and home products at discount prices. The Company's Web site
        was launched in September 1998.

        The Company has sustained net losses and negative cash flows from
        operations since the formation of Bluefly.com. The Company's ability to
        meet its obligations in the ordinary course of business is dependent
        upon its ability to establish profitable operations or raise additional
        financing through public or private debt or equity financing, or other
        sources of financing to fund operations. The Company believes that its
        existing resources, together with working capital should be sufficient
        to satisfy our cash requirements through December 31, 2005. The Company
        may seek additional equity or debt financings to maximize the growth of
        its business or if anticipated operating results are not achieved. If
        such financings are not available on terms acceptable to the Company,
        and/or the Company does not achieve its sales plan, future operations
        will need to be modified, scaled back or discontinued.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        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 in consolidation.

        REVENUE RECOGNITION
        The Company recognizes revenue in accordance with Staff Accounting
        Bulletin ("SAB 101") No. 101 "Revenue Recognition in the Financial
        Statements," as amended. Gross sales consists primarily of revenue from
        product sales and shipping and handling charges and is net of
        promotional discounts. Net sales represent gross sales, less provisions
        for returns, credit card chargebacks and adjustments for uncollected
        sales tax. Revenue is recognized when all the following criteria are
        met:

        .       A customer executes an order.

        .       The product price and the shipping and handling fee have been
                determined.

        .       Credit card authorization has occurred and collection is
                reasonably assured.

        .       The product has been shipped and received by the customer.

        Shipping and handling billed to customers is classified as revenue in
        accordance with Financial Accounting Standards Board ("FASB") Task
        Force's Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for
        Shipping and Handling Fees and Costs" ("EITF No. 00-10").

                                       F-6
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        PROVISIONS FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
        The Company generally permits returns for any reason within 90 days of
        the sale. The Company performs credit card authorizations and checks the
        verifications of its customers prior to shipment of merchandise.
        Accordingly, the Company establishes a reserve for estimated future
        sales returns and allowance for doubtful accounts at the time of
        shipment based primarily on historical data. Accounts receivable is
        presented on the consolidated balance sheet net of the allowance for
        doubtful accounts. As of December 31, 2004 and 2003, the allowance for
        doubtful accounts was $44,000 and $40,000, respectively, and the
        allowance for sales returns was $2,174,000 and $2,528,000, respectively.

        Deferred revenue, which consists primarily of goods shipped to customers
        but not yet received and customer credits, totaled approximately
        $1,697,000 and $1,252,000 as of December 31, 2004 and 2003,
        respectively.

        CASH AND CASH EQUIVALENTS
        The Company considers all highly liquid investments with an original
        maturity of three months or less to be cash and cash equivalents.

        INVENTORIES
        Inventories, which consist of finished goods, are stated at the lower of
        cost or market. Cost is determined by the first-in, first-out ("FIFO")
        method. The Company reviews its inventory levels in order to identify
        slow-moving merchandise and establishes a reserve for such merchandise,
        Inventory reserves are established based on historical data and
        management's best estimate of excess inventory. Inventory may be marked
        down below cost if management determines that the inventory stock will
        not sell at its currently marked price. Inventory is presented net of
        reserves on the consolidated balance sheet.

        As of December 31, 2004 and 2003, inventories, net consists of the
        following:

                                                      2004            2003
                                                  ------------    ------------
        Inventory on hand                         $ 12,433,000    $ 10,755,000
        Inventory to be received due to returns      1,360,000       1,258,000
        Inventory reserves                            (835,000)       (673,000)
                                                  ------------    ------------
                   Total inventories, net         $ 12,958,000    $ 11,340,000
                                                  ============    ============

        PROPERTY AND EQUIPMENT
        Property and equipment are stated at cost net of depreciation. Equipment
        and software are depreciated on a straight-line basis over two to seven
        years. Leasehold improvements are amortized over the shorter of their
        estimated useful lives or the term of the lease. Lease amortization is
        included in depreciation expense. Maintenance and repairs are expensed
        as incurred.

        Certain equipment held under capital leases is classified as property
        and equipment and amortized using the straight-line method over the
        lease terms and the related obligations are recorded as liabilities.

                                       F-7
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        Costs related to the upgrade and development of the Web Site are
        accounted for in accordance with EITF Issue No. 00-02 "Accounting for
        Website Development Costs", and to the extent they are capitalized, are
        amortized over 24 months.

        LONG-LIVED ASSETS
        The Company's policy is to evaluate long-lived assets 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 assets.

        INCOME TAXES
        The Company recognizes deferred income tax assets and liabilities on the
        differences between the financial statement and tax bases of assets and
        liabilities using enacted statutory tax rates in effect for the years in
        which the differences are expected to reverse. The effect on deferred
        taxes of a change in tax rates is realized in income or loss in the
        period that includes the enactment date. In addition, valuation
        allowances are established when it is more likely than not that deferred
        tax assets will not be realized.

        STOCK BASED COMPENSATION
        At December 31, 2004, the Company has two stock-based employee
        compensation plans, which are described more fully in Note 9. The
        Company applies Statement of Financial Accounting Standards ("SFAS") No.
        148 "Accounting for Stock Based Compensation - Transition and
        Disclosure, an amendment of FASB Statement No. 123," SFAS No. 123
        "Accounting for Stock Based Compensation," and FASB Interpretation No.
        44, "Accounting for Certain Transactions Involving Stock Compensation"
        in accounting for its stock based compensation plan. In accordance with
        SFAS No. 123, the Company applies Accounting Principles Board Opinion
        No. 25 and related Interpretations for expense recognition. For the year
        ended December 31, 2004, compensation expense of $17,000 was recorded in
        connection with certain options issued below market value to the
        Company's Chief Executive Officer in accordance with the terms of her
        employment agreement, and $113,000 in compensation expense was recorded
        in connection with certain options issued to the Company's former Chief
        Executive Officer pursuant to his separation agreement. Except for these
        options, no compensation expense has been recorded for the year ended
        December 31, 2004 and December 31, 2003 in connection with stock option
        grants to employees, because the exercise price of employee stock
        options equals or exceeds the market price of the underlying stock on
        the date of grant. Had compensation expense for the Plan been determined
        consistent with the provisions of SFAS No. 123, the effect on the
        Company's basic and diluted net loss per share would have been as
        follows:

                                       F-8
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------
                                                      2004            2003            2002
                                                  ------------    ------------    ------------
        <S>                                       <C>             <C>             <C>
        Net loss, as reported                     $ (3,791,000)   $ (6,369,000)   $ (6,479,000)
        Deduct: total stock-based employee
         compensation expense determined
         under fair value based methods for all
         awards, net of related tax effects         (4,617,000)     (4,219,000)     (4,259,000)
        Add: Stock-based employee compensation
         expense included in reported net loss         130,000               -               -
                                                  ------------    ------------    ------------
            Pro forma net loss                      (8,278,000)    (10,588,000)    (10,738,000)
        Loss per share
          Basic and diluted, as reported          $      (0.55)   $      (0.88)   $      (2.44)
          Basic and diluted, pro forma            $      (0.86)   $      (1.26)   $      (2.87)
</TABLE>

        The effects of applying SFAS No. 123 in this pro forma disclosure are
        not indicative of future amounts, as additional stock option awards are
        anticipated in future years.

        NET LOSS PER SHARE
        The Company calculated net loss per share in accordance with SFAS No.
        128, "Earnings Per Share." Basic loss per share excludes dilution and is
        computed by dividing loss available to common shareholders by the
        weighted average number of common shares outstanding for the period. For
        purposes of calculating basic and diluted loss per share, the Company
        presents the amount of dividends earned but unpaid on the face of the
        statement of operations.

        Diluted loss per share is computed by dividing loss available to common
        shareholders by the weighted average number of common shares outstanding
        for the period, adjusted to reflect potentially dilutive securities. Due
        to the loss, the following shares of Common Stock issuable pursuant to
        options, warrants, Preferred Stock and Convertible Notes were not
        included in the computation of diluted earnings per share because the
        result of such inclusion would be antidilutive:

<TABLE>
<CAPTION>
                                                 COMMON STOCK ISSUABLE
                               --------------------------------------------------------       EXERCISE
                                    2004                 2003                 2002             PRICES
                               --------------       --------------       --------------    --------------
        <S>                        <C>                  <C>                  <C>            <C>
        SECURITY
        Options                     9,813,379            8,508,370            8,508,412     $0.69- $16.60
        Warrants                    1,704,945            1,319,144            1,069,144     $0.78 - $9.08
        Preferred stock            43,323,430 (1)       43,323,430 (1)       27,769,450
        Convertible Notes(2)                -                    -            2,150,538
</TABLE>

             (1)Excludes dividends on preferred stock, which are payable in cash
                or common stock, at the Company's option, upon conversion,
                redemption or liquidation

             (2)Represents debt issued in connection with the July 2003
                financing and October 2003 financing, which is convertible into
                equity securities of the Company sold in any subsequent round of
                financing, at the holder's option, at a price that is equal to
                the lowest price per share accepted by any investor in such
                subsequent round of financing. Until such financing occurs, such
                debt is not convertible into Common Stock.

                                       F-9
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        MARKETING EXPENSES
        In addition to marketing salaries, marketing expenses consist primarily
        of online advertising, print advertising, costs associated with
        sweepstakes, direct mail campaigns as well as the related external
        production costs. The costs associated with online and print advertising
        are expensed as incurred, while the costs associated with direct mail
        campaigns are capitalized and charged to expense over the expected
        future revenue stream. There were no amounts associated with direct mail
        campaigns capitalized at December 31, 2004 and 2003. Marketing expenses
        (excluding marketing and public relations salaries and related salary
        expenses of $761,000, $628,000 and $553,000) for the years ended
        December 31, 2004, 2003 and 2002 amounted to approximately $1,452,000,
        $1,270,000 and $1,722,000, respectively.

        FULFILLMENT EXPENSES
        The Company utilizes a third party to perform all of its order
        fulfillment including warehousing, administrative support, returns
        processing and receiving labor. For the years ended December 31, 2004,
        2003 and 2002, fulfillment expenses totaled $2,914,000, $2,776,000 and
        $2,622,000, respectively. These amounts are included in selling,
        marketing and fulfillment expenses in the statement of operations.

        FAIR VALUE OF FINANCIAL INSTRUMENTS
        The carrying amounts of the Company's financial instruments, including
        cash and cash equivalents, other assets, accounts payable, accrued
        liabilities, and notes payable to related party shareholders approximate
        fair value due to their short maturities.

        RECENT ACCOUNTING PRONOUNCEMENTS
        In March, 2004, the Emerging Issues Task Force issued EITF 03-6,
        "Participating Securities and the Two-Class Method under FASB Statement
        No. 128." This statement provides additional guidance on the calculation
        and disclosure requirements for earnings per share. The FASB concluded
        in EITF 03-6 that companies with multiple classes of common stock or
        participating securities, as defined by SFAS No. 128, calculate and
        disclose earnings per share based on the two-class method. The adoption
        of this statement does not have an impact to the Company's financial
        statement presentation as the Company is currently in a loss position.

        In December 2004, the FASB issued Statement No. 123 (revised 2004),
        "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123 and
        supersedes APB No. 25. Under the new standard, companies will no longer
        be able to account for stock-based compensation transactions using the
        intrinsic value method in accordance with APB No. 25. Instead, companies
        will be required to account for such transactions using a fair-value
        method and to recognize the expense in the statements of income. The
        adoption of SFAS 123R will also require additional accounting related to
        the income tax effects and additional disclosure regarding the cash flow
        effects resulting from share-based payment arrangements. SFAS 123R will
        be effective for periods beginning after June 15, 2005 and allows, but
        does not require, companies to restate prior periods. The Company is
        evaluating the impact of adopting SFAS 123R and expects that it will
        record substantial non-cash stock compensation expenses. The adoption of
        SFAS 123R is not expected to have a significant effect on the Company's
        financial condition or cash flows but is expected to have a significant,
        adverse effect on its results of operations.

        RECLASSIFICATIONS
        Certain amounts in the consolidated financial statements of the prior
        periods have been reclassified to conform to the current period
        presentation for comparative purposes.

                                      F-10
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        USE OF ESTIMATES
        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 disclosures of contingent assets and liabilities at the date of the
        financial statements and the reported amounts of revenues and expenses
        during the reporting period. Significant estimates and assumptions
        include the adequacy of the allowances for sales returns, recoverability
        of inventories, useful lives of property and equipment and the
        realization of deferred tax assets. Actual results could differ from
        those estimates.

3.      PROPERTY AND EQUIPMENT

        As of December 31, 2004 and 2003, property and equipment consists of the
        following:

                                                  2004            2003
                                              ------------    ------------
        Leasehold improvements                $  1,065,000    $    544,000
        Office equipment                           483,000         433,000
        Computer equipment and software          5,619,000       4,550,000
                                              ------------    ------------
                                                 7,167,000       5,527,000
        Less: Accumulated depreciation          (5,234,000)     (3,868,000)
                                              ------------    ------------
                                              $  1,933,000    $  1,659,000
                                              ============    ============

        Depreciation and amortization of property and equipment was
        approximately $1,331,000, $1,650,000 and $1,000,000, for the years ended
        December 31, 2004, 2003 and 2002, respectively.

4.      PREPAID EXPENSES AND OTHER CURRENT ASSETS

        As of December 31, 2004 and 2003, prepaid expenses and other current
        assets consist of the following:

                                                  2004            2003
                                              ------------    ------------
        Prepaid expenses                      $    296,000    $    232,000
        Prepaid inventory                          335,000         273,000
        Other current assets                       722,000         201,000
                                              ------------    ------------
                                              $  1,353,000    $    706,000
                                              ============    ============

                                      F-11
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

5.      ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

        As of December 31, 2004 and 2003, accrued expenses and other current
        liabilities consist of the following:

                                                        2004            2003
                                                    ------------    ------------
        Allowance for sales returns                 $  2,174,000    $  2,528,000
        Salary, vacation and bonus accrual               721,000         550,000
        Current portion of capital lease liability       139,000         314,000
        Accrued expenses                                 354,000         240,000
        Deposit from third party                               -         170,000
        Accrued media expenses                           138,000          67,000
                                                    ------------    ------------
                                                    $  3,526,000    $  3,869,000
                                                    ============    ============

6.      OTHER INCOME

        In June 2002, the Company entered into an agreement with a third party
        investor pursuant to which the investor committed to purchase
        approximately $7 million of Common Stock and warrants from the Company.
        The investor breached the contract by failing to consummate the
        investment, although it did provide the Company with $169,000 as a good
        faith deposit. In October 2002, the Company filed an action against the
        investor based on its failure to consummate the investment, and in
        December 2003, the court entered judgment in the Company's favor against
        the third party investor in the amount of $3,793,688. In the first
        quarter of 2004, following the expiration of all applicable appeal
        periods, the Company recognized the good faith deposit of $169,000 as
        other income, as a partial recognition of litigation settlement. Based
        on the information currently available to it regarding the investor's
        finances, the Company does not believe that it will be successful in
        collecting a material amount of additional funds as a result of the
        damages award.

        In addition, as discussed in Note 9 below, the Company recognized
        $564,000 of other income for the year ended December 31, 2004 to adjust
        a liability associated with warrants issued by the Company to its fair
        value as of June 17, 2004 (at which point the liability was reclassified
        as equity in accordance with EITF 00-19 and described in Note 9).

                                      F-12
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

7.      INCOME TAXES

        Significant components of the Company's deferred tax assets and
        liabilities are summarized as follows:

                                                     2004            2003
                                                 ------------    ------------
        DEFERRED TAX ASSETS
        Net operating losses                     $ 27,328,000    $ 26,230,000
        Depreciation and amortization                 (99,000)       (142,000)
        Accounts receivable and inventory
         reserves                                     350,000         288,000
        Accrued bonuses                               203,000         134,000
        Deferred revenue                              686,000         357,000
        Other                                         270,000           5,000
                                                 ------------    ------------
                                                   28,738,000      26,872,000
        Valuation Allowance                       (28,738,000)    (26,872,000)
                                                 ------------    ------------
            Net deferred tax asset (liability)   $          -    $          -
                                                 ============    ============

        The Company is in an accumulated loss position for both financial and
        income tax reporting purposes. The Company has U.S. Federal net
        operating loss carryforwards of approximately $67,627,000 at December
        31, 2004 which have expiration dates from 2018 through 2024.
        Approximately $5.3 million of these net operating loss carryforwards
        relate to the exercise of employee stock options and any tax benefit
        derived there from, when realized, will be accounted for as a credit to
        additional paid-in-capital rather than a reduction of the income tax
        provision. Pursuant to Section 382 of the Internal Revenue Code, the
        usage of these net operating loss carryforwards may be limited due to
        changes in ownership that have occurred or that may occur in the future.
        The Company has not yet determined the impact, if any, that changes in
        ownership have had on net operating loss carryforwards. The Company
        provided a full valuation allowance on the entire deferred tax asset
        balance to reflect the uncertainty regarding the realizability of these
        assets due to operating losses incurred since inception.

        The Company's effective tax rate differs from the U.S. Federal Statutory
        income tax rate of 35% as follows:

                                                  2004       2003       2002
                                                --------   --------   --------
        Statutory federal income tax rate         (35.00)%   (35.00)%   (35.00)%
        State tax benefit, net of federal
         taxes                                     (5.41)%    (5.41)%    (5.41)%
        Other                                       0.34%      0.16%      0.55%
        Valuation allowance on deferred tax
         asset                                     40.07%     40.25%     39.86%
                                                --------   --------   --------
                  Effective tax rate                0.00%      0.00%      0.00%
                                                ========   ========   ========

                                      F-13
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

8.      COMMITMENTS AND CONTINGENCIES

        EMPLOYMENT CONTRACTS
        The Company has entered into certain employment contracts, which expire
        through September 30, 2007. As of December 31, 2004, the Company's
        aggregate commitment for future base salary under these employment
        contracts is:

        2005                                                   $ 1,219,000
        2006                                                     1,030,000
        2007                                                       324,000
                                                               -----------
                                                               $ 2,573,000
                                                               ===========

        LEASES
        The Company leases equipment and space under various capital and
        operating leases that expire at various dates through 2011. Future
        minimum lease payments under capital and operating leases, excluding
        utilities, that have initial or remaining non-cancelable terms in excess
        of one year are as follows:

                                                       CAPITAL       OPERATING
                                                       LEASES         LEASES
                                                    ------------   ------------
        2005                                        $    139,000   $    462,000
        2006                                              54,000        469,000
        2007                                              27,000        481,000
        2008                                                   -        441,000
        Thereafter                                             -        476,000
                                                    ------------   ------------
                  Total minimum payments                 220,000   $  2,329,000
                                                    ------------   ============
        Obligations due within one year                 (139,000)
                                                    ------------
                  Long-term obligations under
                   capital leases                   $     81,000
                                                    ============

        Rent expense aggregated approximately $442,000, $427,000 and $412,000
        for the years ended December 31, 2004, 2003 and 2002, respectively.

        MARKETING COMMITMENTS
        As of December 31, 2004, the Company has advertising and marketing
        commitments in connection with email services of approximately $150,000
        through December 31, 2005.

        LEGAL PROCEEDINGS
        The Company is, from time to time, involved in litigation incidental to
        the conduct of its business. However, the Company is not party to any
        lawsuit or proceeding which, in the opinion of management is likely to
        have a material adverse effect on its financial condition.

                                      F-14
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

9.      SHAREHOLDERS' EQUITY

        AUTHORIZED SHARES
        The Company is incorporated in Delaware and has 92,000,000 authorized
        shares of common stock, $.01 par value per share ("Common Stock"), and
        25,000,000 authorized shares of preferred stock, $.01 par value per
        share (the "Preferred Stock"). The Preferred Stock is designated as
        follows: 500,000 shares of Series A Convertible Preferred Stock (the
        "Series A Preferred Stock"); 9,000,000 shares of Series B Convertible
        Preferred Stock (the "Series B Preferred Stock"); 3,500 shares of Series
        C Convertible Preferred Stock (the "Series C Preferred Stock"); 2,100
        shares of Series 2002 Convertible Preferred Stock (the "Series 2002
        Convertible Preferred Stock"); 7,150 shares of Series D Convertible
        Preferred Stock (the "Series D Preferred Stock"); 1,000 shares of Series
        E Convertible Preferred Stock (the "Series E Preferred Stock"); and
        15,486,250 shares undesignated and available for issuance.

        PREFERRED STOCK
        OUTSTANDING SHARES
        The Company's currently outstanding shares of Preferred Stock
        (collectively, the "Outstanding Preferred Stock") include the following:
        460,000 shares of Series A Preferred Stock with a stated value of
        $9.2 million; 8,889,414 shares of Series B Preferred Stock with a stated
        value of $20 million; 1,000 shares of Series C Preferred Stock with a
        stated value of $1.0 million; 7,136.548 shares of Series D Preferred
        Stock with a stated value of approximately $7.1 million; and 1,000
        shares of Series E Preferred Stock with a stated value of approximately
        $1.0 million. All such shares are held by affiliates of Soros Private
        Equity Partners, LLC ("Soros") that collectively own a majority of the
        Company's capital stock.

        LIQUIDATION PREFERENCE
        Each share of Outstanding Preferred Stock has a liquidation preference
        equal to the greater of (i) its stated value plus accrued dividends
        (and, in the case of the Series B Preferred Stock an additional
        $10 million, resulting in an aggregate liquidation preference for all
        Outstanding Preferred Stock of $49,100,000 plus accrued dividends of
        $14.3 million) or (ii) the amount that the holder of such share would
        receive if it were to convert such share into shares of Common Stock
        immediately prior to the liquidation, dissolution or winding up of the
        Company. The liquidation preference and accrued dividends on each series
        of Preferred Stock at December 31, 2004 is as follows:

<TABLE>
<CAPTION>
                                                  ACCRUED DIVIDENDS AT   LIQUIDATION
                                   STATED VALUE     DECEMBER 31, 2004     PREFERENCE
                                   ------------   --------------------   ------------
        <S>                        <C>                <C>                <C>
        Series A Preferred Stock   $  9,200,000       $  5,000,000       $ 14,200,000
        Series B Preferred Stock     20,800,000          7,300,000         38,100,000(1)
        Series C Preferred Stock      1,000,000            191,000          1,191,000
        Series D Preferred Stock      7,100,000          1,600,000          8,700,000
        Series E Preferred Stock      1,000,000            202,000          1,202,000
                                   ------------       ------------       ------------
                                   $ 39,100,000       $ 14,293,000       $ 63,393,000
                                   ============       ============       ============
</TABLE>

        (1)     Includes $10 million of additional liquidation preference in
                connection with Series B Preferred Stock

                                      F-15
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        DIVIDENDS
        Each share of Outstanding Preferred Stock bears a cumulative compounding
        dividend, payable upon conversion in cash or Common Stock, at the
        Company's option. The Series A Preferred Stock, Series B Preferred Stock
        and Series C Preferred Stock accrue dividends at the rate of 8% per
        annum, and the Series D Preferred Stock and Series E Preferred Stock
        accrue dividends at the rate of 12% per annum.

        RANKING
        All of the shares of Outstanding Preferred Stock rank pari passu with
        each other, and senior to the Common Stock, with respect to the payment
        of distributions on liquidation, dissolution or winding up of the
        Company and with respect to the payment of dividends.

        CONVERSION
        The Series A Preferred Stock is convertible into Common Stock at the
        rate of $2.34 in stated value per share of Common Stock. The other
        shares of Outstanding Preferred Stock are convertible into Common Stock
        at the rate of $0.76 in stated value per share of Common Stock. The
        conversion price of all of the Outstanding Preferred Stock, other than
        the Series A Preferred Stock, is subject to anti-dilution adjustments,
        pursuant to which, subject to certain exceptions, to the extent that the
        Company issues Common Stock or securities convertible into Common Stock
        at a price per share less than the conversion price in the future, the
        conversion price would be decreased so that it would equal the
        conversion price of the new security or the price at which shares of
        Common Stock are sold, as the case may be. As more fully described
        below, the conversion price of the Series B Preferred Stock and the
        Series C Preferred Stock were reduced from higher levels to $0.76 upon
        the issuance of the Series D Preferred Stock as a result of these
        anti-dilution provisions.

        VOTING RIGHTS
        All of the shares of Outstanding Preferred Stock vote with the Common
        Stock on an as-converted basis, and the Company is prohibited from
        taking certain actions without the approval of a majority of each of the
        separate classes of Outstanding Preferred Stock. In addition, the
        holders of the Series A Preferred Stock have the right to appoint a
        designee to the Company's Board of Directors (the "Series A Designee"),
        and the holders of the Series B Preferred Stock similarly have the right
        to appoint such a designee (the "Series B Designee"), with both the
        Series A Designee and the Series B Designee being entitled to seven
        votes on any issue that comes before the Board of Directors (other than
        issues relating to the redemption of the Outstanding Preferred Stock, as
        described below).

        REDEMPTION
        The Company is entitled, subject to certain conditions, to redeem the
        shares of Outstanding Preferred Stock for cash at prices ranging,
        depending upon the date of such redemption, from 4 times, 4.5 times or
        5 times the conversion price. The directors designated by the holders of
        the Preferred Stock are not entitled to vote on issues relating to the
        redemption of the Outstanding Preferred Stock.

        MISCELLANEOUS RIGHTS
        The holders of the Outstanding Preferred Stock have registration rights
        with respect to the Common Stock issuable upon conversion of the
        Outstanding Preferred Stock and pre-emptive rights with respect to
        future issuance of capital stock of the Company.

                                      F-16
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        JANUARY 2004 FINANCING
        In January 2004, the Company completed a private placement pursuant to
        which it raised $5,000,000 (the "January 2004 Financing"). Under the
        terms of the deal, the Company issued 1,543,209 shares of Common Stock
        at $3.24 per share, which was 90% of the trailing five-day average of
        the Company's volume-weighted stock price as of December 29, 2003, the
        date that a preliminary agreement was reached as to the pricing of the
        deal. The Company also issued to the new investors warrants to purchase
        385,801 shares of Common Stock at any time during the next five years at
        an exercise price equal to $3.96 per share. After professional fees and
        finders fees paid to brokers, the net proceeds from the transaction were
        approximately $4,577,000.

        SOROS FINANCINGS DURING 2003
        CONVERSION OF PREFERRED STOCK
        In January 2003, the holders of 40,000 shares of the Company's Series A
        Convertible Preferred Stock and 21,368 shares of the Company's Series B
        Convertible Preferred Stock exercised their conversion rights with
        respect thereto. The shares of Series A Convertible Preferred Stock were
        converted into an aggregate of 341,880 shares of the Company's Common
        Stock. In addition, as permitted under the Company's Certificate of
        Incorporation, the Company elected to pay the $213,216 in accrued and
        unpaid dividends on such shares of Series A Preferred Stock through the
        issuance of additional shares of Common Stock at a price per share of
        $0.93 (the 30-day trailing average closing price as of the date of
        conversion). Accordingly, an additional 229,265 shares of the Company's
        Common Stock were issued as payment in full of the accrued and unpaid
        dividends on the converted shares of Series A Convertible Preferred
        Stock, in accordance with the Company's Certificate of Incorporation.
        The shares of Series B Convertible Preferred Stock were converted into
        an aggregate of 53,765 shares of the Company's Common Stock. In
        addition, as permitted under the Company's Certificate of Incorporation,
        the Company elected to pay the $7,211 in accrued and unpaid dividends on
        such shares of Series B Preferred Stock through the issuance of
        additional shares of Common Stock at a price per share of $0.93 (the
        30-day trailing average closing price as of the date of conversion).
        Accordingly, an additional 7,754 shares of the Company's Common Stock
        were issued as payment in full of the accrued and unpaid dividends on
        the converted shares of Series B Convertible Preferred Stock, in
        accordance with the Company's Certificate of Incorporation.

        JANUARY 2003 FINANCING
        In January 2003, the Company issued to Soros $1 million of demand
        convertible promissory notes that bore interest at a rate of 8% per
        annum and had a maturity date of July 28, 2003, and warrants to purchase
        25,000 shares of its common stock, exercisable at any time on or prior
        to January 28, 2007 at $1.12 per share (the "January 2003 Financing").
        Interest on the notes was payable only upon repayment of the principal
        amount, whether at maturity or upon a mandatory or optional prepayment.
        The principal amount, together with accrued interest, was convertible
        into equity securities that the Company might issue in any subsequent
        round of financing, at the holder's option, at a price that was equal to
        the lowest price per share accepted by any investor in such subsequent
        round of financing. These notes were converted into Series D Preferred
        Stock in connection with the March 2003 Financing described below.

        MARCH 2003 FINANCING
        In March 2003, the Company entered into an agreement with Soros pursuant
        to which Soros: (i) provided $2 million of new capital by purchasing
        2,000 shares of Series D Preferred Stock, (ii) converted the promissory
        notes issued to it in the January 2003 Financing and all of its Series
        2002 Preferred Stock into 3,109.425 shares of Series D Preferred Stock
        and (iii) purchased 2,027.123

                                      F-17
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        shares of Series D Preferred Stock, with the proceeds from this sale
        being retained by Soros as payment in full of the Company's obligations
        under the Series C Notes (the "March 2003 Financing"). The material
        terms of the Series D Preferred Stock are described above.

        Additionally, Soros agreed to provide the Company with up to $1 million
        in additional financing (the "2003 Standby Commitment Amount") on a
        standby basis at any time prior to January 1, 2004, provided that the
        Company's cash balances were less than $1 million at that time (the
        "2003 Standby Commitment.") Such financing was to be made in one or more
        tranches as determined by the members of the Company's Board of
        Directors (other than the Series A Designee and the Series B Designee),
        and any and all draws against the 2003 Standby Commitment Amount were to
        be effected through the purchase of newly-designated shares of Series E
        Preferred Stock. Subject to certain limitations, the 2003 Standby
        Commitment Amount was to be reduced on a dollar-for-dollar basis by the
        gross cash proceeds received by the Company or any of its subsidiaries
        from the issuance of any equity or convertible securities after March
        12, 2003.

        As a result of the March 2003 Financing, the conversion price of the
        Series B Preferred Stock and the Series C Preferred Stock automatically
        decreased from $0.93 to $0.76 per share. In accordance with EITF 00-27,
        the reduction in the conversion price of the Series C Preferred Stock
        resulted in the Company recording a beneficial conversion feature in the
        approximate amount of $225,000 as part of its financial results for the
        first quarter of 2003. This non-cash charge, which is analogous to a
        dividend, resulted in an adjustment to the Company's computation of Loss
        Per Share.

        MAY 2003 FINANCING
        In accordance with the terms of the 2003 Standby Commitment, in May 2003
        Soros invested an additional $1.0 million in the Company through the
        purchase of 1,000 shares of Series E Preferred Stock and thereby
        fulfilled the 2003 Standby Commitment in full. The terms of the Series E
        Preferred Stock are described above.

        JULY 2003 FINANCING
        In July 2003, Soros invested an additional $2.0 million in the Company.
        Under the terms of the transaction, the Company issued $2.0 million of
        convertible promissory notes that bear interest at a rate of 12% per
        annum and had a maturity date of January 12, 2004 (which, was
        subsequently extended to May 1, 2006). Interest on the notes is payable
        only upon repayment of the principal amount, whether at maturity or upon
        a mandatory or optional prepayment. The principal amount, together with
        accrued interest, is convertible into equity securities of the Company
        sold in any subsequent round of financing, at the holder's option, at a
        price that is equal to the lowest price per share accepted by any
        investor in such subsequent round of financing (the "July 2003
        Financing"). The conversion of the notes is subject to certain
        limitations until such time as the conversion provisions are approved by
        the Company's stockholders.

        OCTOBER 2003 FINANCING
        In October 2003 Soros invested an additional $2.0 million in the
        Company. Under the terms of the transaction, the Company issued $2.0
        million of convertible promissory notes. These notes were on
        substantially the same terms as the notes issued in the July 2003
        Financing, except that the maturity date of these notes was April 14,
        2004. Subsequent to year end, the maturity date of these notes was
        extended to May 1, 2006.

                                      F-18
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        WARRANTS
        WARRANTS TO SOROS
        The Company has issued warrants to Soros in connection with past and
        recent financings as well as in connection with the Loan Facility.
        Warrants issued in connection with the Company's Loan Facility are
        included in the table below and are described more fully in Note 11
        below.

        In connection with the January 2003 Financing, the Company issued
        warrants to purchase 25,000 shares of its common stock, exercisable at
        any time on or prior to January 28, 2007 at $1.12 per share to Soros.

        The Company valued the warrants using the Black Scholes option pricing
        model using the following assumptions: risk free interest rate: 3.54%,
        volatility 113%, expected life 4 years, zero dividend yield. Using these
        factors the warrants were valued at $21,000 and were expensed over the
        life of the note. The full amount was expensed in the first quarter of
        2003.

        In exchange for the March 2002 Standby Agreement, the Company issued to
        Soros warrants to purchase 100,000 shares of Common Stock at an exercise
        price of $1.68 per share (the 20 day trailing average of the closing
        sale price of the Company's Common Stock on the date of issuance),
        exercisable at any time until March 27, 2007. The Company valued the
        warrants using the Black Scholes option pricing model using the
        following assumptions: risk free interest rate: 5.22%, volatility 183%,
        expected life 3 years, zero dividend yield. The Company accounted for
        the warrants by crediting additional paid in capital for approximately
        $157,000 and capitalizing the amount on the balance sheet. This amount
        was then netted against the proceeds from the subsequent May 2003
        Financing and July 2003 Financing described above, on a pro rata basis.

        WARRANTS TO SUPPLIER
        On December 22, 2003 the Company issued warrants to purchase 250,000
        shares of Common Stock at an exercise price of $2.34 per share to a
        supplier of inventory in exchange for reduced pricing. The warrants are
        fully vested and expire on December 22, 2006. The Company valued the
        warrants using the Black-Scholes option pricing model (key assumptions:
        risk free interest rate: 3.75%, volatility 85%, expected life 2 years,
        zero dividend yield). The total value of $502,500 was capitalized and
        classified as prepaid inventory. During 2004 the Company reclassified
        the prepaid inventory when inventory was purchased as a component of the
        inventory cost. As of December 31, 2004 approximately $251,000 of this
        asset remained on the balance sheet and was included in other current
        assets.

        WARRANTS ISSUED TO INVESTORS
        In accordance with EITF 00-19, the Company accounted for the 385,801
        warrants issued in connection with the January 2004 Financing at fair
        market value and classified the warrants as a liability because the
        Company may have been required to make cash payments to the investors
        who purchased the warrants in the event that the registration statement
        covering the offer and sale of the shares underlying the warrants were
        to no longer be effective. The Company used the Black-Scholes option
        pricing method (assumption: volatility 147%, risk free rate 3.76% two
        year expected life and zero dividend yield) to calculate the value of
        the warrants. At January 12, 2004, the date of transaction (the
        "Transaction Date"), the warrants had a value of $1,096,000. The value
        of the warrants was marked to market in each subsequent reporting period
        as a derivative gain or loss until June 17, 2004 (the "End Date"), at
        which time EITF 00-19 called for the warrants to be re-classified as
        equity because the maximum potential cash amount payable to the
        investors had decreased to the point where it was no longer considered
        significant.

                                      F-19
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        During the period beginning on the Transaction Date and ending on the
        End Date, the value of the warrants decreased from $1,096,000 to
        $532,000, and, accordingly the Company recognized $564,000 of other
        income for the year ended December 31, 2004.

        The following table represents warrants issued to purchase Common Stock
        as of December 31, 2004:

<TABLE>
<CAPTION>
                      NUMBER OF
        PARTY         WARRANTS       EXERCISE PRICE RANGE          EXPIRATION DATES
        ----------   -------------   --------------------    ------------------------------
        <S>              <C>            <C>                  <C>
        Investor           385,801          $3.96                    January 2009
        Soros              981,644      $0.78 - $9.08          January 2007 - March 2013
        Supplier           300,000      $2.34 - $3.72        September 2005 - December 2006
        Others              37,500          $1.34                     March 2006
                     -------------
                         1,704,945
                     =============
</TABLE>

        STOCK OPTION PLAN
        The Company's Board of Directors has adopted two stock option plans, one
        in July 2000 (the "2000 Plan") and the other in May 1997 (the "1997
        Plan"). The Plans were adopted 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.
        Options are granted in terms not to exceed ten years and become
        exercisable as specified when the option is granted. Vesting terms of
        the options range from immediately to a ratable vesting period of four
        years. The 2000 Plan has 1,500,000 shares authorized for issuance.
        During 2004, the Company amended the 1997 Plan in order to increase the
        maximum number of shares that may be granted under the Plan to
        14,200,000.

                                      F-20
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        The following table summarizes the Company's stock option activity:

                                                       NUMBER        WEIGHTED
                                                         OF          AVERAGE
                                                       SHARES     EXERCISE PRICE
                                                     ----------   --------------
        BALANCE AT JANUARY 1, 2002                    4,343,203   $         4.28
        Options granted                               5,239,000   $         0.94
        Options canceled                             (1,073,791)  $         5.26
        Options exercised                                     -                -
                                                     ----------
        BALANCE AT DECEMBER 31, 2002                  8,508,412   $         2.27
        Options granted                               2,561,000   $         1.34
        Options canceled                               (705,030)  $         3.49
        Options exercised                            (1,856,012)  $         1.59
                                                     ----------
        BALANCE AT DECEMBER 31, 2003                  8,508,370   $         2.04
        Options granted                               2,629,750   $         2.74
        Options canceled                               (534,360)  $         2.57
        Options exercised                              (790,381)  $         0.95
                                                     ----------
        BALANCE AT DECEMBER 31, 2004                  9,813,379   $         2.28
                                                     ----------
        Eligible for exercise at December 31, 2002    3,612,420   $         3.59
        Eligible for exercise at December 31, 2003    4,523,606   $         1.30
        Eligible for exercise at December 31, 2004    6,512,125   $         2.44

        The stock options are exercisable in different periods through 2014.
        Additional information with respect to the outstanding options as of
        December 31, 2004, is as follows:

<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                          ------------------------------                 ------------------------
                                            WEIGHTED         WEIGHTED                    WEIGHTED
            RANGE OF                         AVERAGE          AVERAGE                     AVERAGE
            EXERCISE        OPTIONS         REMAINING        EXERCISE       OPTIONS     EXERCISE
             PRICES       OUTSTANDING   CONTRACTUAL LIFE       PRICE     EXERCISABLE      PRICE
        ---------------   -----------   ----------------   -----------   ------------   ---------
        <S>                 <C>            <C>             <C>              <C>         <C>
         $0.69 - $1.66      5,163,050      5.8 Years       $      1.12      3,667,018   $    1.05
         $1.66 - $3.32      3,561,179      5.7 Years              2.58      2,075,390        2.82
         $3.32 - $4.98        707,000      5.6 Years              3.96        387,567        3.95
         $4.98 - $6.64         29,750      3.7 Years              5.08         29,750        5.08
         $6.64 - $9.96         54,750      4.6 Years              9.15         54,750        9.15
         $9.96 - $11.62       109,500      4.9 Years             11.19        109,500       11.19
        $11.62 - $13.28        50,000      0.0 Years             12.34         50,000       12.34
        $13.28 - $14.94         7,250      4.9 Years             14.09          7,250       14.09
        $14.94 - $16.60       130,900      2.5 Years             15.71        130,900       15.71
         $0.69 - $16.60     9,813,379      5.7 Years       $      2.28      6,512,125   $    2.44
</TABLE>

        The Company does not recognize compensation expense for stock options
        granted to employees and directors with an exercise price at or above
        fair market value at the date of the grant, in accordance with APB
        No.25. The fair value of options granted during 2004, 2003 and 2002 was
        approximately $6.8 million, $2.9 million and $4.0 million, respectively.
        The Company calculated the fair value of each option grant on the date
        of the grant using the Black-Scholes option pricing model as prescribed
        by SFAS No. 123.

                                      F-21
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        The following assumptions were used in applying the model:

                                    YEAR ENDED DECEMBER 31,
                                   ------------------------
                                    2004     2003     2002
                                   ------   ------   ------
        Risk-free interest rates     3.63%    3.59%    4.38%
        Expected life (in years)        6        6        6
        Dividend yield                  0%       0%       0%
        Expected volitility           139%     113%     164%

        As of December 31, 2004, the Company has reserved an aggregate of
        54,841,754 shares of Common Stock for the conversion of Preferred Stock
        and the exercise of Stock Options and Warrants.

10.     NOTES PAYABLE TO RELATED PARTY SHAREHOLDERS

        In addition to the $4,000,000 of promissory notes issued in connection
        with the July 2003 Financing and October 2003 Financing (see Note 9
        above), on December 15, 2001, the Company issued promissory notes in the
        amount of $182,000 to affiliates of Soros in exchange for legal services
        provided during the course of the year. The notes bore interest at 9%
        per annum and had a maturity date of December 15, 2004. In December 2004
        the Company repaid the notes with accrued interest of $54,000 for a
        total of $236,000.

        In January 2004, the Company also extended the maturity dates on the
        Convertible Promissory Notes issued to Soros in July and October 2003
        (the "Notes"). The maturity dates of the Notes, which were originally
        January and April 2004, respectively, were each extended to March 1,
        2005. In February 2005, the maturity date of the Notes was further
        extended to May 1, 2006.

11.     FINANCING AGREEMENT

        The Company has a financing agreement (the "Financing Agreement") with
        Rosenthal & Rosenthal, Inc. ("Rosenthal") pursuant to which Rosenthal
        provides the Company with certain credit accommodations, including loans
        and advances, factor-to-factor guarantees or letters of credit in favor
        of suppliers or factors or purchases of payables owed to the Company's
        suppliers (the "Loan Facility").

        The Financing Agreement was amended in April 2004 and then again in
        February 2005 to: (i) extend the term until March 30, 2006; (ii)
        substitute $1.25 million of cash collateral pledged by the Company for
        the $2.0 million standby letter of credit previously provided by Soros
        as collateral security for the Company's obligations under the Loan
        Facility; (iii) decrease the maximum amount available under the Loan
        Facility from $4.5 million to $4.0 million; (iv) increase the tangible
        net worth requirement to $7.0 million; (v) increase the working capital
        requirement to $6.0 million; and (vi) increase the minimum cash balance
        that the Company is required to maintain to $750,000 (exclusive of the
        $1.25 million in cash collateral). The cash collateral is included on
        the balance sheet as "Restricted Cash" and represents monies deposited
        in a segregated account that has been pledged to Rosenthal as collateral
        for the facility. During fiscal 2004, the maximum amount available under
        the Loan Facility did not exceed $3.5 million.

                                      F-22
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        Because the requirement that Soros provide a standby letter of credit to
        secure the Loan Facility was removed, the Company is no longer subject
        to an agreement with Soros that previously required it to issue
        additional warrants to Soros with an exercise price equal to 75% of
        market price in the event that Rosenthal were to draw on Soros' letter
        of credit.

        As of December 31, 2004, the maximum availability under the Loan
        Facility was approximately $3.5 million of which approximately $2.3
        million was committed, leaving approximately $1.2 million available
        against the Loan Facility.

        The Company pays interest monthly on the average daily amount
        outstanding under the Loan Facility during the preceding month at a per
        annum rate equal to the prime rate plus 1% (at December 31, 2004 -
        6.25%). For the period ended December 31, 2004, 2003 and 2002 interest
        expense and fees totaled approximately $112,000, $77,000 and $91,000,
        respectively.

        The Company pays an annual facility fee equal to 1.5% of the portion of
        the Loan Facility that is provided on the basis of its inventory level.
        This formula currently results in an annual facility fee of $33,750.
        Rosenthal also charges fees to open letters of credit and guarantees in
        an amount equal to a certain percentage of the face amount of the letter
        of credit for each thirty (30) days such letter of credit, or a portion
        thereof, remains open.

        In consideration for the Loan Facility, among other things, we granted
        to Rosenthal a first priority lien on substantially all of our assets,
        including control of all of our cash accounts (including the $1.25
        million of cash collateral, which has been placed in a segregated,
        restricted account) upon an event of default and certain of our cash
        accounts in the event that the total amount of funded debt loaned to us
        under the Loan Facility exceeds 90% of the maximum amount available
        under the Loan Facility for more than 10 days.

        Under the terms of the Loan Facility, Soros has the right to purchase
        all of our obligations from Rosenthal at any time during its term.

        ROSENTHAL WARRANTS
        Upon inception of the Loan Facility in March 2001, the Company issued to
        Rosenthal a warrant to purchase 50,000 shares of Common Stock at an
        exercise price of $2.34, per share exercisable for five years. The
        Company valued the warrant using the Black-Scholes option pricing model
        (key assumptions: risk free interest rate: 4.86%, volatility 117%,
        expected life 4 years, zero dividend yield) and amortized the fair value
        of the warrants of $45,000 amount over the life of the Loan Facility. In
        March 2002, when the agreement was amended and as partial consideration
        for the amendment, the Company extended the termination date of the
        warrant it issued to Rosenthal from March 30, 2006 to March 30, 2007.
        The Company revalued the warrant as of the new measurement date, using
        the Black-Scholes option pricing model (key assumptions: risk free
        interest rate: 5.25%, volatility 184%, expected life 3 years, zero
        dividend yield) and credited additional paid in capital for $80,000.
        This amount was amortized in full in fiscal 2002.

        In November 2003, Rosenthal exercised this warrant in full.

        SOROS WARRANTS IN CONNECTION WITH LOAN FACILITY
        Prior to April 2004, Soros guaranteed repayment of the Loan Facility
        (the "Soros Guarantee"). The Company issued warrants to Soros in
        consideration for the establishment and continuance of the Soros
        Guarantee as described below.

                                      F-23
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

        The following table represents the warrants issued to Soros in
        connection with the Loan Facility:

<TABLE>
<CAPTION>
        Number of     Date      Exercise        Expiration        Assumptions Under
         Warrants    Issued       Price            Date             Black-Scholes            Reason
        ---------   ---------   ---------      -------------   ----------------------   ----------------
          <S>       <C>         <C>            <C>             <C>                      <C>
          100,000   March 31,   $    0.88(1)   September 11,   Risk Free Rate - 4.86%   As consideration
                      2001                         2011           Volatility - 117%         for Soros
                                                                   Term - 5 years       establishing the
                                                                                         Soros Guarantee

           60,000   March 22,   $    1.66(1)     March 22,     Risk Free Rate - 5.25%   In consideration
                      2002                         2007           Volatility - 184%         for Soros
                                                                   Term - 3 years         extending the
                                                                                         Soros Guarantee
                                                                                        until 11/15/2003

           25,000   March 17,   $    0.78(2)     March 17,     Risk Free Rate - 3.31%   In consideration
                      2003                         2013           Volatility - 123%        for Soros
                                                                   Term - 4 years        extending the
                                                                                        Soros Guarantee
                                                                                        until 11/15/2004
</TABLE>

        (1)     represents the 20 day trailing average of the closing sale price
                of the Company's Common Stock on the date of issuance

        (2)     represents the 10 day trailing average of the closing sale price
                of the Company's Common Stock on the date of issuance

        The Company accounted for the warrants in accordance with Accounting
        Principles Board Opinion No. 14 ("APB No. 14") by valuing the warrants
        using the Black-Scholes option pricing model and crediting additional
        paid in capital for $74,000, $98,000 and $21,000, during the years 2001,
        2002 and 2003, respectively. These amounts were amortized to interest
        expense over the life of the Loan Facility.

                                      F-24
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

12.     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

        Amounts in thousands, except per share data:

<TABLE>
<CAPTION>
                                                                                 QUARTER ENDED
                                                           ---------------------------------------------------------
        2004                                                 MARCH 31        JUNE 30     SEPTEMBER 30    DECEMBER 31
        ------------------------------------------------   ------------   ------------   ------------   ------------
        <S>                                                <C>            <C>            <C>            <C>
        Net Sales                                          $     11,114   $      9,495   $      8,675   $     14,515
                                                           ============   ============   ============   ============
        Gross Profit                                       $      3,782   $      3,807   $      2,966   $      5,851
                                                           ============   ============   ============   ============
        Net Income (Loss)                                  $     (1,130)  $       (708)  $     (1,960)  $          7
                                                           ============   ============   ============   ============
        Preferred stock dividends                          $     (1,024)  $     (1,062)  $     (1,090)  $     (1,099)
                                                           ============   ============   ============   ============
        Net loss available to common shareholders          $     (2,154)  $     (1,770)  $     (3,050)  $     (1,092)
                                                           ============   ============   ============   ============
        (Loss) per common share - basic and diluted        $      (0.15)  $      (0.12)  $      (0.21)  $      (0.07)
                                                           ============   ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                 QUARTER ENDED
                                                           ---------------------------------------------------------
        2003                                                 MARCH 31        JUNE 30     SEPTEMBER 30    DECEMBER 31
        ------------------------------------------------   ------------   ------------   ------------   ------------
        <S>                                                <C>            <C>            <C>            <C>
        Net Sales                                          $      8,257   $      7,468   $      8,210   $     13,993
                                                           ============   ============   ============   ============
        Gross Profit                                       $      1,857   $      2,315   $      1,748   $      5,405
                                                           ============   ============   ============   ============
        Net Income (Loss)                                  $     (1,840)  $     (2,123)  $     (2,517)  $        111
                                                           ============   ============   ============   ============
        Deemed dividend related to beneficial conversion
         feature on Series B and C Preferred Stock         $       (225)  $          -   $          -   $          -
                                                           ============   ============   ============   ============
        Preferred stock dividends                          $       (638)  $       (845)  $       (871)  $       (871)
                                                           ============   ============   ============   ============
        Net loss available to common shareholders          $     (2,703)  $     (2,968)  $     (3,388)  $       (760)
                                                           ============   ============   ============   ============
        (Loss) per common share - basic and diluted        $      (0.25)  $      (0.27)  $      (0.31)  $      (0.07)
                                                           ============   ============   ============   ============
</TABLE>

13.     RELATED PARTY TRANSACTIONS

        In August 2004, the Company entered into a Separation Agreement with its
        former Chief Executive Officer in connection with his resignation. Under
        the terms of the agreement, he agreed to remain employed by the Company
        in a non-executive capacity through November 30, 2004 (the "Termination
        Date") at his then-current salary and to extend the period of the
        non-competition and non-solicitation covenants contained in his
        employment agreement from one year to two years after the Termination
        Date. In consideration for these agreements, the Company, among other
        things, agreed to (i) to make salary continuation payments equal his
        salary until June 30, 2005, (ii) to continue to provide his then-current
        employee benefits for a period of one year following the Termination
        Date, and (iii) to issue him an option to purchase 100,000 shares of
        Common Stock at an exercise price equal to the fair market value of the
        Common Stock on the date of grant and (iv) that all outstanding stock
        options held by him would vest upon the Termination Date. The Company
        valued the warrants using the Black Scholes option pricing model using
        the following assumptions: risk free interest rate: 3.88%, volatility
        137%, expected life 1 year, zero dividend yield, and charged $113,000
        for the options and $212,000 related to severance and benefits to
        general and administrative expense in the third quarter of 2004.

        In December 2003, the Company retained a former Executive Vice President
        of the Company as a consultant. For the year ended December 31, 2004,
        payments made to the individual were $58,000.

                                      F-25
<PAGE>

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2004

<TABLE>
<CAPTION>
           Column A                      Column B                      Column C                 Column D            Column E
---------------------------------   ------------------   -----------------------------------   ----------   ---------------------
                                                                (1)               (2)
---------------------------------   ------------------   ----------------   ----------------   ----------   ---------------------
                                    Beginning Balance    Charged to Costs   Charged to other                Balance end of Period
          Description               at January 1, 2004     and Expenses         Accounts       Deductions     December 31, 2004
---------------------------------   ------------------   ----------------   ----------------   ----------   ---------------------
<S>                                        <C>                <C>                   <C>        <C>                    <C>
Allowance for Sales Returns                 (2,528,000)       (24,366,000)                 -   24,720,000              (2,174,000)

Allowance for Doubtful Accounts                (40,000)          (237,000)                 -      233,000                 (44,000)

Inventory Reserves                            (673,000)          (100,000)                 -      (62,000)               (835,000)

Deferred Tax Valuation Allowance           (26,872,000)        (1,518,000)          (348,000)           -             (28,738,000)
</TABLE>

<TABLE>
<CAPTION>
           Column A                      Column B                      Column C                 Column D            Column E
---------------------------------   ------------------   -----------------------------------   ----------   ---------------------
                                                                (1)               (2)
---------------------------------   ------------------   ----------------   ----------------   ----------   ---------------------
                                    Beginning Balance    Charged to Costs   Charged to other                Balance end of Period
          Description               at January 1, 2003     and Expenses         Accounts       Deductions     December 31, 2003
---------------------------------   ------------------   ----------------   ----------------   ----------   ---------------------
<S>                                        <C>                <C>                 <C>          <C>                    <C>
Allowance for Sales Returns                 (1,725,000)       (21,589,000)                 -   20,786,000              (2,528,000)

Allowance for Doubtful Accounts                (50,000)          (131,000)                 -      141,000                 (40,000)

Inventory Reserves                            (560,000)          (440,000)                 -      327,000                (673,000)

Deferred Tax Valuation Allowance           (22,501,000)        (2,299,000)        (2,072,000)           -             (26,872,000)
</TABLE>

<TABLE>
<CAPTION>
           Column A                      Column B                      Column C                 Column D            Column E
---------------------------------   ------------------   -----------------------------------   ----------   ---------------------
                                                                (1)               (2)
---------------------------------   ------------------   ----------------   ----------------   ----------   ---------------------
                                    Beginning Balance    Charged to Costs   Charged to other                Balance end of Period
          Description               at January 1, 2002     and Expenses         Accounts       Deductions     December 31, 2002
---------------------------------   ------------------   ----------------   ----------------   ----------   ---------------------
<S>                                        <C>                <C>                         <C>  <C>                    <C>
Allowance for Sales Returns                 (1,375,000)       (16,265,000)                 -   15,915,000              (1,725,000)

Allowance for Doubtful Accounts                (55,000)          (241,000)                 -      246,000                 (50,000)

Inventory Reserves                            (455,000)          (113,000)                 -        8,000                (560,000)

Deferred Tax Valuation Allowance           (19,707,000)        (2,794,000)                 -            -             (22,501,000)
</TABLE>

                                       S-1
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

None.

ITEM 9a. CONTROLS AND PROCEDURES

As of the end of the period covered by this Form 10-K, we carried out an
evaluation, under the supervision and with the participation of our management,
including out Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
There have been no changes in our internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers and directors, and their ages and positions are as
follows:

     NAME                     AGE     POSITION
     ---------------------    ---     -------------------------------------
     Alan Kane                 63     Chairman of the Board of Directors

     Melissa Payner-Gregor     46     Chief Executive Officer and President
     Patrick C. Barry          42     Chief Financial Officer and
                                       Chief Operating Officer
     Barry Erdos               60     Director
     Monica Halpert            45     Chief Marketing Officer
     Martin Keane              40     Senior Vice President of E-Commerce
     Christopher G. McCann     44     Director
     Martin Miller             74     Director
     Neal Moszkowski           39     Director
     David Wassong             34     Director


Alan Kane has served as a director since August 2002 and became Chairman of the
Board in August 2004. Since September 1997, Mr. Kane has been the professor of
retailing at the Columbia University Graduate School of Business. Before joining
the Columbia Business School, Mr. Kane spent 28 years in the retailing industry.
His experience in the retailing industry includes the following: President and
Chief Executive Officer of Grossman's Eastern Division, a building materials
retailer, from 1993 to 1994, President and Chief Executive Officer of Pergament
Home Centers, a home center retailer, from 1991 to 1993, Private Consultant in
the retailing industry from 1987 to 1991, and President and Chief Executive
Officer of Hahne & Company, a department store chain and division of May
Company, from 1979 to 1987. He has also served as a member of the Board of
Directors of Circuit City Stores, Inc. an electronics retailer, since 2003.

Melissa Payner-Gregor, has served as our President since September 2003 and
became Chief Executive Officer in August 2004. From December 2000 to March 2003,
Ms. Payner-Gregor served as CEO and President of Spiegel Catalog. She was also a
board member of The Spiegel Group, Inc. ("Spiegel") from December 2000 to March
2003. From 1997 to 2000, Ms. Payner-Gregor was the Senior Vice President of
Merchandising and Advertising of Spiegel. Spiegel filed a plan of reorganization
under Chapter 11 of the Federal Bankruptcy code in March 2003. From 1995 to
1997, Ms. Payner-Gregor was President and a board

                                       26
<PAGE>

member of Chico FAS, Inc. Ms. Payner-Gregor has also held senior executive
positions with Guess?, Inc., Pastille (a Division of Neiman Marcus) and Henri
Bendel.

Patrick C. Barry served as an Executive Vice President from July 1998 to
September 2000 and has been our Chief Financial Officer since August 1998. In
September 2000, Mr. Barry assumed the role of Chief Operating Officer and has
served us in that capacity since such time. From June 1996 to July 1998, Mr.
Barry served as the 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 was the Chief Financial Officer of Warner Music
Enterprises, a direct marketing subsidiary of Time Warner, Inc. From July 1993
to March 1995, Mr. Barry served as Controller of Book-of-the-Month Club, a
direct marketing subsidiary of Time Warner, Inc.

Barry Erdos has served as a director since February 2005. Since April 2004, Mr.
Erdos has served as President and Chief Operating Officer of Build a Bear
Workshop, Inc., a specialty retailer of plush animals and related products. Mr.
Erdos was the Chief Operating Officer and a director of Ann Taylor Stores
Corporation and Ann Taylor Inc., a women's apparel retailer, from November 2001
to April 2004. He was Executive Vice President, Chief Financial Officer and
Treasurer of Ann Taylor Stores Corporation and Ann Taylor Inc. from 1999 to
2001. Prior to that, he was Chief Operating Officer of J. Crew Group, Inc., a
specialty retailer of apparel, shoes and accessories, from 1998 to 1999.

Monica Halpert has served as our Chief Marketing Officer since October 2004. Ms.
Halpert has over 20 years of experience in marketing and brand building. Since
September 2001, she has worked as an independent branding and marketing
consultant for a number of clients, including AOL, ABC Family, USA cable and
News Corporation. From October 1998 to September 2001, Ms. Halpert was a Senior
Vice President and Creative Director of VH1.

Martin Keane served as Vice President of Product Development and E-Commerce from
January 1999 through September 2004 when he assumed the role of Senior Vice
President of E-Commerce. From 1997 to 1999, Mr. Keane was the Design Director
for Music Boulevard, an E-Commerce site owned by N2K, Inc. From 1990 to 1997,
Mr. Keane served as Regional Manager for APCO Graphics, an architectual graphics
company.

Christopher G. McCann has served as a director since February 2005. Since
September 2000, Mr. McCann has been the President of 1-800-flowers, a leading
retailer of floral products and other gifts, and prior to that was that
company's Senior Vice President. Mr. McCann has been a Director of 1-800-flowers
since inception. Mr. McCann serves on the board of directors of Neoware, Inc., a
provider of software, services and solutions to enable thin client appliance
computing, and is a member of the Board of Trustees of the Marist College.

Martin Miller has served as a director since July 1991. Since July 1999, Mr.
Miller has served as the President of The Terbell Group, Inc., a consulting
company. From October 1997 to April 2003, Mr. Miller has been a partner in the
Belvedere Fund, L.P., a fund of hedge funds.

Neal Moszkowski has served as a director since August 1999 and is the Series A
Preferred Stock designee. Mr. Moszkowski is the co-head of Soros Private Equity,
the private equity investment business of Soros Fund Management LLC ("Soros
Private Equity") and has been a partner of Soros Private Equity since August
1998. Prior to joining Soros Private Equity, Mr. Moszkowski was an Executive
Director of Goldman Sachs International and a Vice President of Goldman, Sachs &
Co., an investment banking firm, in its Principal Investment Area. He joined
Goldman, Sachs & Co. in August 1993. Mr. Moszkowski is also a Director of
Integra Life Sciences Holdings, Inc., a medical products company, Wellcare
Health Plans, Inc., a managed care services provider and Jet Blue Airways
Corporation, a low fare airline.

David Wassong has served as a director since February 2001 and is the Series B
Preferred Stock designee. Mr. Wassong has been a partner of Soros Private Equity
since June 1998. Prior to joining Soros Private Equity, from July 1997 to June
1998, Mr. Wassong was Vice President, and previously Associate, at Lauder Gaspar
Ventures, LLC, a media, entertainment and telecommunications-focused venture
capital fund.

CORPORATE GOVERNANCE

Our Board of Directors has reviewed the independence of each of our directors on
the basis of the standards adopted by Nasdaq. In this review, the Board
considered transactions and relationships between us, on the one hand, and each
director, members of his or her immediate family, and other entities with which
he or she is affiliated, on the other hand. As a result of this review, the
Board of Directors affirmatively determined that Messrs. Miller, Kane, Erdos and
McCann are each "independent directors"

                                       27
<PAGE>

within the meaning of the Nasdaq rules. Because Soros owns a majority of the
voting power of our capital stock, the Board determined that it was appropriate
for us to rely upon the "Controlled Company" exemption provided by Nasdaq rules.
Accordingly, Nasdaq rules do not require that a majority of our Board of
Directors be independent, and, similarly, do not require that all of the members
of the Nominating Committee (as defined below) be independent.

The Board of Directors has established an Audit Committee ("Audit Committee") in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Audit Committee is comprised of Barry Erdos,
Chris McCann, Alan Kane and Martin Miller. Mr. Erdos is the Chairman of the
Audit Committee. The Audit Committee is responsible for the appointment of our
outside accountants, examining the results of audits, reviewing internal
accounting controls and reviewing related party transactions. The Board has
determined that Mr. Erdos is an "audit committee financial expert" within the
meaning of the Securities and Exchange Commission's rules and that each member
of the Audit Committee is "independent," as that term is used in Item
7(d)(3)(iv) of Schedule 14A promulgated under the Exchange Act.

The Board of Directors also has established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Neal Moszkowski
and Martin Miller. The Option Plan/Compensation Committee administers the
Company's 1997 and 2000 Stock Option Plans, establishes the compensation levels
for executive officers and key personnel and oversees the Company's bonus plans.

In June 2004, the Board of Directors established a Nominating and Governance
Committee ("Nominating Committee"), consisting of Alan Kane and David Wassong.
Mr. Kane is an independent director under Nasdaq rules. While Mr. Wassong is not
an independent director under Nasdaq rules, he is permitted to sit on the
Nominating Committee pursuant to the "Controlled Company" exemption discussed
above. The purposes of the Nominating Committee are to assist the Board of
Directors by identifying individuals qualified to become directors, and setting
criteria for, and evaluating, candidates for director nominees, and to recommend
to the Board of Directors the director nominees for election at the annual
meetings of stockholders or for appointments to fill vacancies; recommend to the
Board of Directors nominees for each committee of the Board; advise the Board of
Directors about appropriate composition of the Board and its committees; advise
the Board of Directors about and recommend to the Board of Directors appropriate
corporate governance practices and to assist the Board of Directors in
implementing those practices; lead the Board of Directors in its annual review
of the performance of the Board and its committees; and perform such other
functions as the Board of Directors may assign to it from time to time.

We have adopted a Code of Ethics applicable to all directors, officers and
employees, which meets the requirements of a "code of ethics" as defined in Item
406 of Regulation S-K, and we maintain procedures for the confidential,
anonymous submission by employees of complaints regarding our accounting,
internal accounting controls, auditing matters and other issues. A copy of our
code of ethics is available on the Company's Web site at www.bluefly.com. Any
amendment to or waiver of a provision of the code of ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer, controller or persons performing similar functions and relates to
elements of the code specified in the rules of the Securities and Exchange
Commission will be posted on the Web site.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our directors and executive officers
and persons who beneficially own more than ten percent of our Common Stock
(collectively, the "Reporting Persons") to file with the Securities and Exchange
Commission initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock. Reporting Persons are required to
furnish us with copies of all such reports. E. Kenneth Seiff, our former Chief
Executive Officer, was late in filing two Form 4's. Both Form 4's were filed
five business days after the first transaction included therein. To our
knowledge, based solely on a review of copies of such reports furnished to us,
we believe that during the 2004 fiscal year all Reporting Persons complied with
all applicable Section 16(a) reporting requirements except as noted above.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

Our independent, outside non-employee directors are paid a cash stipend of
$1,500 for each board or committee meeting attended in person (and, in the case
of the Audit Committee Chairman, $2,000 per meeting) and are reimbursed for
expenses incurred on our behalf. In addition, each such director is paid an
annual retainer of $10,000 at the first regularly scheduled

                                       28
<PAGE>

Board meeting of each fiscal year. The maximum aggregate stipend and retainer
paid to any such director in a year is $16,000 (or, in the case of the Audit
Committee Chairman, $18,000).

Each non-employee director receives an option to purchase 15,000 shares of
Common Stock (25,000 shares in the case of the Chairman of the Board and 20,000
shares in the case of the Chairman of the Audit Committee) at the time of the
first regularly scheduled Board meeting after such director is appointed to the
Board and an annual grant of an option to purchase 10,000 shares of Common Stock
(20,000 shares in the case of the Chairman of the Board and 12,500 shares in the
case of the Chairman of the Audit Committee) at the first regularly scheduled
Board meeting of each fiscal year (even if such director is receiving an option
in connection with his or her appointment at such meeting).

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning the compensation paid by
us during the fiscal years ended December 31, 2004, 2003 and 2002 to our Chief
Executive Officer, our former Chief Executive Officer and our two other
executive officers who received total compensation from us in excess of $100,000
in the year 2004 (the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                                                                      LONG TERM
                                                          ANNUAL COMPENSATION                       COMPENSATION
                                               ----------------------------------------------   ---------------------
                                                                                 OTHER ANNUAL   SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION             YEAR      SALARY           BONUS         COMPENSATION         OPTIONS
-------------------------------------   ----   -----------      -----------      ------------   ---------------------
<S>                                     <C>    <C>              <C>              <C>               <C>
Melissa Payner-Gregor                   2004   $   466,960      $   115,000      $        655          700,000/(3)/
Chief Executive Officer and President   2003   $   112,500               --      $         --        1,200,000/(2)/

E. Kenneth Seiff/(1)/                   2004   $   222,116/(6)/          --      $      2,926          400,000/(2)/
Former Chief Executive Officer          2003   $   274,999      $    75,000      $      2,926        1,000,000/(2)/
                                        2002   $   274,999      $    50,000/(4)/ $      3,782        1,000,000/(2)/

Patrick C. Barry                        2004   $   260,429      $    80,000      $        590          300,000/(2)/
Chief Financial Officer and Chief       2003   $   225,000               --      $        590               --
  Operating Officer                     2002   $   224,999      $    35,000/(4)/ $        590        1,000,000/(2)/

Martin Keane                            2004   $   171,538      $    20,000/(5)/ $         --               --
Senior Vice President of E-Commerce     2003   $   152,308      $    30,500      $         --               --
                                        2002   $   150,000      $    12,500      $         --          300,000/(2)/
</TABLE>

/(1)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004.
/(2)/   Options granted at an exercise price equal to 100% of the fair market
        value on the date of grant.
/(3)/   Options granted at an exercise price equal to 100% of the fair market
        value on the date of grant, except for 100,000 options that, pursuant to
        Ms. Payner-Gregor's employment agreement, were granted at an exercise
        price of $1.56 (the fair market value of the Common Stock on the date of
        Ms. Payner-Gregor's employment agreement). The fair market value of the
        common stock on the date of grant of such options was $2.49 per share.
/(4)/   Represents amounts earned in 2002, but paid in fiscal 2003.
/(5)/   Represents amounts earned in 2003, but paid in fiscal 2004.
/(6)/   Includes $31,731 related to severance and excludes $63,462 related to
        services provided as a consultant

EMPLOYMENT AGREEMENTS

We currently have employment agreements with Ms. Payner-Gregor and Mr. Barry.
Each such employment agreement provides for a base salary, subject to increase
by the Compensation Committee, and an annual bonus to be determined by the
Compensation Committee. Ms. Payner-Gregor's annual bonus for each fiscal year
during her agreement cannot be less than 3% of our net income for such fiscal
year, subject to a cap equal to 200% of her base salary. Her bonus is subject to
a minimum floor of $100,000. Ms. Payner-Gregor's annual base salary is $450,000,
and Mr. Barry's annual base salary is $300,000. The employment agreement for Mr.
Barry terminates on June 30, 2005, and Ms. Payner-Gregor's terminates on March
1, 2007 (unless both parties fail to provide notice of their desire not to renew
such agreement at least 90 days prior to the end of the then-current term of
such agreement in which case the employment agreement shall automatically renew
for successive one-year

                                       29
<PAGE>

terms)on . Each of these employment agreements obligates the Company to make
severance payments equal to six months' salary in connection with a termination
by the Company of such Named Executive Officer's employment, other than for
cause, and also provides for the immediate vesting of any stock options held by
them under such circumstances. Ms. Payner-Gregor's and Mr. Barry's employment
agreements also provide for the immediate vesting of any stock options held by
such Named Executive Officer upon the occurrence of certain events classified as
a "Change In Control". In addition, Ms. Payner-Gregor's and Mr. Barry's
employment agreements provide that upon the occurrence of certain events
classified as a "Change of Control" in which cash, securities or other
consideration is paid or payable, or otherwise to be distributed directly to the
Company's stockholders, each such Named Executive shall receive a bonus equal to
a percentage of the proceeds received by the Company's stockholders.

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the grant of stock options
to the Named Executives Officers during the fiscal year ended December 31, 2004:

<TABLE>
<CAPTION>
                                    INDIVIDUAL GRANTS                                             POTENTIAL REALIZABLE VALUE AT
                        -----------------------------------------                                 ASSUMED ANNUAL RATES OF STOCK
                                               % OF TOTAL OPTIONS    EXERCISE                     PRICE APPRECIATION FOR OPTION
                        NUMBER OF SECURITIES       GRANTED TO           OR                                     TERM
                         UNDERLYING OPTIONS        EMPLOYEES IN        BASE       EXPIRATION      -----------------------------
NAME                         GRANTED (#)         FISCAL YEAR (%)     PRICE ($)       DATE               5%              10%
---------------------   --------------------   ------------------   -----------   ----------      -------------     -----------
<S>                            <C>                    <C>              <C>        <C>               <C>             <C>
Melissa Payner-Gregor          100,000/(1)/            3.88%           $ 1.56      5/24/2014      $     180,590     $   207,636
                               100,000                 3.88%           $ 2.49      5/24/2014      $     288,249     $   331,419
                               500,000                19.41%           $ 2.08      8/26/2014      $   1,203,930     $ 1,384,240

E. Kenneth Seiff/(2)/          300,000                11.65%           $ 3.95     11/30/2005      $   1,371,786     $ 1,577,235
                               100,000                 3.88%           $ 2.08     11/30/2005      $     240,786     $   276,848

Patrick C. Barry               300,000                11.65%           $ 2.08      8/26/2014      $     722,358     $   830,544
</TABLE>

/(1)/   Pursuant to Ms. Payner-Gregor's employment agreement this option was
        granted at an exercise price equal to the fair market value on the date
        of the employment agreement. The fair market value on the date of grant
        was $2.49 per share.
/(2)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004.

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 number and value of unexercised options held at December
31, 2004.

<TABLE>
<CAPTION>
                                                         SECURITIES UNDERLYING UNEXERCISED    VALUE OF UNEXERCISED IN-THE-MONEY
                               SHARES        VALUE       OPTIONS AT DECEMBER 31, 2004 (#)    OPTIONS AT DECEMBER 31, 2004 ($)/(1)/
                            ACQUIRED ON    REALIZED      ---------------------------------   -------------------------------------
NAME                         EXERCISE #        $          EXERCISABLE      UNEXERCISABLE           EXERCISABLE     UNEXERCISABLE
---------------------       -----------    ----------    ------------      -------------           -----------     -------------
<S>                             <C>        <C>              <C>                <C>                 <C>               <C>
E. Kenneth Seiff/(2)/           551,623    $  779,553       2,953,377/(3)/            --           $ 2,023,020               --
Melissa Payner-Gregor                --            --         609,040          1,290,960           $   411,956       $  696,044
Patrick C. Barry                     --            --       1,436,496            250,081           $ 1,057,937       $  352,614
Martin Keane                         --            --         300,200             99,780           $   282,310       $  140,690
</TABLE>

/(1)/   Represents the value of unexercised, in-the-money stock options at
        December 31, 2004, using the $2.32 closing price of the Common Stock on
        that date.
/(2)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004.
/(3)/   On January 11, 2005, 1,105,000 of these options expired.

                                       30
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

COMMON STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of February 18, 2005,
for (i) each person who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) the Named
Executive Officers, and (iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES
     NAME/(1)/                                                         BENEFICIALLY OWNED       PERCENTAGE/(2)/
     -----------------------------------------------------------     ----------------------     ---------------
     <S>                                                             <C>                             <C>
     Patrick C. Barry                                                 1,528,985/(3)/                  9.12%
     Barry Erdos                                                             --                           *
     Alan Kane                                                            7,500/(4)/                      *
     Martin Keane                                                       325,240/(5)/                  2.09%
     Martin Miller                                                       31,250/(6)//(7)/                 *
     Neal Moszkowski/(8)/                                                18,750/(9)/                      *
     Christopher G. McCann                                                   --                           *
     Melissa Payner-Gregor                                              767,467/(10)/                 4.79%
     E. Kenneth Seiff/(11)/                                           2,147,800/(12)//(13)/          12.57%
     David Wassong/(8)/                                                  11,250/(14)/                     *
     SFM Domestic Investments LLC                                     1,576,833/(15)//(19)/           9.47%
     Quantum Industrial Partners LDC                                 48,188,318/(16)//(19)/          82.88%
     George Soros                                                    49,765,151/(17)//(19)/          83.57%
     All directors and executive officers as a group (10 persons)     2,926,631/(18)/                16.14%
</TABLE>

----------
* Less than 1%.

/(1)/   Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
/(2)/   Beneficial ownership is determined in accordance with the rules of the
        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.
/(3)/   Includes 1,523,985 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
/(4)/   Includes 7,500 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
/(5)/   Includes 325,240 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
/(6)/   Includes 28,250 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
/(7)/   Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
        Martin Miller, as to which Mr. Miller disclaims beneficial ownership.
/(8)/   Messrs. Moszkowski and Wassong's address is c/o Soros Fund Management
        LLC, 888 Seventh Avenue, 28th floor, New York, New York 10106. Messrs.
        Moszkowski and Wassong are the designees of the holders of the Series A
        and B Preferred Stock, respectively. Messrs. Moszkowski and Wassong
        disclaim beneficial ownership of the

                                       31
<PAGE>

        shares of Common Stock beneficially owned by George Soros, SFMDI and QIP
        (as defined in notes (15) and (16) below) and none of such shares are
        included in the table above as being beneficially owned by them.
/(9)/   Includes 18,750 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
/(10)/  Includes 767,467 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
/(11)/  Mr. Seiff resigned as an executive officer of the Company in August
        2004. Mr. Seiff's address is c/o Seiff Ventures, LLC, 645 Madison
        Avenue, 20th Floor, New York, New York 10022.
/(12)/  Includes 3,000 shares of Common Stock held by Nicole Seiff, the wife of
        E. Kenneth Seiff, as to which Mr. Seiff disclaims beneficial ownership.
/(13)/  Includes 1,848,377 shares of Common Stock issuable upon exercise of
        options.
/(14)/  Includes 11,250 shares of Common Stock issuable upon exercise of
        options.
/(15)/  Represents: 124,700 shares of Common Stock issuable upon conversion of
        14,590 shares of Series A Preferred Stock; 866,942 shares of Common
        Stock issuable upon conversion of 281,571 shares of Series B Preferred
        Stock; 41,710 shares of Common Stock issuable upon conversion of 31.7
        shares of Series C Preferred Stock; 297,669 shares of Common Stock
        issuable upon conversion of 226.229 shares of Series D Preferred Stock;
        41,710 shares of Common Stock issuable upon conversion of 31.7 shares of
        Series E Preferred Stock; 172,995 shares of Common Stock; 31,107 shares
        of Common Stock issuable upon exercise of warrants (collectively, the
        "SFMDI Shares") held in the name of SFM Domestic Investments LLC
        ("SFMDI"). SFMDI is a Delaware limited liability company. As sole
        managing member of SFMDI, George Soros ("Mr. Soros") may also be deemed
        the beneficial owner of the SFMDI Shares. The principal address of SFMDI
        is at 888 Seventh Avenue, 33rd Floor, New York, New York 10106. The
        foregoing information was derived, in part, from certain publicly
        available reports, statements and schedules filed with the Commission.
/(16)/  Represents: 3,806,923 shares of Common Stock issuable upon conversion of
        445,410 shares Series A Preferred Stock; 26,503,095 shares of Common
        Stock issuable upon conversion of 8,607,843 shares of Series B Preferred
        Stock; 1,274,078 shares of Common Stock issuable upon conversion of
        968.3 shares of Series C Preferred Stock; 9,092,525 shares of Common
        Stock issuable upon conversion of 6,910.319 shares of Series D Preferred
        Stock; 1,274,078 shares of Common Stock issuable upon conversion of
        968.3 shares of Series E Preferred Stock; 5,287,082 shares of Common
        Stock; 950,537 shares of Common Stock issuable upon exercise of warrants
        (collectively, the "QIP Shares") held in the name of Quantum Industrial
        Partners LDC ("QIP"). QIP is an exempted limited duration company formed
        under the laws of the Cayman Islands. QIH Management Investor, L.P.
        ("QIHMI"), an investment advisory firm organized as a Delaware limited
        partnership, is a minority shareholder of, and is vested with investment
        discretion with respect to portfolio assets held for the account of QIP.
        The sole general partner of QIHMI is QIH Management LLC, a Delaware
        limited liability company ("QIH Management"). Soros Fund Management LLC,
        a Delaware limited liability company ("SFM"), is the sole managing
        member of QIH Management. QIP is a Cayman Islands limited duration
        company with its principal address at Kaya Flamboyan 9, Willemstad,
        Curacao, Netherlands Antilles. Mr. Soros is the sole shareholder of QIH
        Management, and has entered into an agreement with SFM, pursuant to
        which Mr. Soros has agreed to use his best efforts to cause QIH
        Management to act at the direction of SFM. Mr. Soros, as Chairman of
        SFM, may be deemed to have sole voting power and sole investment power
        with respect to the QIP Shares. Accordingly, each of QIP, QIHMI, QIH
        Management, SFM and Mr. Soros may be deemed to be the beneficial owners
        of the QIP Shares. Each has their principal office at 888 Seventh
        Avenue, 33rd Floor, New York, New York 10106. The foregoing information
        was derived, in part, from certain publicly available reports,
        statements and schedules filed with the Commission.

/(17)/  See (15) and (16) above
/(18)/  Includes 2,885,692 shares of Common Stock issuable upon exercise of
        options.
/(19)/  See "Risk Factors - Soros Owns a Majority of Our Stock."

SERIES A PREFERRED STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock of the Company as of
February 18, 2005, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series A Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executive Officers, and (iv)
all directors and executive officers as a group.

                                       32
<PAGE>

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES
     NAME/(1)/                                                         BENEFICIALLY OWNED     PERCENTAGE/(2)/
     ------------------------------------------------------------      ------------------     ---------------
     <S>                                                               <C>                         <C>
     Patrick C. Barry                                                         -                        -
     Barry Erdos                                                              -                        -
     Alan Kane                                                                -                        -
     Martin Keane                                                             -                        -
     Martin Miller                                                            -                        -
     Neal Moszkowski/(3)/                                                     -                        -
     Christopher G. McCann                                                    -                        -
     Melissa Payner-Gregor                                                    -                        -
     E. Kenneth Seiff/(7)/                                                    -                        -
     David Wassong/(3)/                                                       -                        -
     Quantum Industrial Partners LDC                                    445,410/(4)//(6)/           96.8%
     George Soros                                                       460,000/(5)//(6)/          100.0%
     All directors and executive officers as a group (10 persons)             -                        -
</TABLE>

----------
     * Less than 1%.

/(1)/   Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
/(2)/   Beneficial ownership is determined in accordance with the rules of the
        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.
/(3)/   Messrs. Moszkowski's and Wassong's address is c/o Soros Fund Management
        LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
        Moszkowski and Wassong are the designees of the holders of the Series A
        and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the Series A Preferred Stock beneficially owned
        by George Soros and QIP and none of such shares are included in the
        table above as being beneficially owned by them.
/(4)/   Represents the shares of Series A Preferred Stock held in the name of
        QIP (the "QIP A Shares"). QIP is an exempted limited duration company
        formed under the laws of the Cayman Islands, with its principal address
        at Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. QIHMI,
        an investment advisory firm organized as a Delaware limited partnership,
        is a minority shareholder of, and is vested with investment discretion
        with respect to portfolio assets held for the account of QIP. The sole
        general partner of QIHMI is QIH Management. SFM is the sole managing
        member of QIH Management. Mr. Soros, the sole shareholder of QIH
        Management, has entered into an agreement with SFM, pursuant to which
        Mr. Soros has agreed to use his best efforts to cause QIH Management to
        act at the direction of SFM. Mr. Soros, as Chairman of SFM, may be
        deemed to have sole voting power and sole investment power with respect
        to the QIP A Shares. Accordingly, each of QIHMI, QIH Management, SFM and
        Mr. Soros may be deemed to be beneficial owners of the QIP Shares. Each
        has their principal office at 888 Seventh Avenue, 33rd Floor, New York,
        New York 10106. The foregoing information was derived, in part, from
        certain publicly available reports, statements and schedules filed with
        the Commission.
/(5)/   Represents both (i) 14,590 shares of Series A Preferred Stock held in
        the name of SFMDI (the "SFMDI A Shares") and (ii) the QIP A Shares
        referenced in Note 4 above. As sole managing member of SFMDI, Mr. Soros
        also may be deemed the beneficial owner of the SFMDI A Shares. The
        principal office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New
        York, New York 10106.
/(6)/   See "Risk Factors - Change of Control Covenant and Liquidation
        Preference of Preferred Stock."
/(7)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004. Mr. Seiff's address is c/o Seiff Ventures, LLC, 645 Madison
        Avenue, 20th Floor, New York, New York 10022.

                                       33
<PAGE>

SERIES B PREFERRED STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Series B Preferred Stock of the Company as of
February 18, 2005, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series B Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executive Officers, and (iv)
all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES
     NAME/(1)/                                                         BENEFICIALLY OWNED     PERCENTAGE/(2)/
     ------------------------------------------------------------      ------------------     ---------------
     <S>                                                               <C>                         <C>
     Patrick C. Barry                                                          -                       -
     Barry Erdos                                                               -                       -
     Alan Kane                                                                 -                       -
     Martin Keane                                                              -                       -
     Martin Miller                                                             -                       -
     Neal Moszkowski/(3)/                                                      -                       -
     Christopher G. McCann                                                     -                       -
     Melissa Payner-Gregor                                                     -                       -
     E. Kenneth Seiff/(7)/                                                     -                       -
     David Wassong/(3)/                                                        -                       -
     Quantum Industrial Partners LDC                                   8,607,843/(4)//(6)/          96.8%
     George Soros                                                      8,889,414/(5)//(6)/         100.0%
     All directors and executive officers as a group (10 persons)              -                       -
</TABLE>

----------
* Less than 1%.

/(1)/   Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
/(2)/   Beneficial ownership is determined in accordance with the rules of the
        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.
/(3)/   Messrs. Moszkowski's and Wassong's address is c/o Soros Fund Management
        LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
        Moszkowski and Wassong are the designees of the holders of the Series A
        and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the shares of Series B Preferred Stock
        beneficially owned by George Soros and QIP and none of such shares are
        included in the table above as being beneficially owned by them.
/(4)/   Represents the shares of Series B Preferred Stock held in the name of
        QIP (the "QIP B Shares").QIP is an exempted limited duration company
        formed under the laws of the Cayman Islands, with its principal address
        at Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. QIHMI,
        an investment advisory firm organized as a Delaware limited partnership,
        is a minority shareholder of, and is vested with investment discretion
        with respect to portfolio assets held for the account of QIP. The sole
        general partner of QIHMI is QIH Management. SFM is the sole managing
        member of QIH Management. Mr. Soros, the sole shareholder of QIH
        Management, has entered into an agreement with SFM pursuant to which Mr.
        Soros has agreed to use his best efforts to cause QIH Management to act
        at the direction of SFM. Mr. Soros, as Chairman of SFM, may be deemed to
        have sole voting power and sole investment power with respect to the QIP
        B Shares. Accordingly, each of QIHMI, QIH Management, SFM and Mr. Soros
        may be deemed to be beneficial owners of the QIP Shares. Each has their
        principal office at 888 Seventh Avenue, 33rd Floor, New York, New York
        10106. The foregoing information was derived, in part, from certain
        publicly available reports, statements and schedules filed with the
        Commission.
/(5)/   Represents both (i) 281,571 shares of Series B Preferred Stock held in
        the name of SFMDI (the "SFMDI B Shares") and (ii) the QIP B Shares
        referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also
        may be deemed the beneficial owner of the SFMDI Shares. The principal
        office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New York
        10106.
/(6)/   See "Risk Factors - Change of Control Covenant and Liquidation
        Preference of Preferred Stock."

                                       34
<PAGE>

/(7)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004. Mr. Seiff's address is c/o Seiff Ventures, LLC, 645 Madison
        Avenue, 20th Floor, New York, New York 10022.

SERIES C PREFERRED STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Series C Preferred Stock of the Corporation as of
February 18, 2005, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series C Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES
     NAME/(1)/                                                         BENEFICIALLY OWNED     PERCENTAGE/(2)/
     ------------------------------------------------------------      ------------------     ---------------
     <S>                                                                <C>                       <C>
     Patrick C. Barry                                                         -                       -
     Barry Erdos                                                              -                       -
     Alan Kane                                                                -                       -
     Martin Keane                                                             -                       -
     Martin Miller                                                            -                       -
     Neal Moszkowski/(3)/                                                     -                       -
     Christopher G. McCann                                                    -                       -
     Melissa Payner-Gregor                                                    -                       -
     E. Kenneth Seiff/(7)/                                                    -                       -
     David Wassong/(3)/                                                       -                       -
     Quantum Industrial Partners LDC                                      968.3/(4)//(6)/          96.8%
     George Soros                                                       1,000.0/(5)//(6)/         100.0%
     All directors and executive officers as a group (10 persons)             -                       -
</TABLE>

----------
*Less than 1%.

/(1)/   Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
/(2)/   Beneficial ownership is determined in accordance with the rules of the
        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.
/(3)/   Messrs. Moszkowski's and Wassong's address is c/o Soros Fund Management
        LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
        Moszkowski and Wassong are the designees of the holders of the Series A
        and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the shares of Series C Preferred Stock
        beneficially owned by George Soros and QIP and none of such shares are
        included in the table above as being beneficially owned by them.
/(4)/   Represents the shares of Series C Preferred Stock held in the name of
        QIP (the "QIP C Shares").QIP is an exempted limited duration company
        formed under the laws of the Cayman Islands, with its principal address
        at Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. QIHMI,
        an investment advisory firm organized as a Delaware limited partnership,
        is a minority shareholder of, and is vested with investment discretion
        with respect to portfolio assets held for the account of QIP. The sole
        general partner of QIHMI is QIH Management. SFM is the sole managing
        member of QIH Management. Mr. Soros, the sole shareholder of QIH
        Management, has entered into an agreement with SFM, pursuant to which
        Mr. Soros has agreed to use his best efforts to cause QIH Management to
        act at the direction of SFM. Mr. Soros, as Chairman of SFM, may be
        deemed to have sole voting power and sole investment power with respect
        to the QIP C Shares. Accordingly, each of QIHMI, QIH Management, SFM and
        Mr. Soros may be deemed to be beneficial owners of the QIP Shares. Each
        has their principal office at 888 Seventh Avenue, 33rd Floor, New York,
        New York 10106. The foregoing information was derived, in part, from
        certain publicly available reports, statements and schedules filed with
        the Commission.

                                       35
<PAGE>

/(5)/   Represents both (i) 31.7 shares of Series C Preferred Stock held in the
        name of SFMDI (the "SFMDI C Shares") and (ii) the QIP C Shares
        referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also
        may be deemed the beneficial owner of the SFMDI C Shares. The principal
        office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New York
        10106.
/(6)/   See "Risk Factors - Change of Control Covenant and Liquidation
        Preference of Preferred Stock."
/(7)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004. Mr. Seiff's address is c/o Seiff Ventures, LLC, 645 Madison
        Avenue, 20th Floor, New York, New York 10022.

SERIES D PREFERRED STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Series D Preferred Stock of the Company as of
February 18, 2005, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series D Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executives, and (iv) all
directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES
     NAME/(1)/                                                         BENEFICIALLY OWNED     PERCENTAGE/(2)/
     ------------------------------------------------------------      ------------------     ---------------
     <S>                                                               <C>                         <C>
     Patrick C. Barry                                                          -                       -
     Barry Erdos                                                               -                       -
     Alan Kane                                                                 -                       -
     Martin Keane                                                              -                       -
     Martin Miller                                                             -                       -
     Neal Moszkowski/(3)/                                                      -                       -
     Christopher G. McCann                                                     -                       -
     Melissa Payner-Gregor                                                     -                       -
     E. Kenneth Seiff/(7)/                                                     -                       -
     David Wassong/(3)/                                                        -                       -
     Quantum Industrial Partners LDC                                   6,910.319/(4)//(6)/          96.8%
     George Soros                                                      7,136.548/(5)//(6)/         100.0%
     All directors and executive officers as a group (10 persons)              -                       -
</TABLE>

----------
*Less than 1%.

/(1)/   Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
/(2)/   Beneficial ownership is determined in accordance with the rules of the
        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.
/(3)/   Messrs. Moszkowski's and Wassong's address is c/o Soros Fund Management
        LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
        Moszkowski and Wassong are the designees of the holders of the Series A
        and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the shares of Series D Preferred Stock
        beneficially owned by George Soros and QIP and none of such shares are
        included in the table above as being beneficially owned by them.
/(4)/   Represents the shares of Series D Preferred Stock held in the name of
        QIP (the "QIP D Shares").QIP is an exempted limited duration company
        formed under the laws of the Cayman Islands, with its principal address
        at Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. QIHMI,
        an investment advisory firm organized as a Delaware limited partnership,
        is a minority shareholder of, and is vested with investment discretion
        with respect to portfolio assets held for the account of QIP. The sole
        general partner of QIHMI is QIH Management. SFM is the sole managing
        member of QIH Management. Mr. Soros, the sole shareholder of QIH
        Management, has entered into an agreement with SFM, pursuant to which
        Mr. Soros has agreed to use his best efforts to cause QIH Management to
        act at the direction of SFM. Mr. Soros,

                                       36
<PAGE>

        as Chairman of SFM, may be deemed to have sole voting power and sole
        investment power with respect to the QIP D Shares. Accordingly, each of
        QIHMI, QIH Management, SFM and Mr. Soros may be deemed to be beneficial
        owners of the QIP Shares. Each has their principal office at 888 Seventh
        Avenue, 33rd Floor, New York, New York 10106. The foregoing information
        was derived, in part, from certain publicly available reports,
        statements and schedules filed with the Commission.
/(5)/   Represents both (i) 226.229 shares of Series D Preferred Stock held in
        the name of SFMDI (the "SFMDI D Shares") and (ii) the QIP D Shares
        referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also
        may be deemed the beneficial owner of the SFMDI D Shares. The principal
        office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New York
        10106.
/(6)/   See "Risk Factors - Change of Control Covenant and Liquidation
        Preference of Preferred Stock."
/(7)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004. Mr. Seiff's address is c/o Seiff Ventures, LLC, 645 Madison
        Avenue, 20th Floor, New York, New York 10022.

SERIES E PREFERRED STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Series D Preferred Stock of the Company as of
February 18, 2005, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series D Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executives, and (iv) all
directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                        NUMBER OF SHARES
     NAME/(1)/                                                         BENEFICIALLY OWNED     PERCENTAGE/(2)/
     ------------------------------------------------------------      ------------------     ---------------
     <S>                                                                  <C>                    <C>
     Patrick C. Barry                                                          -                     -
     Barry Erdos                                                               -                     -
     Alan Kane                                                                 -                     -
     Martin Keane                                                              -                     -
     Martin Miller                                                             -                     -
     Neal Moszkowski/(3)/                                                      -                     -
     Christopher G. McCann                                                     -                     -
     Melissa Payner-Gregor                                                     -                     -
     E. Kenneth Seiff/(7)/                                                     -                     -
     David Wassong/(3)/                                                        -                     -
     Quantum Industrial Partners LDC                                       968.3/(4)//(6)/        96.8%
     George Soros                                                          1,000/(5)//(6)/       100.0%
     All directors and executive officers as a group (10 persons)              -                     -
</TABLE>

----------
*Less than 1%.

/(1)/   Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
/(2)/   Beneficial ownership is determined in accordance with the rules of the
        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.
/(3)/   Messrs. Moszkowski's and Wassong's address is c/o Soros Fund Management
        LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
        Moszkowski and Wassong are the designees of the holders of the Series A
        and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the shares of Series D Preferred Stock
        beneficially owned by George Soros and QIP and none of such shares are
        included in the table above as being beneficially owned by them.
/(4)/   Represents the shares of Series E Preferred Stock held in the name of
        QIP (the "QIP E Shares").QIP is an exempted limited duration company
        formed under the laws of the Cayman Islands, with its principal address
        at Kaya Flamboyan 9,

                                       37
<PAGE>

        Willemstad, Curacao, Netherlands Antilles. QIHMI, an investment advisory
        firm organized as a Delaware limited partnership, is a minority
        shareholder of, and is vested with investment discretion with respect to
        portfolio assets held for the account of QIP. The sole general partner
        of QIHMI is QIH Management. SFM is the sole managing member of QIH
        Management. Mr. Soros, the sole shareholder of QIH Management, has
        entered into an agreement with SFM pursuant to which Mr. Soros has
        agreed to use his best efforts to cause QIH Management to act at the
        direction of SFM. Mr. Soros, as Chairman of SFM, may be deemed to have
        sole voting power and sole investment power with respect to the QIP E
        Shares. Accordingly, each of QIHMI, QIH Management, SFM and Mr. Soros
        may be deemed to be beneficial owners of the QIP Shares. Each has their
        principal office at 888 Seventh Avenue, 33rd Floor, New York, New York
        10106. The foregoing information was derived, in part, from certain
        publicly available reports, statements and schedules filed with the
        Commission.
/(5)/   Represents both (i) 31.7 shares of Series E Preferred Stock held in the
        name of SFMDI (the "SFMDI E Shares") and (ii) the QIP E Shares
        referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also
        may be deemed the beneficial owner of the SFMDI E Shares. The principal
        office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New York
        10106.
/(6)/   See "Risk Factors - Change of Control Covenant and Liquidation
        Preference of Preferred Stock."
/(7)/   Mr. Seiff resigned as an executive officer of the Company in August
        2004. Mr. Seiff's address is c/o Seiff Ventures, LLC, 645 Madison
        Avenue, 20th Floor, New York, New York 10022.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

EXTENSION OF MATURITY DATES OF NOTES

In February 2005, we extended the maturity dates on the Convertible Promissory
Notes issued to affiliates of Soros in July and October 2003. The maturity dates
of the Notes, which were originally January and April 2004, respectively, were
each extended for one year, from May 1, 2005 to May 1, 2006.

TRANSACTIONS WITH SOROS RELATING TO THE LOAN FACILITY

The Rosenthal Financing Agreement was amended in April 2004 to, among other
things, substitute $1.25 million of cash collateral pledged by the Company for
the $2.0 million standby letter of credit previously provided by Soros as
collateral security for our obligations under the Loan Facility. Because we
removed the requirement that Soros provide a standby letter of credit to secure
the Loan Facility, we are no longer subject to an agreement with Soros that
previously required us to issue additional warrants to Soros with an exercise
price equal to 75% of market price in the event that Rosenthal were to draw on
Soros' letter of credit.

REPAYMENT OF NOTES TO SOROS

In December 2004, promissory notes that we issued to Soros in December 2001
became due and were paid. The notes, which had a face value of $182,000, were
repaid with accrued interest of $54,000 for a total of $236,000.

OTHER RELATED PARTY TRANSACTIONS

In August 2004, we entered into a Separation Agreement with E. Kenneth Seiff in
connection with his resignation as our Chief Executive Officer. Under the terms
of the agreement, Mr. Seiff agreed to remain employed by the Company in a
non-executive capacity through November 30, 2004 (the "Termination Date") at his
then-current salary and to extend the period of the non-competition and
non-solicitation covenants contained in his employment agreement from one year
to two years after the Termination Date. In consideration for these agreements,
the Company, among other things, agreed (i) to make salary continuation payments
equal to Mr. Seiff's salary until June 30, 2005, (ii) to continue to provide Mr.
Seiff's then-current employee benefits for a period of one year following the
Termination Date, (iii) to issue Mr. Seiff an option to purchase 100,000 shares
of Common Stock at an exercise price equal to the fair market value of the
Common Stock on the date of grant; and (iv) that all outstanding stock options
held by Mr. Seiff would vest upon the Termination Date. The Company and Mr.
Seiff also exchanged releases in connection with the Separation Agreement.

                                       38
<PAGE>

In December 2003, Jonathan Morris, a former Executive Vice President of the
company, was retained as a consultant. Mr. Morris terminated his consulting
agreement with the company effective March 2004. For the year ended December 31,
2004, payments made to Mr. Morris for consulting services provided totaled
approximately $58,000.

We believe that each of the transactions described above was on terms fair to us
and our stockholders, and at least as favorable to us as those available from
unaffiliated third parties.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

        The aggregate fees billed for professional services rendered by
Pricewaterhouse Coopers, LLP ("PwC"), our independent registered public
accounting firm, for the audit of our consolidated financial statements,
including the reviews of our condensed consolidated financial statements
included in its quarterly reports on Form 10-Q, for fiscal 2004 and 2003 were
approximately $148,500 and $100,000, respectively. In addition we paid PwC
approximately $59,000 in connection with professional services rendered to us in
connection with the filing of our S-3.

AUDIT RELATED FEES

        Other than the fees described under the caption "Audit Fees" above, PwC
did not bill any fees for services rendered to us during fiscal 2004 and 2003
for assurance and related services in connection with the audit or review of our
consolidated financial statements.

TAX FEES

        PwC did not bill us for any professional services rendered to us during
fiscal 2004 and 2003 for tax compliance, tax advice or tax planning.

OTHER FEES

        PwC did not bill us for any other professional services rendered during
fiscal 2004 and 2003 other than those described under the caption "Audit Fees."

AUDIT COMMITTEE PRE-APPROVAL POLICIES

        Our policy is that, before PwC is engaged by us to render audit or
non-audit services, the engagement is approved by the Audit Committee.

ITEM 15. EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT NO.       DESCRIPTION
-----------       ----------------------------------------------------------------------------------------------------------------
<S>               <C>
3.1 (f)           Certificate of Incorporation of the Company.

3.2 (f)           By-Laws of the Company.

3.3 (i)           Certificate of Powers, Designations, Preferences and Rights of Series C Preferred Stock of the Registrant

3.4 (j)           Certificate of Powers, Designations, Preferences and Rights of Series D Preferred Stock of the Registrant

3.5 (k)           Certificate of Powers, Designations, Preferences and Rights of Series E Preferred Stock of the Registrant

10.1 (c)          Amended and Restated 1997 Stock Option Plan.

10.2 (a)          Lease Agreement by and between the Company and John R. Perlman, et al., dated as of May 5, 1997.

10.3 (b)          Investment Agreement among the Company, Quantum Industrial Partners LDC, SFM Domestic Investments
</TABLE>

                                       39
<PAGE>

<TABLE>
<S>               <C>
                  LLC and Pilot Capital Corp., dated July 27, 1999.

10.4 (b)          Lease by and between the Company and Adams & Co. Real Estate, Inc., dated March 22, 1999.

10.5 (c)          Note and Warrant Purchase Agreement, dated as of March 28, 2000, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.

10.6 (d)          Lease by and between the Company and Adams & Co. Real Estate, Inc., dated May 4, 2000.

10.7 (d)          Note and Warrant Purchase Agreement, dated as of May 16, 2000, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.

10.8 (d)          Note and Warrant Purchase Agreement, dated as of June 28, 2000, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.

10.9 (e)          Bluefly, Inc. 2000 Stock Option Plan.

*10.10 (e)        Service Agreement by and between the Company and Distribution Associates, Inc., dated July 27, 2000.

10.11 (e)         Note and Warrant Purchase Agreement, dated as of August 21, 2000, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.

10.12 (e)         Note and Warrant Purchase Agreement, dated as of October 2, 2000, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.0

10.13 (e)         Investment Agreement, dated November 13, 2000, by and among the Company, Bluefly Merger Sub, Inc., Quantum
                  Industrial Partners LDC and SFM Domestic Investments LLC.

10.14 (f)         Financing Agreement, dated March 30, 2001, between the Company and Rosenthal & Rosenthal, Inc.

10.15 (f)         Warrant, dated March 30, 2001, issued to Rosenthal & Rosenthal, Inc.

10.16 (f)         Warrant, dated March 30, 2001, issued to Quantum Industrial Partners LDC.

10.17 (f)         Warrant, dated March 30, 2001, issued to SFM Domestic Investments LLC.

10.18 (g)         EBusiness Hosting Agreement, dated January 9, 2002 between the Company and International Business Machines
                  Corporation.

*10.19            (g) Software License and Services Agreement, dated March 12,
                  2002, by and among the Company and Blue Martini Software, Inc.

10.20 (g)         Amendment No. 1 to Financing Agreement, dated April 30, 2001, between the Company and Rosenthal & Rosenthal,
                  Inc.

10.21 (g)         Amendment No. 2 to Financing Agreement, dated February 14, 2002 between the Company and Rosenthal & Rosenthal,
                  Inc.

10.22 (g)         Amendment No. 3 to Financing Agreement, dated March 22, 2002, between the Company and Rosenthal & Rosenthal,
                  Inc.

10.23 (g)         Amendment to warrant dated March 22, 2002, issued to Rosenthal & Rosenthal, Inc.

10.24 (g)         Warrant No. 1 dated March 27, 2002, issued to Quantum Industrial Partners LDC.

10.25 (g)         Warrant No. 2 dated March 27, 2002, issued to SFM Domestic Investments LLC.

10.26 (g)         Warrant No. 3 dated March 30, 2002, issued to Quantum Industrial Partners LDC.

10.27 (g)         Warrant No. 4 dated March 30, 2002, issued to SFM Domestic Investments LLC.

10.28 (h)         Common Stock and Warrant Purchase Agreement, dated May 24, 2002, by and between the Registrant and the
                  investors listed on Schedule 1 thereto.

10.29 (i)         Series C Preferred Stock and Note Purchase Agreement, dated September 27, 2002, by and between the Registrant
                  and the investors listed on Schedule 1 thereto.
</TABLE>

                                       40
<PAGE>

<TABLE>
<S>               <C>
10.30 (j)         Employment Agreement, dated as of July 31, 2002, by and between the Company and Patrick Barry.

10.31 (j)         Amendment No. 4 to Financing Agreement, dated December 19, 2002, between the Company and Rosenthal & Rosenthal,
                  Inc.

10.32 (j)         Employment Agreement, dated as of December 31, 2002, by and between the Company and E. Kenneth Seiff.

10.33 (j)         Note and Warrant Purchase Agreement, dated January 28, 2003, by and between the Registrant and the investors
                  listed on Schedule 1 thereto.

10.34 (j)         Warrant No. 1 dated January 28, 2003, issued to Quantum Industrial Partners LDC.

10.35 (j)         Warrant No. 2 dated January 28, 2003, issued to SFM Domestic Investments LLC.

10.36 (j)         Series D Preferred Stock Purchase Agreement, dated March 12, 2003, by and between the Registrant and the
                  investors listed on Schedule 1 thereto.

10.37 (j)         Amendment  No. 5 to Financing  Agreement,  dated March 17, 2003,  between the Company and Rosenthal & Rosenthal,
                  Inc.

10.38 (j)         Warrant No. 4 dated March 17, 2003, issued to Quantum Industrial Partners LDC.

10.39 (j)         Warrant No. 5 dated March 17, 2003, issued to SFM Domestic Investments LLC.

10.40 (k)         Series E  Preferred  Stock  Purchase  Agreement,  dated May 21,  2003,  by and between  the  Registrant  and the
                  investors listed on Schedule 1 thereto.

10.41 (l)         Note Purchase  Agreement,  dated as of July 16, 2003, by and between the Registrant and the investors  listed on
                  Schedule 1 thereto.

10.42 (l)         Demand Promissory Note, dated as of July 16, 2003, issued to Quantum Industrial Partners LDC.

10.43 (l)         Demand Promissory Note, dated as of July 16, 2003, issued to SFM Domestic Investments LLC.

10.44 (m)         Note Purchase  Agreement,  dated as of October 17, 2003, by and between the Registrant and the investors  listed
                  on Schedule 1 thereto.

10.45 (m)         Demand Promissory Note, dated as of October 17, 2003, issued to Quantum Industrial Partners LDC.

10.46 (m)         Demand Promissory Note, dated as of October 17, 2003, issued to SFM Domestic Investments LLC.

10.47 (n)         Employment Agreement dated as of September 22, 2003 by and between Bluefly, Inc. and Melissa Payner-Gregor.

10.48 (n)         Amendment to Financing Agreement dated October 2, 2003.

10.49 (o)         Common Stock and Warrant  Purchase  Agreement  dated  January 9, 2004 by and among the Company and the Investors
                  listed on Schedule 1 thereto.

10.50 (p)         Amendment to Promissory Notes, dated as of January 12, 2004, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.

10.51 (q)         Amended and Restated Financing  Agreement,  dated as of April 21, 2004, by and between the Company and Rosenthal
                  & Rosenthal, Inc.

*10.52 (r)        Amendment,  dated  as of March  17,  2004,  to the  Services  Agreement,  dated  as of July  27,  2000,  between
                  Distribution Associates, Inc. and the Company.

*10.53 (s)        CallTech Master Agreement for Outsourcing Contact Center Support, dated as of August 5, 2004, by and between the
                  Registrant and CallTech Communications, LLC.
</TABLE>

                                       41
<PAGE>

<TABLE>
<S>               <C>
10.54 (t)         Separation  Agreement and General  Release of All Claims by and between the Company and E. Kenneth Seiff,  dated
                  as of August 26, 2004.

10.55 (u)         Employment Agreement, dated as of October 14, 2004, by and between the Company and Monica Halpert.

10.56 (v)         Amendment No. 2, dated as of February 18, 2005, to Amended and Restated Financing  Agreement,  dated as of April
                  21, 2004, by and between the Company and Rosenthal & Rosenthal, Inc.

10.57 (v)         Amendment to Promissory Notes, dated as of February 18, 2005, by and among the Company, Quantum Industrial
                  Partners LDC and SFM Domestic Investments LLC.

10.58             Bluefly, Inc. 2005 Stock Incentive Plan

21.1              Subsidiaries of the Registrant.

23.1              Consent of PricewaterhouseCoopers LLP.

31.1              Certification Pursuant to Rule 13a-14(a)/15d-14(a).

31.2              Certification Pursuant to Rule 13a-14(a)/15d-14(a).

32.1              Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
                  of 2002.

32.2              Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
                  of 2002.
</TABLE>

* Confidential treatment requested as to certain portions of this Exhibit.
  Such portions have been redacted.

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

  (b) Incorporated by reference to the Company's Quarterly report filed on
      Form 10-QSB for the quarterly period ended June 30, 1999.

  (c) Incorporated by reference to the Company's Annual report filed on Form
      10-KSB for the year ended December 31, 1999.

  (d) Incorporated by reference to the Company's Quarterly report filed on
      Form 10-Q for the quarterly period ended June 30, 2000.

  (e) Incorporated by reference to the Company's Quarterly report filed on
      Form 10-Q for the quarterly period ended September 30, 2000.

  (f) Incorporated by reference to the Company's Annual report filed on Form
      10-K for the year ended December 31, 2000.

  (g) Incorporated by reference to the Company's Annual report filed on Form
      10-K for the year ended December 31, 2001.

  (h) Incorporated by reference to the Company's Quarterly report filed on
      Form 10-Q for the quarterly period ended June 30, 2002.

  (i) Incorporated by reference to the Company's report on Form 8-K, dated
      October 1, 2002. (j) Incorporated by reference to the Company's Annual
      Report filed on Form 10-K for the year ended December 31, 2002.

  (k) Incorporated by reference to the Company's Quarterly report filed on
      Form 10-Q for the quarterly period ended June 30, 2003.

  (l) Incorporated by reference to the Company's report on Form 8-K, dated
      July 17, 2003.

  (m) Incorporated by reference to the Company's report on Form 8-K, dated
      October 20, 2003.

  (n) Incorporated by reference to the Company's Quarterly report filed on
      Form 10-Q for the quarterly period ended September 30, 2003.

  (o) Incorporated by reference to the Company's report on Form 8-K, dated
      January 13, 2004.

  (p) Incorporated by reference to the Company's report on Form 8-K, dated
      January 16, 2004.

  (q) Incorporated by reference to the Company's report on Form 8-K, dated
      April 22, 2004.

  (r) Incorporated by reference to the Company's quarterly report on Form 10-Q
      for the quarterly period ended March 31, 2004.

  (s) Incorporated by reference to the Company's quarterly report on Form 10-Q
      for the quarterly period ended June 30, 2004.

  (t) Incorporated by reference to the Company's report on Form 8-K, dated
      August 30, 2004.

  (u) Incorporated by reference to the Company's report on Form 8-K, dated
      October 29, 2004.

  (v) Incorporated by reference to the Company's report on form 8-K, dated
      February 22, 2005.

  *   Confidential treatment has been requested as to certain portions of this
      Exhibit. Such portions have been redacted.

                                       42
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                       BLUEFLY, INC.

                                       By: /s/ Melissa Payner-Gregor
                                           -------------------------------------
                                           Melissa Payner-Gregor
                                           Chief Executive Officer and President

March 1, 2005

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                       Title                                                     Date
--------------------------      ------------------------------------------------------    -------------
<S>                             <C>                                                       <C>
/s/ Alan Kane                   Chairman of the Board                                     March 1, 2005
--------------------------
Alan Kane

/s/ Melissa Payner-Gregor       Chief Executive Officer (Principal Executive Officer),    March 1, 2005
--------------------------      President and Director
Melissa Payner-Gregor

/s/ Patrick C. Barry            Chief Financial Officer and Chief Operating               March 1, 2005
--------------------------      Officer (Principal Accounting Officer)
Patrick C. Barry

/s/ Barry Erdos                 Director                                                  March 1, 2005
--------------------------
Barry Erdos

/s/ Martin Miller               Director                                                  March 1, 2005
--------------------------
Martin Miller

/s/ Neal Moszkowski             Director                                                  March 1, 2005
--------------------------
Neal Moszkowski

/s/Christopher McCann           Director                                                  March 1, 2005
--------------------------
Christopher McCann

/s/ David Wassong               Director                                                  March 1, 2005
--------------------------
David Wassong
</TABLE>

                                       43