<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-KSB/A

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

         For the fiscal year ended December 31, 1999

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

         For the transition period from ______ to ______

                       Commission File Number: 333-22895
                    ---------------------------------------
                                  BLUEFLY, INC.
                 (Name of small business issuer in its charter)

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

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

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

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

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

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

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

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

The issuer's revenues for its most recent fiscal year were:  $4,951,000

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 15, 2000 based upon the last sale price of such
equity reported on the National Associated of Securities Dealers Automated
Quotation SmallCap Market was approximately $39,500,000.

As of March 15, 2000, the issuer had outstanding 4,924,906 of shares of Common
Stock, $.01 par value.

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

                              Reason For Amendment

This Form 10-KSB/A (this "Amendment") amends and supplements the Form 10-KSB
(the "Original 10-KSB") filed by Bluefly, Inc., a New York corporation (the
"Company"), on March 30, 2000. The sole purpose of this Amendment is to amend
and revise Part II Item 7 and Part III Item 13 of the Original Form 10-KSB to
read in their entirety as set forth below in connection with the Company's
decision to revise its consolidated financial statements for the year ended
December 31, 1999, to clarify the redemption features of the Series A
Convertible Preferred Stock. See Note 12 of the Consolidated Financial
Statements.

<PAGE>

                                  FORM 10KSB/A
                                TABLE OF CONTENTS
PART II

Item 7. Financial Statements

PART III

Item 13. Exhibits and Reports on Form 8-K

Item 7. Financial Statements

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

         Report of Independent Accountant                                    F-1

         Independent Auditors' Report                                        F-2

         Consolidated Balance Sheets  as of  December 31, 1999 and 1998      F-3

         Consolidated Statements of Operations for the three years
            ended December 31, 1999, 1998 and 1997                           F-4

         Consolidated Statements of Changes in Shareholders' Equity
            and Redeemable Preferred Stock for the three years
            ended December 31, 1999, 1998 and 1997                           F-5

         Consolidated Statements of Cash Flows for the three years
            ended December 31, 1999, 1998 and 1997                           F-6

         Notes to Consolidated Financial Statements                          F-8

                                       2

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Bluefly, Inc.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 7 on page 16 present fairly, in all material respects, the
consolidated financial position of Bluefly, Inc. at December 31, 1999 and the
results of their operations and of their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America, which
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 audit provides a
reasonable basis for the opinion expressed above.

As discussed in Note 12 to the accompanying financial statements, the Company
has revised the consolidated financial statements as of December 31, 1999 to
present $9,943,000 of preferred stock as redeemable preferred stock outside of
shareholders' equity.



PricewaterhouseCoopers LLP
New York, N.Y.
February 11, 2000 (except with respect to Notes 1 and 11, as to which the date
is March 28, 2000 and except with respect to Note 12, as to which the date is
May 12, 2000)

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Bluefly, Inc.

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

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

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

As more fully discussed in Notes 1 and 9 to the financial statements, on June
25, 1998, the Company's Board of Directors adopted a plan to discontinue its
golf sportswear division. Historical assets and operations of the golf
sportswear division have represented a substantial portion of the Company's
assets and results of operations.

M.R. Weiser & Co. LLP
March 26, 1999
New York, N.Y.

                                      F-2
<PAGE>

BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            1999               1998
                                                                   (Revised See Note 12)
ASSETS
<S>                                                                      <C>                <C>
Current assets:
    Cash and cash equivalents                                            $ 7,934,000        $ 2,830,000
    Funds deposited with factor                                                    -          2,264,000
    Inventories, net                                                       7,020,000            429,000
    Prepaid expenses and other current assets                              1,080,000            624,000
    Current assets of discontinued operations                                      -            553,000
                                                                         -----------        -----------
             Total current assets                                         16,034,000          6,700,000

Property and equipment, net                                                1,037,000            497,000
Other assets                                                                  38,000             15,000
                                                                         -----------        -----------

                                                                         $17,109,000        $ 7,212,000
                                                                         -----------        -----------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                     $ 4,287,000        $   489,000
    Accrued expenses and other current liabilities                         2,236,000            267,000
                                                                         -----------        -----------
             Total current liabilities                                     6,523,000            756,000

Deferred income taxes                                                              -             64,000
                                                                         -----------        -----------
                                                                           6,523,000            820,000
                                                                         -----------        -----------

Commitments and contingencies (Note 7)

Redeemable preferred stock - $.01 par value;
    2,000,000 shares authorized, 500,000 shares issued
    and outstanding in 1999, (liquidation preference:
    $20 per share plus accrued dividends)                                  9,943,000                  -

Shareholders' equity:
    Common stock - $.01 par value; 15,000,000 shares authorized,
      4,924,906 and 3,433,255 shares issued and
      outstanding, respectively                                               49,000             34,000
    Additional paid-in capital                                            17,825,000         10,395,000
    Accumulated deficit                                                  (17,231,000)        (4,037,000)
                                                                         -----------        -----------
                                                                             643,000          6,392,000
                                                                         -----------        -----------

                                                                         $17,109,000        $ 7,212,000
                                                                         -----------        -----------
</TABLE>

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

                                       F-3
<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           1999              1998             1997

<S>                                                                    <C>               <C>              <C>
Net sales                                                              $  4,951,000      $    215,000     $          -
Cost of sales                                                             3,766,000           266,000                -
                                                                       ------------      ------------     ------------

             GROSS PROFIT (LOSS)                                          1,185,000           (51,000)               -

Selling, marketing and fulfillment expenses                              11,424,000         1,121,000                -
General and administrative expenses                                       3,460,000         1,166,000          819,000
Internet business start up costs                                                  -           332,000                -
                                                                       ------------      ------------     ------------

             TOTAL OPERATING EXPENSES                                    14,884,000         2,619,000          819,000
                                                                       ------------      ------------     ------------

             OPERATING LOSS FROM CONTINUING OPERATIONS                  (13,699,000)       (2,670,000)        (819,000)

Interest and other income, net                                              440,000           142,000          123,000
                                                                       ------------      ------------     ------------

             LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES        (13,259,000)       (2,528,000)        (696,000)

Income tax benefit                                                            2,000            50,000          227,000
                                                                       ------------      ------------     ------------

             LOSS FROM CONTINUING OPERATIONS                            (13,257,000)       (2,478,000)        (469,000)
                                                                       ------------      ------------     ------------

Discontinued operations - Note 9:
    Income (loss) from operations, net of income tax
      provision of $0, $105,000 and $45,000, respectively                    63,000        (1,178,000)          88,000
                                                                       ------------      ------------     ------------

             NET LOSS                                                  $(13,194,000)     $ (3,656,000)    $   (381,000)
                                                                       ------------      ------------     ------------

Preferred stock dividends                                                  (342,000)                -                -
                                                                       ------------      ------------     ------------

Net loss available to common shareholders                              $(13,536,000)     $ (3,656,000)    $   (381,000)
                                                                       ------------      ------------     ------------
Basic and diluted (loss) income per common share:
    Continuing operations                                                     (2.83)             (.89)            (.22)
    Discontinued operations                                                     .01              (.43)             .04
                                                                       ------------      ------------     ------------

             BASIC AND DILUTED LOSS PER SHARE                          $      (2.82)     $      (1.32)    $       (.18)
                                                                       ------------      ------------     ------------

Weighted average shares outstanding used in calculating basic
      and diluted income (loss) per common share                          4,802,249         2,770,869        2,149,315
                                                                       ------------      ------------     ------------
</TABLE>

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

                                       F-4
<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
REDEEMABLE PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                 REDEEMABLE           COMMON STOCK,
                                               PREFERRED STOCK       $.01 PAR VALUE
                                            --------------------  ---------------------
                                            NUMBER OF               NUMBER OF               ADDITIONAL     ACCUMULATED
                                             SHARES      AMOUNT      SHARES     AMOUNT   PAID-IN CAPITAL     DEFICIT         TOTAL
<S>                                         <C>       <C>          <C>         <C>       <C>            <C>              <C>
Balance at January 1, 1997                        -          $ -   1,200,000   $ 12,000     $ 397,000            $ -      $ 409,000

Issuance of warrants - bridge financing           -            -           -          -       138,000              -        138,000

Cancellation of warrants - bridge financing       -            -           -          -       (55,000)             -        (55,000)

Sale of units ($5.00 per share)                   -            -   1,500,000     15,000     5,924,000              -      5,939,000

Net loss                                          -            -           -          -             -       (381,000)      (381,000)
                                            -------   ----------   ---------   --------  ------------   ------------     ----------
Balance at December 31, 1997                      -            -   2,700,000     27,000     6,404,000       (381,000)     6,050,000

Issuance of common stock for services             -            -      24,755          -        49,000                        49,000

Issuance of common stock for exercise of
    warrants ($5.00 per share)                    -            -     573,250      6,000     2,861,000                     2,867,000

Issuance of common stock for exercise of
    unit purchase options ($8.00 per share)       -            -     135,250      1,000     1,081,000                     1,082,000

Net loss                                                                                                  (3,656,000)    (3,656,000)
                                            -------   ----------   ---------   --------  ------------   ------------     ----------
Balance at December 31, 1998                      -            -   3,433,255     34,000    10,395,000     (4,037,000)     6,392,000

Issuance of Series A Preferred Stock
    ($20.00 per share) net of expenses
    of $57,000                              500,000    9,943,000           -          -             -              -              -

Exercise of warrants and stock options            -            -   1,491,651     15,000     7,381,000              -      7,396,000

Issuance of stock options to consultants          -            -           -          -        49,000              -         49,000

Net loss                                          -            -           -          -             -    (13,194,000)   (13,194,000)
                                            -------   ----------   ---------   --------  ------------   ------------     ----------
Balance at December 31, 1999 (Revised
    - See Note 12)                          500,000   $9,943,000   4,924,906   $ 49,000  $ 17,825,000   $(17,231,000)    $  643,000
                                            -------   ----------   ---------   --------  ------------   ------------     ----------
</TABLE>

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

                                       F-5

<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      1999            1998             1997
<S>                                                              <C>               <C>               <C>
Cash flows from operating activities:
    Loss from continuing operations                              $ (13,257,000)    $(2,478,000)      $ (469,000)
    Adjustments to reconcile loss from continuing operations
      to net cash provided by operating activities:
        Loss on equipment disposition                                        -           7,000            7,000
        Depreciation and amortization                                  130,000          84,000           31,000
        Common stock issued for services                                 7,000          49,000                -
        Deferred income taxes                                           50,000           5,000                -
        Non cash compensation                                           49,000               -                -
        Changes in operating assets and liabilities:
           Increase in:
             Inventories                                            (6,591,000)       (429,000)               -
             Prepaid expenses and other current assets                (507,000)       (399,000)        (128,000)
             Other assets                                              (23,000)              -                -
           (Decrease) increase in:
             Accounts payable, accrued expenses and
               other current liabilities                             5,767,000        (381,000)         756,000
             Deferred tax liability                                    (64,000)              -                -
                                                                 -------------     -----------       ----------

             NET CASH (USED IN) PROVIDED BY OPERATING
               ACTIVITIES - CONTINUING OPERATIONS                  (14,439,000)     (3,542,000)         197,000
                                                                 -------------     -----------       ----------

    Income/loss from discontinued operations                            63,000      (1,178,000)          88,000
    Adjustments to reconcile income from discontinued operations
      to net cash provided by (used in) operating activities:
        Loss on equipment disposal                                           -               -            3,000
        Write-down of property and equipment                                 -         259,000                -
        Write-down of prepaid expenses and other current assets              -         101,000                -
        Write-down of other assets                                           -         119,000                -
        Amortization of deferred costs for bridge financing                  -               -          293,000
        Amortization of debt discount                                        -               -           83,000
        Depreciation and amortization                                        -          44,000           45,000
        Deferred income taxes                                                -          94,000                -
        Changes in operating assets and liabilities:
           (Increase) decrease in:
             Inventories                                               187,000       1,413,000         (578,000)
             Non-factored receivables                                        -        (136,000)         (10,000)
             Prepaid expenses and other current assets                       -          70,000          (84,000)
           Increase (decrease) in:
             Income taxes receivable                                   195,000           7,000         (315,000)
                                                                 -------------     -----------       ----------

             NET CASH PROVIDED BY (USED IN) OPERATING
               ACTIVITIES - DISCONTINUED OPERATIONS                    445,000         793,000         (475,000)
                                                                 -------------     -----------       ----------

             NET CASH USED IN OPERATING ACTIVITIES                 (13,994,000)     (2,749,000)        (278,000)
                                                                 -------------     -----------       ----------

Cash flows from investing activities - continuing operations:
    Purchase of property and equipment                                (670,000)        (88,000)        (519,000)
    Funds deposited with factor                                      2,264,000        (960,000)      (4,920,000)
    Increase of funds deposited with factor                                  -         553,000        3,063,000
                                                                 -------------     -----------       ----------

             NET CASH PROVIDED BY (USED IN) INVESTING
               ACTIVITIES - CONTINUING OPERATIONS                    1,594,000        (495,000)      (2,376,000)
                                                                 -------------     -----------       ----------
</TABLE>

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

                                       F-6
<PAGE>

BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       1999            1998             1997
<S>                                                                <C>             <C>               <C>
Cash flows from investing activities - discontinued operations:
    Purchase of property and equipment                             $         -     $   (22,000)      $ (236,000)
    Trademark costs                                                          -          (1,000)          (7,000)
                                                                   -----------     -----------       ----------

             NET CASH USED IN INVESTING ACTIVITIES -
               DISCONTINUED OPERATIONS                                       -         (23,000)        (243,000)
                                                                   -----------     -----------       ----------

             NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     1,594,000        (518,000)      (2,619,000)
                                                                   -----------     -----------       ----------

Cash flows from financing activities - continuing operations:
    Net proceeds from issuance of Preferred Stock                    9,943,000               -                -
    Net proceeds from warrant redemption and unit purchase options   7,130,000       3,949,000                -
    Net proceeds from option exercise                                  260,000               -                -
    Net proceeds from initial public offering                                -               -        5,939,000
    Deferred costs association with initial public offering                  -               -           53,000
                                                                   -----------     -----------       ----------
             NET CASH PROVIDED BY FINANCING ACTIVITIES -
               CONTINUING OPERATIONS                                17,333,000       3,949,000        5,992,000
                                                                   -----------     -----------       ----------

Cash flows from financing activities - discontinued operations:
    Net change in due to/from factor                                   171,000       2,093,000       (2,211,000)
    Repayments of bridge financing                                           -               -       (1,500,000)
    Repayments of notes payable and short-term loan                          -               -         (644,000)
    Net proceeds from bridge financing                                       -               -        1,207,000
    Deferred costs associated with bridge financing                          -               -           75,000
                                                                   -----------     -----------       ----------

             NET CASH PROVIDED BY (USED IN) FINANCING
               ACTIVITIES - DISCONTINUED OPERATIONS                    171,000       2,093,000       (3,073,000)
                                                                   -----------     -----------       ----------

             NET CASH PROVIDED BY FINANCING ACTIVITIES              17,504,000       6,042,000        2,919,000
                                                                   -----------     -----------       ----------

Net increase in cash                                                 5,104,000       2,775,000           22,000

Cash balance - beginning of year                                     2,830,000          55,000           33,000
                                                                   -----------     -----------       ----------

             CASH BALANCE - END OF YEAR                            $ 7,934,000     $ 2,830,000       $   55,000
                                                                   -----------     -----------       ----------

Supplemental disclosure of cash flow information:
    Cash paid during the year for:
      Interest                                                               -     $     8,000       $   75,000
                                                                   -----------     -----------       ----------
      Income taxes                                                 $    17,000     $     5,000       $  125,000
                                                                   -----------     -----------       ----------
    Non-cash transactions:
      Issuance of warrants in connection with bridge financing               -     $         -       $  138,000
                                                                   -----------     -----------       ----------
      Cancellation of warrants in connection with bridge financing           -     $         -       $   55,000
                                                                   -----------     -----------       ----------
      Exchange of goods for services provided                      $    19,000
                                                                   -----------
</TABLE>

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

                                       F-7
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

1.       THE COMPANY

         The Company is an internet retailer of designer fashions and home
         accessories at outlet store prices. The full service Web store
         ("Bluefly.com" or "Web Site") sells over 300 brands of designer
         apparel, accessories and house and home products at discounts of up to
         75%. Bluefly.com, which launched in September 1998, also offers
         information on current fashion trends.

         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 equity financing, collaborative or
         other arrangements with corporate sources, or other sources of
         financing to fund operations. During 1999, the Company received
         additional financing of approximately $17 million. Should the need
         arise, the Company has received a commitment from a preferred
         stockholder to finance anticipated working capital deficiencies up to
         $15 million, if any, through December 31, 2000. Management believes
         that its current funds and the funds under commitment from a preferred
         stockholder will be sufficient to enable the Company to meet its
         planned expenditures through at least December 31, 2000. If anticipated
         operating results are not achieved, the Company intends to obtain
         additional equity or debt financings. If such financings are not
         available on terms acceptable to the Company, the Company will delay or
         reduce its expenditures in order to meet its obligations.

         On June 25, 1998, the Company's Board of Directors voted to discontinue
         the operations of its golf sportswear division and devote all of the
         Company's energy and resources to building Bluefly.com. See Note 9.

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

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 on product sales when goods are shipped
         to the customer.

         Net sales include reductions for estimated returns, uncollectible
         accounts and sales discounts. The Company does not record proceeds
         received for shipping and handling as sales.

                                      F-8
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

         In December 1999, the Securities and Exchange Commission ("SEC") issued
         Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
         Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views
         in applying generally accepted accounting principles to revenue
         recognition in financial statements. SAB 101 is not a rule or
         interpretation of the SEC, however, it represents interpretations and
         practices followed by the Division of Corporation Finance and the
         Office of the Chief Accountant in administering the disclosure
         requirements of the Federal securities laws. The Company does not
         believe that the interpretations outlined in SAB 101 will have an
         impact on the Company's revenue recognition policies.

         RISKS AND UNCERTAINTIES
         The Company has a limited operating history and its prospects are
         subject to the risks, expenses and uncertainties frequently encountered
         by companies in the new and rapidly evolving markets for Internet
         products and services. These risks and uncertainties include, but are
         not limited to, the following: the competitive nature of the business
         and the potential for competitors with greater resources to enter such
         business; the Company's limited operating history and need for
         additional financing; consumer acceptance of the Internet as a medium
         for purchasing apparel; rapid technological change of online commerce
         and the potential for security risks; governmental regulation and legal
         uncertainties, as well as other risks and uncertainties. In the event
         that the Company does not successfully implement its business plan,
         certain assets may not be recoverable.

         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 include
         inventory valuation and reserves for returns and allowance for doubtful
         accounts. Actual results could differ from those estimates.

         CASH AND CASH EQUIVALENTS
         The Company considers all short-term marketable securities having an
         original maturity of three months or less to be 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.

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

         INCOME TAXES
         The Company recognizes deferred 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 in the
         period that includes the enactment date. In

                                      F-9
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

         addition, valuation allowances are established when it is more likely
         than not that deferred tax assets will not be realized.

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

         STOCK BASED COMPENSATION
         The Company applies Statement of Financial Accounting Standards No.
         ("SFAS") 123 "Accounting for Stock Based 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. In connection with
         stock option grants to employees, no compensation expense has been
         recorded in fiscal years 1999, 1998 and 1997, because the exercise
         price of employee stock options equals or exceeds the market price of
         the underlying stock on the date of grant.

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

         Diluted earnings (loss) per share is computed by dividing earnings
         (loss) available to common shareholders by the weighted average number
         of common shares outstanding for the period, adjusted to reflect
         potentially dilutive securities. Due to the loss from continuing
         operations, options to purchase 1,110,150 shares of Common Stock and
         Preferred Stock convertible into 952,381 of Common Stock shares were
         not included in the computation of diluted earnings per share because
         the result of the exercise of such inclusion would be antidilutive.

         ADVERTISING
         Advertising costs are expensed as incurred. Advertising expenses for
         the years ended December 31, 1999 and 1998 amounted to approximately
         $6,540,000 and $443,000 respectively. For the year ended December 31,
         1997, the Company incurred approximately $908,000 in advertising
         expense relating to the discontinued operations.

         FULFILLMENT
         The Company utilizes a third party to perform all of its order
         fulfillment. For the years ended December 31, 1999 and 1998,
         fulfillment expenses totaled $557,000 and $54,000, respectively. These
         amounts are included in selling, marketing and fulfillment expenses in
         the statements of operations.

         RESEARCH AND DEVELOPMENT
         Research and development costs, incurred in connection with
         enhancements to the Web Site, prior to technological feasibility, are
         expensed when incurred. During the years ended December 31, 1999 and
         1998 amounts charged to research and development expense amounted to
         $146,000 and $347,000 respectively.

                                      F-10
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

         COMPREHENSIVE INCOME
         In June 1997, the Financial Accounting Standards Board issued SFAS No.
         130, "Reporting Comprehensive Income" ("SFAS No.130"). This statement
         requires companies to classify items of other comprehensive income by
         their nature in the financial statements and display the accumulated
         balance of other comprehensive income separately from retained earnings
         and additional paid-in capital in the equity section of a statement of
         financial position. SFAS No.130 is effective for financial statements
         issued for fiscal years beginning after December 15, 1997. The Company
         has had no other comprehensive income items to report.

         START UP COSTS
         In June 1998, the Company adopted Statement of Position ("SOP") 98-5
         "Reporting on the Costs of Start-Up Activities." Startup activities
         include (i) one-time activities relating to the introduction of a new
         product or service, conducting business in a new territory, conducting
         business with a new class of customer or commencing a new operation and
         (ii) organization costs. Start-up activities are expensed as incurred.
         For the year ended December 31, 1998, $332,000 of start up costs
         relating to the formation of the Internet business were expensed as
         incurred.

         FAIR VALUE OF FINANCIAL INSTRUMENTS
         The carrying amounts of the Company's financial instruments, including
         cash and cash equivalents, funds deposited with factor, accounts
         payable and accrued liabilities, approximate fair value due to their
         short maturities.

         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.

3.       PROPERTY AND EQUIPMENT

         As of December 31, 1999 and 1998, property and equipment for continuing
         operations consist of the following:

<TABLE>
<CAPTION>
                                                       1999              1998
<S>                                                 <C>                <C>
Leasehold improvements                              $  488,000         $ 287,000
Office equipment                                       308,000           167,000
Computer equipment and software                        471,000           142,000
                                                    ----------         ---------
                                                     1,267,000           596,000
    Less accumulated depreciation                      230,000            99,000
                                                    ----------         ---------
                                                    $1,037,000         $ 497,000
                                                    ----------         ---------
</TABLE>

         Depreciation and amortization of property and equipment was
         approximately $130,000, $84,000 and $31,000, for the years ended
         December 31, 1999, 1998 and 1997, respectively.

                                      F-11
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

4.       PREPAID EXPENSES AND OTHER CURRENT ASSETS

         As of December 31, 1999 and 1998, prepaid expenses and other current
         assets consist of the following:

<TABLE>
<CAPTION>
                                                    1999              1998
<S>                                              <C>                <C>
Due from credit card companies                   $  350,000         $  27,000
Other current assets                                453,000            68,000
Prepaid expenses                                    213,000           424,000
Income taxes receivable                              34,000            55,000
Other receivables                                    30,000                 -
Deferred income tax                                       -            50,000
                                                 ----------         ---------
                                                 $1,080,000         $ 624,000
                                                 ----------         ---------
</TABLE>

5.       ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

         As of December 31, 1999 and 1998, accounts payable, accrued expenses
         and other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                                    1999              1998
<S>                                              <C>                <C>
Accounts payable                                 $4,287,000         $ 489,000
Accrued expenses                                    646,000           105,000
Provision for returns and bad debt                  868,000            47,000
Accrued media expenses                              407,000                 -
Salary and bonus accrual                            315,000           115,000
                                                 ----------         ---------
                                                 $6,523,000         $ 756,000
                                                 ----------         ---------
</TABLE>

                                      F-12
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

6.       INCOME TAXES

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

<TABLE>
<CAPTION>
                                  CONTINUING OPERATIONS
                    ---------------------------------------------------
                            1999             1998               1997

Current
<S>                      <C>               <C>               <C>
    Federal              $  (2,000)        $ (55,000)        $(220,000)
    State                        -                 -            (7,000)
                    ---------------  ----------------  ----------------
                            (2,000)          (55,000)         (227,000)
                    ---------------  ----------------  ----------------

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

                         $  (2,000)        $ (50,000)        $(227,000)
                    ---------------  ----------------  ----------------

<CAPTION>
                                 DISCONTINUED OPERATIONS
                    ---------------------------------------------------
                            1999             1998               1997

Current
<S>                      <C>               <C>               <C>
    Federal              $       -         $  11,000         $  45,000
    State                        -                 -                 -
                    ---------------  ----------------  ----------------
                                 -            11,000            45,000
                    ---------------  ----------------  ----------------

Deferred
    Federal              $       -         $  81,000         $       -
    State                        -            13,000                 -
                    ---------------  ----------------  ----------------
                                 -            94,000                 -
                    ---------------  ----------------  ----------------

                         $       -         $ 105,000         $  45,000
                    ---------------  ----------------  ----------------
</TABLE>

                                      F-13
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                         1999          1998
<S>                                                  <C>             <C>
Deferred tax assets
    Net operating losses                             $ 6,222,000     $ 920,000
    Foreign tax credits                                   13,000             -
    Depreciation and amortization                        216,000             -
    Accounts receivable and inventory reserves            95,000        50,000
    Other                                                  4,000             -
                                                     -----------     ---------
                                                       6,550,000       970,000
        Valuation Allowance                           (6,550,000)     (920,000)
                                                     -----------     ---------
                                                                        50,000
Deferred tax liability
    Tax over book depreciation                                 -       (64,000)
                                                     -----------     ---------
             NET DEFERRED TAX ASSET (LIABILITY)      $         -     $ (14,000)
                                                     -----------     ---------
</TABLE>

         The Company has tax credit carryforwards of $13,000 which have
         expiration dates through 2001. In addition, the Company has
         approximately $15,785,000 of net operating loss carryforwards which
         have expiration dates through 2019. The Company provided a full
         valuation allowance on the entire deferred tax asset balance due to the
         uncertainty regarding the realizability of these assets due to recent
         losses.

         The Company's effective tax rate differs from the U.S. Federal
         Statutory income tax rate of 34% as follows:

<TABLE>
<CAPTION>
                                               1999         1998          1997
<S>                                           <C>          <C>          <C>
Statutory federal income tax rate             (34.00)%     (34.00)%     (34.00)%
State taxes, net of federal tax benefit        (5.40)        0.40         1.70
Other                                           0.20            -            -
Valuation allowance on deferred tax asset      39.18        35.10            -
                                            ---------     --------    ---------
Effective tax rate                             (0.02)%       1.50%      (32.30)%
                                            ---------     --------    ---------
</TABLE>

                                      F-14
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

7.       COMMITMENTS AND CONTINGENCIES

         EMPLOYMENT CONTRACTS
         The Company has entered into certain employment contracts, which expire
         through December 31, 2003. As of December 31, 1999, the Company's
         aggregate commitment for future base salary under these employment
         contracts is:

<TABLE>
<CAPTION>
<S>                                                           <C>
2000                                                          $1,045,000
2001                                                           1,045,000
2002                                                             767,000
2003                                                             182,000
                                                              ----------
           TOTAL                                              $3,039,000
                                                              ----------
</TABLE>

         OPERATING LEASES
         The Company leases equipment and space under various leases which
         expire beginning 2000 through 2009. Rent expense aggregated
         approximately $156,000, $78,000 and $95,000 for the years ended
         December 31, 1999, 1998 and 1997. As of December 31, 1999, future
         minimum rentals, excluding utilities, are as follows:

<TABLE>
<CAPTION>
<S>                                                           <C>
2000                                                          $1,902,000
2001                                                           1,150,000
2002                                                             215,000
2003                                                             219,000
2004                                                             224,000
Thereafter                                                       898,000
                                                              ----------
           TOTAL                                              $4,608,000
                                                              ----------
</TABLE>

         MARKETING AND ADVERTISING COMMITMENTS
         As of December 31, 1999, the Company has advertising and marketing
         commitments in connection with its online and offline relationships of
         approximately $1,695,000 through December 31, 2000.

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

         The Company was named as a defendant in an action commenced by Tommy
         Hilfiger Licensing, Inc. ("Hilfiger") in August 1999 in the United
         States District Court for the Southern District of New York. In its
         complaint, Hilfiger specifically alleged that ten styles of Hilfiger
         product sold by the Company were not authentic Hilfiger merchandise and
         also alleged, upon information and belief, that the Company had sold
         other styles of Hilfiger merchandise that were not authentic. The
         Company sold less than $5,000 of the styles of product that Hilfiger
         has specifically alleged to be inauthentic. Subsequent to year end, the
         Company and Hilfiger settled the lawsuit on terms acceptable to both
         parties. The Company does not believe that the settlement will have a
         material adverse effect upon its business, financial condition or
         results of operations.

                                      F-15
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

8.       SHAREHOLDER'S EQUITY AND REDEEMABLE EQUITY

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

         SERIES A CONVERTIBLE PREFERRED STOCK
         On July 27, 1999, the Company entered into an Investment Agreement with
         an investor group led by affiliates of Soros Private Equity Partners,
         LLC (the "Soros Investment Agreement") pursuant to which it issued
         500,000 shares of Series A Convertible Preferred Stock (the "Series A
         Preferred Stock") for an aggregate purchase price of $10 million. The
         Series A Preferred Stock is convertible into shares of Common Stock at
         a rate of $10.50 per share, and bears a cumulative compounding dividend
         of 8% per annum, payable upon conversion at the Company's option in
         cash or in Common Stock. The Series A Preferred Stock has a liquidation
         preference equal to the face value of the Series A Preferred plus
         accrued dividends and ranks 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.

         The Series A Preferred Stock may be converted into Common Stock at any
         time by the holders thereof and will automatically be converted into
         Common Stock if the closing price of the Common Stock is $31.50 or
         higher for 30 consecutive trading days, or immediately prior to the
         consummation of a merger or sale of all or substantially all of the
         assets of the Company pursuant to which shareholders of the Company are
         to receive cash, securities and/or other property worth at least $31.50
         per share of Common Stock of the Company. Excluding shares of Common
         Stock that may be issued as payment for accrued dividends, the 500,000
         shares of Series A Preferred Stock are convertible into 952,381 shares
         of Common Stock, subject to customary antidilution provisions. The
         holders of the Series A Preferred Stock have certain rights to appoint
         a designee to the Company's Board of Directors. Certain actions of the
         Company may not be taken without the approval of such designee. In
         addition, holders of the Series A Preferred Stock have certain
         registration rights with respect to the Common Stock issuable upon
         conversion of the Series A Preferred Stock and certain pre-emptive
         rights with respect to future issuances of capital stock by the
         Company.

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

                                      F-16
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

         UNIT PURCHASE OPTIONS
         In May 1997, the Company sold to the underwriter of the IPO, for an
         aggregate purchase price of $100, 150,000 Unit Purchase Options
         ("UPO's"). Each UPO entitles the holder thereof to purchase one Unit.
         The UPO's are exercisable initially at a price of $8.00 per Unit during
         the four-year period commencing on May 15, 1998. During the fourth
         quarter of 1998, 135,250 UPO's were exercised and during 1999, 3,250
         UPO's were exercised. As of December 31, 1999, there were 11,500 UPO's
         outstanding.

         WARRANTS
         In connection with the Company's IPO, the Company issued 1,500,000
         units ("Units"), with each Unit consisting of one share of common stock
         and one redeemable common stock purchase warrants ("Warrant"). These
         Warrants entitled the holders to purchase one share of Common Stock at
         $5.00 per share during the four-year period commencing May 15, 1998;
         all Warrants became exercisable on such date. The Company had the right
         to redeem the Warrants at any time after they became exercisable, at a
         price of $.01 per Warrant, provided that the market price of the stock
         exceeded $8.25 for a specific period of time, and upon specific notice
         provisions. On December 21, 1998, the Company provided notice of its
         election to redeem the Warrants. In the first quarter of 1999,
         1,412,374 Warrants were exercised, resulting in proceeds of $7,062,000.
         Substantially all of the Warrants included in the Units were exercised
         prior to the redemption.

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

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

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

         STOCK OPTION PLAN
         In May 1997, the Company's Board of Directors adopted a stock option
         plan (the "Plan") for the purpose of encouraging key employees,
         consultants and directors who are not employees to acquire a
         proprietary interest in the growth and performance of the Company.
         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. In 1999, the Company amended the plan in order to increase the
         maximum number of shares that may be granted under the Plan to
         1,500,000.

                                      F-17
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                     NUMBER           WEIGHTED
                                                       OF             AVERAGE
                                                     SHARES        EXERCISE PRICE
<S>                                                  <C>              <C>
Options granted                                      117,000          $    5.00
Options canceled                                     (24,500)              5.00
                                                   ----------

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

Balance at December 31, 1998                         259,975               3.27
                                                   ----------
Options granted                                      958,050              11.90
Options canceled                                     (40,000)             12.04
Options exercised                                    (67,875)              4.12
                                                   ----------

Balance at December 31, 1999                       1,110,150              10.35
                                                   ----------

Eligible for exercise at December 31, 1998            96,694               4.21
                                                   ----------
Eligible for exercise at December 31, 1999           169,763               7.15
                                                   ----------
</TABLE>

         The stock options are exercisable in different periods commencing in
         1998 through 2009.

         Additional information with respect to the outstanding options as of
         December 31, 1999, 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>
$2.16-$3.22              163,600       8.52 Years           $ 2.59            80,542         $ 2.48
$5.00                     28,500       6.25 Years             5.00            26,750           5.00
$8.34-$9.66              169,250       9.60 Years             9.12             9,104           9.10
$10.28-$13.81            514,700       9.89 Years            11.24             5,942          10.77
$14.38-$16.60            234,100       9.13 Years            15.07            47,425          15.09
                       ---------                                             -------
$2.16-$16.60           1,110,150       9.43 Years            10.35           169,763           7.15
</TABLE>

                                      F-18
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

         The Company does not recognize compensation expense for stock options
         granted at or above fair market value, as permitted by the accounting
         standards. The fair value of options granted during 1999, 1998 and 1997
         was approximately $8.6 million, $332,000 and $112,000, respectively.
         The Company calculated the minimum fair value of each option grant on
         the date of the grant using the minimum value option pricing model as
         prescribed by SFAS No. 123. The following assumptions were used in
         applying the model:

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------------------
                                                                  1999            1998            1997
<S>                                                            <C>             <C>             <C>
Risk-free interest rates                                       4.80-6.55%      4.46-5.72%      5.98-6.67%
Expected lives (in years)                                          6               6               6
Dividend yield                                                     0%              0%              0%
Expected volitility                                               62%             49%             40%
</TABLE>

         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:

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------------------
                                                                  1999            1998            1997
<S>                                                           <C>             <C>              <C>
Basic and diluted net loss as reported                        $13,194,000     $ 3,656,000      $ 381,000
Basic and diluted net loss per share, as reported             $      2.82     $      1.32      $    0.18
Basic and diluted net loss, pro forma                         $14,009,000     $ 3,988,000      $ 493,000
Basic and diluted net loss per share, pro forma               $      2.92     $      1.44      $    0.23
</TABLE>

         As of December 31, 1999 the Company has reserved an aggregate of
         2,085,531 shares of Common Stock for the exercise of the UPO's, Stock
         Options and the conversion of Preferred Stock.

9.       DISCONTINUED OPERATIONS

         The operating loss from discontinued operations of $1,178,000 in 1998
         includes a $479,000 loss relating to the write down of the assets of
         the golf sportswear division. The Company does not anticipate any
         future losses from its discontinued operations.

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

                                      F-19
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

         trademarks and is entitled to a broker's fee equal to 11.9% of future
         payments received, if any, by the Company (a maximum of $34,500 in fees
         may be due under the agreement).

         The disposal of the golf sportswear division has been accounted for as
         a discontinued operation and, accordingly, its net assets have been
         segregated from continuing operations in the accompanying consolidated
         balance sheet, and its operating results are segregated and reported as
         discontinued operations in the accompanying consolidated statements of
         operations and cash flows.

         Information relating to the discontinued operations of the golf
         sportswear division for the years ended December 31, 1999, 1998 and
         1997 are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                   1999            1998            1997
<S>                                                               <C>           <C>             <C>
Net sales                                                         $     -       $ 3,914,000     $10,323,000
Cost of sales                                                           -         3,838,000       7,392,000
                                                                  -------       -----------     -----------
             GROSS PROFIT                                               -            76,000       2,931,000

Income from adjustments to allowances and
    accruals                                                       67,000                 -               -

Selling, marketing, design and administrative                       8,000         1,155,000       2,200,000
Writedown of property and equipment                                     -           379,000               -
                                                                  -------       -----------     -----------
             OPERATING INCOME (LOSS)                               59,000        (1,458,000)        731,000

Income from sale of trademarks                                          -           400,000               -
Other income (expenses)                                             4,000           (15,000)       (305,000)
Amortization and write-off of deferred costs
    for bridge financing                                                -                 -        (293,000)
                                                                  -------       -----------     -----------
             INCOME (LOSS) BEFORE PROVISION
               FOR INCOME TAXES                                    63,000        (1,073,000)        133,000

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

             NET INCOME (LOSS)                                    $63,000       $(1,178,000)    $    88,000
                                                                  -------       -----------     -----------
</TABLE>

                                      F-20
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                                    1998
<S>                                                              <C>
Due from factor                                                  $  171,000
Non-factored receivables                                            187,000
Income taxes receivable                                             195,000
                                                                 ----------
             TOTAL CURRENT ASSETS OF
               DISCONTINUED OPERATIONS                           $  553,000
                                                                 ----------
</TABLE>

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

10.      CONCENTRATION

         The Company acquired approximately 14.6% and 40.6%, respectively, for
         the years ended December 31, 1999, and 1998 of its inventory from one
         supplier.

11.      SUBSEQUENT EVENTS

         Subsequent to year end, the Company has obtained a commitment from
         affiliates of Soros Private Equity Partners ("Soros") to provide, at
         the Company's option, up to $15 million of financing at any time during
         2000 on terms reflecting market rates for such financings at the time
         such financing is provided (the "Soros Commitment"). The Company's
         investment banker, Credit Suisse First Boston, is advising it in
         determining its most prudent strategy for financing, including whether
         to proceed with a round of financing with Soros pursuant to the Soros
         commitment, with one or more private investors, or some combination
         thereof. In the interim, Soros has provided the Company with $3 million
         in debt financing, in a note that bears interest at a rate of 8% per
         annum and is due in January 2002 (the "Soros Note"). The Soros Note
         provides that amounts due thereunder will convert into securities sold
         in the Company's next round of financing and will be considered as part
         of the $15 million of financing committed under the terms of the Soros
         Commitment. In connection with the Soros Commitment and Soros Note, the
         Company has granted Soros a warrant pursuant to which it has the right
         to purchase up to 175,000 shares of Common Stock (subject to certain
         vesting provisions relating to the timing of the Company's next round
         of financing) at an exercise price equal to the value of a share of
         Common Stock as determined in the Company's next round of financing,
         exercisable at any time during the next 5 years.

                                      F-21
<PAGE>

BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
--------------------------------------------------------------------------------

12.      EFFECTS OF REVISED REPORTING OF REDEEMABLE EQUITY

         As described in Note 8, the Company issued 500,000 shares of Series A
         Preferred Stock in July 1999. The Series A Convertible Preferred Stock
         is subject to optional redemption upon a change in control of the
         Company that results in the holders of Series A Convertible Preferred
         Stock receiving cash or marketable securities with an aggregate value
         of less than 3 times the conversion price of the Series A Preferred
         Stock.

         Although the Company believes that the likelihood of redemption
         occurring is remote, it has revised the financial statements as of
         December 31, 1999 to account for the Series A Convertible Preferred
         Stock pursuant to the SEC Accounting Series Release No. 268, as
         redeemable equity on the accompanying balance sheet.

         The revision of the financial statements for the matter described
         above had no effect on the Company's net loss, total assets, total
         liabilities, or cash position. The Company's redeemable equity, total
         shareholders' equity at December 31, 1999, as previously reported and
         as revised, are as follows:

<TABLE>
<CAPTION>
                                                             December 31, 1999
<S>                                                            <C>
 Redeemable equity - previously reported                       $        --
 Adjustment related to the presentation of the Series A
      Convertible Preferred Stock as redeemable                  9,943,000
                                                               -----------
 As revised                                                    $ 9,943,000
                                                               ===========

 Shareholders' equity - previously reported                    $10,586,000
 Adjustment related to the presentation of the Series A
      Convertible Preferred Stock as redeemable                 (9,943,000)
                                                               -----------
 As revised                                                    $   643,000
                                                               ===========
</TABLE>

                                      F-22
<PAGE>

                                    PART III

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

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

EXHIBIT NO.   DESCRIPTION

3.1(a)        Restated Certificate of Incorporation of the Company.

3.2(e)        Amended and Restated By-Laws of the Company.

3.3(e)        Certificate of Amendment of the Company's Certificate of
              Incorporation dated October 28, 1998.

3.4(d)        Certificate of Amendment of the Company's Certificate of
              Incorporation dated July 27, 1999.

4.1           Form of Senior Convertible Note.

10.1          Employment Agreement by and between the Company and E. Kenneth
              Seiff, dated December 29, 1999.

10.2          Amended and Restated 1997 Stock Option Plan.

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

10.4(c)       Employment Agreement dated as of July 13, 1998 by and between the
              Company and Patrick Barry.

10.5(c)       Employment Agreement dated as of June 15, 1998 by and between the
              Company and Jonathan Morris.

10.6(c)       Agreement dated as of May 13, 1998 by and between the Company and
              Kaufman Patricof Enterprises ("KPE").

10.7(c)       Amendment to Agreement dated August 17, 1998 between the Company
              and KPE.

10.8(d)       Investment Agreement among the Company, Quantum Industrial
              Partners LDC, SFM Domestic Investments LLC and Pilot Capital
              Corp., dated July 27, 1999.

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

+10.10(e)     Service Agreement by and between the Company and
              Marketing-Out-Of-The-Box, Inc., dated August 16, 1999.

10.11         Employment Agreement dated as of November 3, 1999 by and between
              the Company and Robert G. Stevens.

10.12(f)      Trademark Purchase Agreement, dated as of September 14, 1998, by
              and between the Company and Klear Knit Sales Inc.

10.13         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.

16.1(g)       Letter from M.R. Weiser & Co., LLP to Bluefly, Inc.

21.1          Subsidiaries of the Registrant.

27            Revised Financial Data Schedule.

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

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

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

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

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

(f) - Incorporated by reference to the Company's report filed on Form 8-K,
      dated September 15, 1999.

                                       3
<PAGE>

(g) - Incorporated by reference to the Company's report filed on Form 8-K,
      dated December 9, 1999.

+ Confidential treatment granted as to certain portions of this Exhibit. Such
  portions have been redacted.

(b)   Reports on Form 8-K

The Company filed a report on Form 8-K, dated December 9, 1999, regarding a
Change in the Company's Certifying Accountant.

                                       4
<PAGE>

                                   SIGNATURES

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

                                       BLUEFLY, INC.

                                       By: /s/ E. Kenneth Seiff
                                           -------------------------------------
                                           E. Kenneth Seiff
                                           Chief Executive Officer and President



May 15, 2000

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

<TABLE>
<CAPTION>
Signature                       Title                                              Date
---------                       -----                                              ----
<S>                             <C>                                                <C>
/s/ E. Kenneth Seiff
----------------------------
E. Kenneth Seiff                Chairman of the Board of Directors, Chief          May 15, 2000
                                Executive Officer, President,
                                and Treasurer (Principal Executive Officer)

/s/ Patrick C. Barry
----------------------------
Patrick C. Barry                Chief Financial Officer                            May 15, 2000
                                (Principal Accounting Officer)

/s/ Red Burns
----------------------------
Red Burns                       Director                                           May 15, 2000

/s/ Martin Miller
----------------------------
Martin Miller                   Director                                           May 15, 2000

/s/ Robert G. Stevens
----------------------------
Robert G. Stevens               Director                                           May 15, 2000

/s/ Neal Moszkowski
----------------------------
Neal Moszkowski                 Director                                           May 15, 2000

/s/ Mark H. Goldstein
----------------------------
Mark H. Goldstein               Director                                           May 15, 2000

/s/ Ellin J. Saltzman
----------------------------
Ellin J. Saltzman               Director                                           May 15, 2000
</TABLE>

                                       5