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, 2007

[ ]  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:

     Title of Each Class               Name of Each Exchange on Which Registered
     -------------------               -----------------------------------------
Common Stock, par value $.01 per share       The Nasdaq Stock Market LLC

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

Indicate  by check mark  if  the  registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark  if the registrant  is  not  required to  file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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 [X]

Indicate  by check  mark whether the registrant is a large accelerated filer, an
accelerated filer, or  a non-accelerated  filer  or a smaller reporting company.
See  the  definitions  of "larger  accelerated  filer," "accelerated  filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer [ ]    Accelerated filer [ ]   Non-accelerated filer [ ]
Smaller reporting company [ X ]
                  (Do not check if a smaller reporting company)

Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes [ ]    No [X]

As of  March 24, 2008,  there were  132,899,844 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 29, 2007, based
upon  the last  sale price of such equity reported on the Nasdaq Capital Market,
was approximately $18.7 million.

                       DOCUMENTS INCORPORATED BY REFERENCE
Certain  information  required  by  Part III  of  Form  10-K is  incorporated by
reference  to  the Registrant's proxy statement for the 2008 Annual Stockholders
Meeting, which will be filed with the Securities and Exchange Commission.
<PAGE>

                                  BLUEFLY, INC.
                           ANNUAL REPORT ON FORM 10-K
                                      INDEX
<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<S>          <C>                                                                 <C>

                                     Part I.

             Special Note Regarding Forward-Looking Statements                    3
Item 1       Business                                                             3
Item 1A      Risk Factors                                                         7
Item 2       Properties                                                          14
Item 3       Legal Proceedings                                                   14
Item 4       Submission of Matters to a Vote of Security Holders                 14

                                    Part II.

Item 5       Market for the Registrant's Common Equity, Related Stockholder
               Matters and Issuer Purchases of Equity Securities                 14
Item 6       Selected Financial Data                                             17
Item 7       Management's Discussion and Analysis of Financial Condition and
               Results of Operations                                             18
Item 7A      Quantitative and Qualitative Disclosures About Market Risk          26
Item 8.      Financial Statements and Supplementary Data                         27
Item 9.      Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure                                          27
Item 9A(T).  Controls and Procedures                                             27
Item 9B.     Other Information                                                   27

                                    Part III.

Item 10.     Directors, Executive Officers and Corporate Governance              28
Item 11.     Executive Compensation                                              28
Item 12.     Security Ownership of Certain Beneficial Owners and Management
               and Related Stockholder Matters                                   28
Item 13.     Certain Relationships and Related Transactions, and Director
               Independence                                                      28
Item 14.     Principal Accounting Fees and Services                              28

                                    Part IV.

Item 15.     Exhibits and Financial Statement Schedules                          28

Signatures                                                                       32

Financial Statements                                                            F-1
</TABLE>

                                        2
<PAGE>

                                     PART I
                                     ------
Special Note Regarding Forward-Looking Statements and Associated Risks

This  Annual Report  contains "forward-looking statements" within the meaning of
Section  27A of the  Securities Act of  1933 and  Section 21E of the  Securities
Exchange  Act  of  1934. Forward-looking statements include, without limitation,
any  statement  that  may predict, forecast,  indicate, or imply future results,
performance, or achievements, and may contain the words "believe," "anticipate,"
"expect,"  "estimate,"  "project,"  "will  be," "will  continue,"  "will  likely
result,"  or  words  or  phrases  of similar meaning. Forward-looking statements
involve  risks  and  uncertainties  that  may  cause  actual  results  to differ
materially  from  the  forward-looking statements ("Cautionary Statements"). The
risks  and uncertainties include, but are not limited to those matters addressed
herein  under  "Risk  Factors."  All subsequent written and oral forward-looking
statements  attributable  to  us  or  persons acting on our 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. We undertake no obligation to publicly update or revise
any  forward-looking  statements, whether as a result of new information, future
events or otherwise.

Item 1. Description of Business

General

Bluefly,  Inc.  is a leading online retailer of designer brands, fashion  trends
and  superior  value. During  2007,  we offered over 50,000 different styles for
sale  in  categories such as men's, women's and accessories as well as house and
home accessories  from  over 350 brands at discounts up to 75% off retail value.
We  launched  the Bluefly.com Web site (the "Web site") in September 1998. Since
its inception, www.bluefly.com has served over one million customers and shipped
to over 13 countries.

Our  common stock is listed on the Nasdaq Capital Market under the symbol "BFLY"
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  March  2008, we entered into an agreement (the "Commitment") with affiliates
of  Soros  Fund  Management  LLC  ("Soros")  and  private  funds associated with
Maverick Capital, Ltd. ("Maverick") pursuant to which they  agreed to provide up
to $3 million of debt financing to us, on a standby basis, during the next year,
provided that the commitment amount will be reduced by the gross proceeds of any
equity financing consummated during the year.  We can  draw  down debt in one or
more tranches, provided that our cash balances  are less  than $1 million at the
time  of  any  draw  down.  The  draw  downs  will  be evidenced by subordinated
convertible  notes  (the "Subordinated Notes")  that have a term expiring on the
later  of  June 26,  2011 and three years from the date of the issuance  of  the
Subordinated  Notes  and  bear interest at the rate of 8% per annum,  compounded
annually.  Interest  is  payable upon maturity or  conversion.  The Subordinated
Notes are convertible (subject to stockholder approval to the extent required by
the NASDAQ Capital Market), at the holder's option  (a)  into  equity securities
that the Company might issue in any subsequent  round  of  financing  at a price
that  was  equal  to  the  lowest  price per  share paid by any investor in such
subsequent  round  of  financing  or (b)  into Common Stock at a price per share
equal to the  market price (as defined in the Subordinated Notes) on the date of
issuance of the  note. In  connection with the Commitment, we issued warrants to
Soros and Maverick to purchase an aggregate of 525,002 shares of Common Stock at
an  exercise price equal to the trailing 20-day average stock price on the  date
of grant.

In March 2008, we  amended our  credit  facility  ("Credit Facility") with Wells
Fargo Retail Finance, LLC. ("Wells Fargo") to (i) extend the term until July 26,
2011; (ii) change the rate at which interest accrues on the average daily amount
under the  Credit  Facility during the preceding month to a per annum rate equal
to  the prime rate plus 0.75% or LIBOR plus 3.25% on average excess availability
less  than  $3.0  million  and prime rate plus 0.50% or LIBOR plus 3% on average
excess  availability  greater  than  $3.0  million;  (iii)  increase the monthly
commitment fee on the unused portion of the Credit Facility to 0.50% from 0.35%;
(iv)  include  a  servicing  fee  of $3,333.33 per month; (v) increase the early
termination  fee  to  1% of  the  revolving  credit  ceiling, from 0.50% through
maturity;  and  (vi)  amend the standby and documentary letter of credit fees to
3.25% and 2.75%,

                                        3
<PAGE>

respectively on average  excess  availability  less than $3.0 million, and 3.00%
and  2.50%,  respectively  on  average  excess  availability  greater  than $3.0
million.

In addition, the amendment calls for no revolving credit loans to be made unless
the  full  amount available pursuant to the Subordinated Notes (described above)
has  been  advanced  to the Company  and is outstanding. In connection with this
amendment,  we  paid  Wells  Fargo a $35,000 amendment fee. Under the terms of a
Subordination and Intercreditor Agreement, dated as of March 26, 2008, Soros and
Maverick  have  the right to purchase all of our obligations from Wells Fargo at
any time if we are then in default under the Credit Facility.

On March  13, 2008,  our Board  of Directors  approved a  1-for-10 reverse stock
split of our Common Stock. The record date for the reverse stock split is  April
3, 2008,  and the  reverse stock  split will  be effective  as of  the close  of
trading on the same date.  On a pre-split basis, we currently have approximately
132  million shares  of Common  Stock outstanding  (excluding treasury  shares),
which will be reduced  to approximately 13.2 million  shares as a result  of the
split. All share numbers in this report are shown on a pre-split basis.

Business Strategy

Our goal is to offer our  customers the best designer brands and  latest fashion
trends at superior  values. We offer  the same types  of on-trend and  in-season
designer  merchandise as  are sold  in luxury  department stores  at  discounts.
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.  The
frequent  addition of  new on-trend  products to  our site  is also  key to  our
marketing  strategy, as  it gives  our shoppers  reason to  visit the  site and
encourages them to be loyal and active.

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. Because we work with our suppliers both at the  beginning
and throughout the season,  we are able to  help them manage inventory  and cash
flow. We also create  an environment that is  respectful of the brands  we sell.
Our buyers all have backgrounds in a full price branded retail environment.  Our
Web  site  creates a  high-end  retail environment  that  offers only  the  best
designer  brands  and the  most  current trends.  In  doing so,  we  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. 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 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. Our  customer
research  suggests  that  this  strategy  has  been  successful.  For   example,
respondents to a recent third party  study that we commissioned rated us  at the
level of, or higher than,  luxury department stores for assortment,  quality and
service and rated us much higher for value.

E-Commerce And The Online Apparel Market

The dramatic growth of  e-commerce has been widely  reported and is expected  to
continue.  According to  "US eCommerce  Forecast: 2008  to 2012",  published  by
Forrester Research, Inc.,  in January 2008,  online retail in  the United States
reached $175

                                        4
<PAGE>

billion in 2007 and is projected to  grow to $335 billion by 2012. The  apparel,
accessories and footwear category for 2007 totaled $22.7 billion and is expected
to grow to $41.8 billion by the year 2012.

According to the  ComScore Inc., e-commerce  non travel retail  holiday spending
(excluding auctions and large corporate purchases) surpassed $29 billion in 2007
compared to $24.6 billion in 2006, an increase of 19 percent.

Marketing

Our marketing efforts are focused both on acquiring new customers and  retaining
existing  customers.  Active Bluefly  customers  visit the  site  frequently and
purchase from one season to the next at high levels with great predictability. 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.

Prior to 2005, we acquired  new customers primarily through online  advertising,
word-of-mouth, sweepstakes and our  affiliate program. In September  2005, faced
with  low  awareness numbers,  we  began a  national  advertising campaign  that
featured both print and television. Over the  past two and a half years we  have
increased awareness by targeting general  advertising efforts to a more  fashion
focused customer. In 2007 we further refined our marketing strategy by  aligning
ourselves with entertainment properties, such as BravoTV.com and Project Runway.

Merchandising

We buy merchandise  directly from designers  as well as  from other third  party
indirect resources. Currently, we offer  products from more than 350  name brand
designers.  We  believe  that  we  have  been  successful  in  developing vendor
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.

Warehousing And Fulfillment

When we  receive an  order, the  information is  transmitted to  our third party
warehouse and  fulfillment center,  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. During the third quarter
of 2007, we completed  our transition to a  new third party distribution  center
located  in Ohio.  Over the  long term,  we  expect  the transition  to the  new
Distribution  center  to  improve customer  service  and  increase efficiencies,
however,  there can be no  assurance that this  will happen. See, "Risk Factor -
Our  Business Has  Been Impacted  by Issues  Related to Our  Transition to a New
Third Party Distribution Center."

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, chat  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  ensure  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.

In January 2007,  we were  awarded  the "E-tailing  Excellence  Award"  from the
e-tailing group for the second consecutive  year.  This award  recognizes online
merchants who excel in customer service.

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

                                        5
<PAGE>

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 third party co-location facility in New York.

In September 2006,  we entered into  agreements with Art  Technology Group, Inc.
("ATG"), pursuant to  which we will  license certain technology  from ATG to  be
used as a platform for future versions of our Web site. We are in the process of
developing an improved version  of our Web site  based on ATG software.  The new
version of our Web site is expected  to launch in the second half of  2008/early
2009 and will  replace the older  version. The launch  of the new  Web site will
involve the use  of significant internal  and external resources.  Certain costs
related to the development of the new Web site will be capitalized and amortized
over a 36-month period.

We expect  that the  more robust  tools provided  by the  upgraded Web site will
allow us to better  create and manage, and  measure the performance of,  on-site
marketing promotions. In addition, we believe that the new Web site will provide
a more  efficient platform  from which  to scale  our technology  infrastructure
should any future growth  in our business dictate  such a need. There  can be no
assurance that the  new Web site  will have a  positive effect on  our business.
See, "Risk Factor - The Implementation Of A New Web site May Place A Significant
Strain On Our Resources and Could Result in Start-Up Performance Issues."

Competition

E-commerce generally, and, in particular, the online retail apparel and  fashion
accessories  market,  is  a   relatively   dynamic,  high-growth   market.   Our
competition for  online customers  comes from  a variety  of sources,  including
existing  land-based  retailers that  are  using the  Internet  to expand  their
channels of  distribution, established  Internet companies  and less established
companies. In  addition, our  competition for  customers comes  from traditional
direct  marketers,  designer brands  that  may attempt  to  sell their  products
directly  to  consumers through  the  Internet and  land-based  off-price retail
stores, 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.

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  affect 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

                                        6
<PAGE>

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 March 17, 2008, we  had 104 full-time employees and 1  part-time employee,
as compared to 95 full-time and 1 part-time employees as of March 17, 2007. None
of our employees are represented by a labor union, and we consider our relations
with our employees to be good.

Item 1A. Risk Factors

We Have A History Of Losses And Expect That Losses Will Continue In The  Future.
As of  December 31,  2007, we  had an  accumulated deficit  of $131,826,000.  We
incurred net  losses of  $15,829,000, $12,193,000  and $3,820,000  for the years
ended  December  31,  2007,  2006  and  2005,  respectively.  We  have  incurred
substantial costs  to develop  our Web  site and  infrastructure, and  build our
customer file and brand awareness. 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
may continue to incur substantial operating  losses for at least the next  year.
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.

Soros, Maverick And Prentice Each Own A Large Amount Of Our Stock And  Therefore
Can Exert Significant  Influence Over Our  Management And Policies.  As of March
21, 2008, Soros owned, in the aggregate, approximately 38% of our Common  Stock.
Maverick and investment  entities and accounts  managed and advised  by Prentice
Capital Management, LP ("Prentice") each  owned approximately 23% of our  Common
Stock. We entered into a voting agreement with Soros, Maverick and Prentice (the
"Voting Agreement"), pursuant  to which Soros  has the right  to designate three
designees to our  Board of Directors,  and Maverick and  Prentice each have  the
right to  designate one  designee. The  Voting Agreement  also provides that one
designee of Soros  and the designee  of each of  Maverick and Prentice  have the
right to serve on the  Compensation Committee and the Governance  and Nominating
Committee of the Board of Directors. If we establish an Executive Committee, the
designees of  Soros, Maverick  and Prentice  will be  entitled to  serve on such
committee. In March 2008, we entered into the Commitment pursuant to which Soros
and Maverick agreed to provide up to  $3 million of debt financing to us  during
the  next  year.  Draw  downs  on  the  Commitment  will  be  evidenced  by  the
Subordinated Notes, which  are convertible (subject  to stockholder approval  to
the extent required by the NASDAQ Capital Market), at the holder's option,  into
shares of our Common Stock. To  the extent we issue Subordinated Notes  to Soros
and Maverick that are subsequently  converted, the ownership interests of  Soros
and   Maverick  will   be  increased.   See  "Description  of  Business - Recent
Developments."

In view  of their  large percentage  of ownership,  Soros, Maverick and Prentice
each have  the ability  to exert  significant influence  over 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.

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 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.  In  March  2008,  we entered into the Commitment  pursuant to which
Soros  and  Maverick  agreed  to  provide  up  to  $3  million in debt financing
to us during the next year. The Company  believes that  its existing  resources,
together   with  working  capital  should  be  sufficient  to  satisfy  its cash
requirements  through  at  least  December  31,  2008.  The  Company  may   seek
additional  equity or debt  capital  to  maximize the  growth  of  its  business
or  if  anticipated  operating  results  are not  achieved. The  environment for
raising investment 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 "Description
of Business- Recent Developments."

                                        7
<PAGE>

Our Lender Has Liens On Substantially  All Of Our Assets And Could  Foreclose In
The Event That We Default Under Our  Loan Facility. Under the terms of our  loan
facility, our  lender has  a first  priority lien  on substantially  all of  our
assets, including our cash balances. If we default under the loan facility,  our
lender would  be entitled,  among other  things, to  foreclose on  our assets in
order to satisfy our obligations under the loan facility.

Our Business  Has Been  Impacted by  Issues Related  to Our  Transition to a New
Third Party Distribution Center. During the third quarter of 2007, we  completed
our transition to a new third party distribution center. In connection with this
transition, we incurred incremental expenses of approximately $721,000 in  costs
directly related to  the move (including  trucking, labor, insurance,  etc.). We
took additional charges of  approximately $550,000 against our  inventory during
the third  quarter of  2007, based  on the  reconciliation of  inventory that we
normally perform in  connection with each  quarter's close. We  believe that the
charges that were taken were sufficient to cover any loss of inventory resulting
from the transition.  We have worked  with the distribution  center to implement
necessary changes to their inventory reporting  systems as a result of the  full
physical inventory that was performed in January 2008, following the end of  the
Holiday sales and returns cycle. We believe that significant operational  issues
related to  the move  have been  resolved. Start-up  issues associated  with the
transition to  the new  distribution center  also resulted  in certain cancelled
orders and other incremental costs such as expedited shipping costs. During  the
period from June 2007 through mid  September of 2007 a portion of  the Company's
inventory was  not available  for sale.  This had  a significant  impact on  the
offering to the consumer  and hence the ultimate  sales recognized in this  time
frame. As a result  of this the Company  made the decision to  liquidate certain
inventory in order to  improve the efficiency of  the new fulfillment center  as
well as to enhance the customer  experience. The net effect to the  statement of
operations  of removing  this inventory  from our  site was  approximately $1.5
million. In addition, during this transition period the Company experienced some
processing issues with a small percentage  of orders and returns resulting in  a
decrease in revenue  from repeat business.  We believe that  these issues had  a
negative impact on those customers affected  at least in the short term.  In the
long term, we expect  the transition to the  new Distribution center to  improve
customer service and increase efficiencies,  however, there can be no  assurance
that  the  transition will  not  continue to  have  a negative  impact  upon our
business, financial condition and results of operations.

Our Ability  To Maintain  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. Assuming we  meet our business  plan, we
will be able to pay our interest as required. 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  our  minimum availability
requirement  throughout the  term of  the agreement.  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, our lender
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."

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 loan facility. See "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."

Our National  Advertising Campaign  and Other  Marketing Initiatives  May Not Be
Successful. Our success depends  on our  ability to  attract customers  on cost-
effective terms.  We  have relationships with  online services, search  engines,
and other Web sites and e-commerce businesses to provide other links that direct
customers  to our  Web site.  In addition,  during 2005  we launched  our first
national television and advertising campaign, and we have continued and expanded
on that  campaign since  that time.  Such campaigns  are expensive  and may  not
result in the  cost effective acquisition  of customers. We  are relying on  the
campaign as a significant source of  traffic to our Web site and  new customers.
If these campaigns and initiatives are not successful, our results of operations
will be adversely affected.

We Purchase a Substantial  Portion of Our Inventory  from One Supplier. In  2007
and 2006, we purchased approximately 38% and 28%, respectively, of our inventory
from one  supplier. Should  our relationship  with this  supplier deteriorate or
terminate,  or should  this supplier  lose some  or all  of its  access to  the
products that we purchase from it, our performance could

                                        8
<PAGE>

be adversely affected.  Under such circumstances,  we would be  required to seek
alternative sources of supply for these products, and there can be no  assurance
that we would be  able to obtain such  products from alternative sources  on the
same terms, or at all. A failure  to obtain such products on as favorable  terms
could have an adverse effect on our revenue and/or gross margin.

We  Do  Not  Have  Long  Term  Contracts  With  Our  Vendors  And  Therefore The
Availability  Of  Merchandise  Is  At  Risk.   We  do  not  have  any agreements
controlling the  long-term availability  of merchandise  or the  continuation of
particular  pricing 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. In addition,  in order to
entice new vendors to open up  relationships with us, we sometimes are  required
to either make prepayments or agree  to shortened payment 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  customers' 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"  and  "Risk Factors  -  We Purchase  a  Substantial Portion  of  Our
Inventory from One Supplier."

The Implementation Of  The New Web  Site May Place  A Significant Strain  On Our
Resources  and Could  Result in  Start-Up Performance  Issues. During  2006, we
entered into  a Master  License Agreement  with ATG,  pursuant to  which we will
license certain technology from ATG to be used as a platform for future versions
of our Web site, and ATG will provide certain support and consulting services in
connection therewith. The new version of  our Web site is expected to  launch in
the second  half of  2008/early 2009  and will  replace the  older version.  The
launch of  the new  Web site  will involve  the use  of significant internal and
external resources. We will need  to develop new internal procedures  to operate
the  new  Web site  and  to make  the  most effective  use  of the  improvements
available on the  new Web site.  As with any  new technology, we  may experience
instability and  performance issues  upon launch,  and such  issues could have a
material  adverse  effect  on  our  revenue  and,  therefore,  our  results   of
operations. While we believe that this  project is a prudent investment for  our
future growth prospects, the  return on this investment  is not certain and  the
time and attention required to build out  and learn how to best use the  new Web
site could result in our  inability to undertake certain initiatives  that could
have a more immediate, positive impact  on our business and/or distract us  from
other  areas  of our  business  that require  the  time and  attention  of those
involved in the continued development of the new Web site.

We Are Not In Compliance with Certain Nasdaq Listing Requirements. On August 16,
2007, we were notified by The Nasdaq Stock Market, Inc. ("Nasdaq") that we  were
not in compliance with the continued listing requirements for the Nasdaq Capital
Market because shares of our Common Stock had closed at a per share bid price of
less than $1.00 for at least 30 trading days. Under Nasdaq rules, we were  given
a 180-day  grace period  to regain  compliance, which  extended to  February 11,
2008.  On  February 13,  2008, we  received a  Nasdaq Staff Determination Letter
indicating that the Company's common stock had not regained compliance with  the
$1 minimum bid price continued listing requirement set forth in Marketplace Rule
4310(c)(4) during the  180-day extension period  provided the Company  in August
2007. The Company  would have been  entitled to an  additional 180-day extension
period had  it met  the initial  listing criteria  of the  Nasdaq Capital Market
(other than  the minimum  bid price  requirement) as  of the  expiration of  the
initial  180-day period.  For a  majority of  the initial  180-day period,  the
Company met these criteria and therefore  expected that it would be granted  the
additional extension. However, due to the decrease in the price of the Company's
common stock over the first few weeks of 2008, it did not meet the public  float
requirement of Nasdaq's initial listing  criteria as of the determination  date,
and therefore was not granted the additional extension. Accordingly, the  Nasdaq
Staff determined that the Company's  common stock was subject to  delisting from
the  Nasdaq Capital  Market. The  Company requested  a hearing  before a  Nasdaq
Listing  Qualifications  Panel  to  review  the  Staff  Determination,  and  the
delisting action  was stayed  pending the  issuance of  a final  decision by the
Panel.

In advance of the hearing, on March 13, 2008, the Board of Directors approved  a
1 for 10 reverse stock split, which will be effective as of April 3, 2008. While
the trading price of our common stock cannot be predicted with certainty, as our
common stock begins  trading following the  reverse stock split,  it is expected
that the price per share will  increase to reflect the reverse stock  split. For
example, as of March  20, 2008, the last  closing sale price reported  on NASDAQ
was $0.49. Assuming that this was the  price per share as of the effective  time
of the reverse stock split, it is expected that the price per share  immediately
following the effective time would be $4.90, well above the $1 minimum bid price
requirement. Although  we have  not received  a formal  decision from the Nasdaq
Listing Qualifications Panel, we  expect that we will  be provided with a  short
grace  period  to  regain  compliance with  the  minimum  bid  price requirement
following  the effectiveness  of the  reverse stock  split. In  order to  regain
compliance with the minimum bid  price requirement, our common stock  would need
to close at or above $1  for 10 consecutive business days following  the reverse
stock split. There can be no assurance that such reverse stock split will  cause
the Company to regain compliance for  the minimum bid price requirement for  the
required period of time. The failure  to maintain listing on the Nasdaq  Capital
Market could have a material adverse effect on the price and/or liquidity of our
Common Stock.

                                        9
<PAGE>

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. See Risk  Factor "Our
Business Has Been Impacted  by Issues Related to  Our Transition to a  New Third
Party Distribution Center" for a discussion of a write off of inventory taken in
the fourth quarter of 2007.

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. Economic downturns,  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."

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.

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. Historically, our  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

                                       10
<PAGE>

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.  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 DHL, 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. See, "Risk Factor  -
Our Business  Has Been  Impacted by  Issues Related  to Our  Transition to a New
Third Party Distribution Center."

We Are  In Competition  With Companies  Much Larger  Than Ourselves.  E-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:

    o  existing land-based, full price retailers, that are using the Internet to
       expand their channels of distribution;

    o  less established online companies;

    o  internet sites;

    o  traditional direct marketers; and

    o  traditional  off-price  retail  stores,  which may  or  may not  use  the
       Internet to grow their customer base.

Competition  in  our industry  has  intensified, and  we  expect this  trend  to
continue as  the list  of our  competitors grows.  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:

    o  brand recognition;

    o  merchandise selection;

    o  price;

    o  convenience;

    o  customer service;

    o  order delivery performance; and

    o  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 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,

                                       11
<PAGE>

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. See "Risk Factors - The Implementation Of The New Web Site May Place  A
Significant Strain On Our Key Personnel."

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. As a  result, our reserve for  returns and
credit card chargebacks for fiscal 2007, 2006 and 2005 has been 39.6%, 39.6% and
37.8%, respectively.  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.  Our current employment  agreements
with our  Chief Executive  Officer, President  and Chief  Operating Officer  and
Chief Marketing Officer run through July 2009, January 2011 and September  2008,
respectively,  however there  can be  no  assurance  that any  of them  will not
terminate their  employment earlier.  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 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

                                       12
<PAGE>

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 us 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 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 would 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  Ohio and  New York.  However, state  taxation laws  and
regulations may change in the future, and 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
Ohio 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.

                                       13
<PAGE>

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  15,479,250 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
it may deem necessary or appropriate. 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
public  accounting firm  will be  required to  audit the  design  and  operating
effectiveness of our internal controls and attest to management's assessment  of
the design and the effectiveness of our internal controls. The first such  audit
will be required for  our fiscal year ending  December 31, 2008. It  is possible
that, as we prepare  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 an audit of our 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.

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 leases expire in 2010 through 2012.
Our  total  lease  expense  for  the  current  office  space  during  2007   was
approximately $477,000.

Item 3. Legal Proceedings

In June 2007, we received a Civil Investigative Demand (the "Discovery Request")
from the Federal Trade Commission  (the "FTC") that requested the  production of
certain documents and other  information regarding the labeling  and advertising
of apparel  containing products  that contain  fur or  faux fur  components. The
Discovery Request was issued in connection  with a petition filed by the  Humane
Society of the United States with the FTC regarding the labeling and advertising
of fur products by a number of national retailers and apparel manufacturers. The
Company is cooperating fully with the Discovery Request.

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.

Item 4. Submission of Matters to a Vote of Security Holders

No matter  was submitted  to a  vote of  stockholders of  the Company during the
fourth quarter of 2007.

                                     PART II
                                     -------

Item 5. Market For Registrant'S  Common Equity, Related Stockholder Matters  and
Issuer Purchases of Equity Securities

Market Information

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

                                       14
<PAGE>

                      Fiscal 2007           High         Low
                      -----------           ----         ---
                      First Quarter        $1.38       $0.98
                      Second Quarter       $1.20       $0.98
                      Third Quarter        $1.03       $0.85
                      Fourth Quarter       $0.97       $0.66

                      Fiscal 2006           High         Low
                      -----------           ----         ---
                      First Quarter        $1.49       $0.96
                      Second Quarter       $1.23       $0.68
                      Third Quarter        $1.20       $0.93
                      Fourth Quarter       $1.59       $0.79

On March 13, 2008,  the Board of Directors  approved a one for  10 reverse stock
split, which will be effective as of  April 3, 2008. While the trading price  of
our common stock cannot be predicted with certainty, as our common stock  begins
trading following the  reverse stock split,  it is expected  that the price  per
share will increase to reflect the reverse stock split. For example, as of March
20, 2008, the  last closing sale  price reported on  NASDAQ was $0.49.  Assuming
that this was the price per share as of the effective time of the reverse  stock
split,  it  is expected  that  the price  per  share immediately  following  the
effective time would be $4.90.

Holders

As of  March 20,  2008, there  were approximately  115 holders  of record of the
Common Stock. We believe that there  were more than 4,800 beneficial holders  of
the Common Stock as of such date.

Dividends

We have never declared or paid cash dividends on our Common Stock. In  addition,
the terms of our credit facility prohibit us from paying cash dividends  without
the consent of our lender. See Note 11 to the Financial Statements. 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.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2007 with  respect
to  the Company's  equity compensation  plans which  have been  approved by  its
stockholders. The Company has one equity compensation plan that was not approved
by its stockholders.

<TABLE>
<CAPTION>
                                                                                                           Number of Securities
                                                                                                          remaining available for
                                                 Number of Securities to                                   future issuance under
                                                 be issued upon exercise        Weighted-average            equity compensation
                                                          of                    exercise price of                  plans
                                                  outstanding options,         outstanding options,        (excluding securities
                                                  warrants and rights          warrants and rights        reflected in column (a))
Plan Category                                            (a)                          (b)                         (c)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                             <C>                        <C>
Equity compensation plans approved by
  security holders                                            10,726,680(1)                   $1.05(2)                   5,609,862
Equity compensation plans not approved by
  security holders                                               246,060                       1.02                             --
----------------------------------------------------------------------------------------------------------------------------------
Total                                                         10,972,740                      $1.05                      5,609,862
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes  3,428,777  options  to  purchase  shares of Common  Stock, 396,514
    shares of Restricted Stock and 7,147,447 Deferred Stock Units.
(2) Calculated  based on the exercise price of the 3,428,777 options referred to
    in Note 1 above.

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.

                                       15
<PAGE>

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 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.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

<TABLE>
<CAPTION>
                                                                                      Total Number           Maximum
                                                                                           of                 Number
                                                                                         Shares           of Shares that
                                                                                      Purchased as            May
                                                                                        Part of              Yet Be
                                                 Total Number          Average         Publicly             Purchased
                                                      of                price          Announced            Under the
                                                    Shares            Paid per         Plans or             Plans or
Period                                             Purchased            Share          Programs             Programs
---------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                  <C>               <C>                  <C>
October 1, 2007 -- October 31, 2007                1,233,905(1)         $ 0.92            n/a                  n/a
November 1, 2007 -- November 30, 2007                      -            $    -            n/a                  n/a
December 1, 2007 -- December 31, 2007                149,925(1)         $ 0.90            n/a                  n/a

Total -- Three months ended December 31, 2007      1,383,830            $ 0.92            n/a                  n/a
</TABLE>

                                       16
<PAGE>

   (1)  These shares were withheld by the Company to satisfy the tax withholding
obligations  of certain officers and employees of the Company in connection with
the distribution of common stock in respect of deferred stock units held by such
officers and employees.

Item 6. Selected Financial Data

The following  selected financial  data should  be read  in conjunction with the
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. The selected financial data for  the years ended December 31, 2004  and
2003  and at  December 31,  2005, 2004  and 2003  are derived  from our  audited
financial statements not included in this report. In January 2006, the start  of
the  first  quarter  of  fiscal 2006,  the  Company  adopted  the provisions  of
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"), which  requires that the costs resulting  from all
stock-based payment transactions  be recognized in  the financial statements  at
their fair values. Results for prior periods have not been restated for SFAS No.
123(R). All data is in thousands, except share data:

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                                -----------------------
                                                        2007           2006            2005            2004               2003
                                                        ----           ----            ----            ----               ----
<S>                                               <C>              <C>             <C>             <C>                <C>
Statement of Operations Data:
Net sales                                             $91,493         $77,062         $58,811         $43,799           $ 37,928
Cost of sales                                          58,754          46,153          35,816          27,393             26,603
                                                       ------          ------          ------          ------             ------
    Gross profit                                       32,739          30,909          22,995          16,406             11,325

Selling and fulfillment expenses                       18,898          15,808          12,880          11,783             10,163
Marketing expenses                                     16,063          14,196           6,961           2,120              1,898
General and administrative expenses                    13,848          13,001           6,299           6,408              5,207
                                                       ------          ------          ------          ------             ------
    Total operating expenses                           48,809          43,005          26,140          20,311             17,268

Operating loss(2)                                     (16,070)        (12,096)         (3,145)         (3,905)            (5,943)

Interest expense                                         (260)           (599)           (856)           (733)              (464)
Interest/other income                                     501             502             181             847                 38
                                                       ------          ------          ------          ------             ------

    Net loss                                          (15,829)        (12,193)         (3,820)         (3,791)            (6,369)
Basic and diluted loss per share:                      $(0.12)         $(0.23)         $(0.54)         $(0.55)            $(0.88)
Basic and diluted weighted average number of
common shares outstanding available to            130,911,295      80,170,532      16,153,020      14,586,752         11,171,018
common stockholders(1)

<CAPTION>
Balance Sheet Data:                                                              As of December 31,
                                                                                 ------------------
                                                        2007           2006            2005            2004                2003
                                                        ----           ----            ----            ----                ----
<S>                                                    <C>            <C>              <C>           <C>                  <C>
Cash and cash equivalents                              $6,730         $20,188          $9,408        $7,938(3)            $7,721
Inventories, net                                       28,492          24,189          16,893          12,958             11,340
Other current assets                                    3,589           4,229           3,536           2,559              1,863
Total assets                                           45,019          52,430          33,045          25,541             22,998
Current liabilities                                    17,922          14,603          11,936           9,413              8,459
Long term liabilities                                      60              --           5,244           4,739              4,260
Shareholders' equity                                   27,037          37,827          15,865          11,389             10,279
</TABLE>

(1) Weighted average shares increased to approximately 80.2 million in 2006 as a
result an equity financing consummated in  June  2006  and the conversion of the
Company's preferred stock into common  stock in connection with such  financing.
(2) This amount includes non-cash expense of approximately $6.2 million and $4.5
million in  2007 and  2006,  respectively,  related to stock-based compensation,
recorded in accordance with SFAS 123R.
(3) Includes restricted cash of $1,253.

                                       17
<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 financial statements and the related  notes
thereto included elsewhere in this report.

Overview

Bluefly, Inc.  is a  leading Internet  retailer that  sells over  350 brands  of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value. We launched our Web site in September 1998

We believe that there is an opportunity to accelerate the growth of our business
while continuing to provide our customers  with the great values that they  have
become accustomed to.  In an effort  to take advantage  of this opportunity,  we
began a national advertising campaign  that featured both print and  television.
Over the past  two and a  half years, we  have increased awareness  by targeting
general advertising  efforts to  a more  fashion focused  consumer. In  2007, we
further refined our marketing strategy by aligning ourselves with  entertainment
properties, such as BravoTV.com and Project Runway.

During the third  quarter of 2007,  we completed our  transition to a  new third
party  distribution  center. In  connection  with this  transition,  we incurred
incremental expenses of approximately $721,000 in costs directly related to  the
move (including trucking, labor, insurance, etc.). We took additional charges of
approximately $550,000 against  our inventory during  the third quarter  of 2007
based on the reconciliation of inventory that we normally perform in  connection
with each  quarter's close.  We believe  that the  charges that  were taken were
sufficient to cover any loss of inventory resulting from the transition. We have
worked with  the distribution  center to  implement necessary  changes to  their
inventory reporting systems as a result of the full physical inventory that  was
performed in January 2008,  following the end of  the Holiday sales and  returns
cycle. We believe that significant  operational issues related to the  move have
been  resolved.  Start-up  issues  associated with  the  transition  to  the new
distribution  center  also  resulted  in  certain  cancelled  orders  and  other
incremental  costs  such  as  expedited shipping  costs.   As  a  result of  the
transition,  during the  period from  June 2007  through mid  September 2007,  a
portion of the Company's inventory was  not available for sale to our  customers
and, therefore, our revenue during this period was adversely affected.   Because
the increased inventory level could  adversely affect our flexibility in  taking
advantage of other  buying opportunities that  may become available  in the near
term, and because of our desire to keep our merchandise fresh we decided not  to
carry some of this inventory into next season, and removed it from our Web site.
We  believe  that  by doing  so,  we  will improve  the  efficiency  of the  new
fulfillment  center  and  enhance  the customer  experience.  We  have  taken an
inventory  write-down  with respect  to  this merchandise  because  it is  being
removed from  our Web  site. The  net effect  to the  statement of operations of
removing this inventory from our site, was approximately $1.5 million.

In  addition,  during  this  transition  period,  the  Company  experienced some
processing issues with a small percentage  of orders and returns. We believe  we
have taken  the appropriate  action related  to the  customers affected by these
processing  issues.  In the  long  term, we  expect  the transition  to  the new
distribution  center  to  improve customer  service  and  increase efficiencies,
however, there can be no assurance that the transition will not continue to have
a  negative  impact  upon  our  business,  financial  condition  and  results of
operations.

Our net sales increased  nearly 19% to $91,493,000  for the year ended  December
31, 2007 from $77,062,000 for the  year ended December 31, 2006. On  a quarterly
basis,  our  net  sales  increased  by  approximately  31%,  29%,  11%  and  9%,
respectively,  as  compared  to  the same  periods  in  2006.  Our gross  margin
decreased to 35.8% from 40.1% in  2006. Our gross profit increased by  nearly 6%
to $32,739,000 for  the year ended  December 31, 2007  from $30,909,000 for  the
year  ended December  31, 2006.   The  decrease  in gross  margin was  primarily
related to (i)  a write off  of inventory (ii)  a change in  the merchandise mix
(iii) expedited shipping cost incurred in connection with our transition to  the
new  third-party fulfillment  center and  (iv) the  additional reserves  against
inventory taken as a result of the transition to the new fulfillment center,  as
described above.  Our operating  loss increased  by over  32%, to $16,070,000 in
2007, from $12,096,000 in 2006. This increase was primarily a result of a  write
of inventory in the fourth quarter, an increase in stock-based compensation as a
result of  equity awards  granted in  the fourth  quarter of  2006 (stock  based
compensation was $6.2 million for the  year ended December 31, 2007 versus  $4.5
million for the same period last  year) as well as costs incurred  in connection
with  our transition  to the  new fulfillment  center, and  increased marketing
expenses.

Total marketing expenses increased by 13% to $16,063,000 for the full year 2007,
from $14,196,000 for the full year 2006. We increased our spending in  marketing
(excluding staff related costs)  by 14% to $14,908,000  for the full year  2007,
from

                                       18
<PAGE>

$13,040,000 for the full year 2006.  The primary goal of our marketing  campaign
is to build upon the awareness created by the initial launch of the campaign  in
fall 2005, both  with new customers  as well as  with our existing  customers. A
large portion  of the  increased marketing  expense was  a result  of the  costs
associated with our sponsorships with entertainment properties. We believe  that
this investment in marketing is a prudent investment in our business given  that
our margin  structure and  average order  size have  historically resulted  in a
relatively high positive contribution to overhead and marketing on a  customer's
first order.

Our reserve for returns and credit card chargebacks remained unchanged at  39.6%
of gross sales for the years  ended December 31, 2007 and 2006  respectively. In
general, our merchandise mix has been shifting towards higher end products which
tend to drive return rates higher. We continually try to refine our  merchandise
mix to reduce the return rate. However, we believe that the higher return  rates
will be more than  offset by the higher  gross margin dollars and  average order
sizes. As  such, we  continually evaluate  our merchandise  mix in  an effort to
reduce return rates.

A portion of  our inventory includes  merchandise that we  either purchased with
the intention  of holding  for the  appropriate season  or were  unable to  sell
through in its entirety  in a prior season  and have determined to  hold for the
next  selling  season,  subject  to  appropriate  mark-downs.  We  evaluate  our
inventory on a quarterly basis to determine the lower of cost or the fair market
value of that  inventory based upon  age of the  inventory, market factors,  and
historical trends among other factors, and take the appropriate reserves against
inventory. In recent years we  have increased the amount of  inventory purchased
on a  pack and  hold basis  in order  to take  advantage of opportunities in the
market.

On January  1, 2006,  we adopted  SFAS No.  123(R), which  requires expensing of
stock options. As a result, we recorded total share-based compensation  expenses
of $6,194,000 for the year ended  December 31, 2007 and $4,454,000 for  the year
ended December 31, 2006. Results for prior periods have not been restated due to
the adoption based on the modified prospective approach.

At December 31,  2007, we had  an accumulated deficit  of $131,826,000. The  net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web  site and building our infrastructure,  as well
as  noncash  beneficial  conversion  charges  resulting  from  decreases  in the
conversion price of our Preferred Stock and the payment of dividends to  holders
of Preferred  Stock. 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. Therefore,  we
may continue to incur substantial operating losses. 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,  the  realization  of  deferred  tax  assets,  and the
calculations related  to stock-based  compensation. Actual  amounts could differ
significantly from these estimates.

Revenue Recognition

We recognize revenue  in accordance with  Staff Accounting Bulletin  ("SAB") No.
104  "Revenue  Recognition".  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:

    o  A customer executes an order.

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

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

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

                                       19
<PAGE>

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.
This  valuation  requires  us  to  make  judgments  based on currently available
information,  about the saleability of such merchandise, the selling price, etc.
Based  upon this evaluation, 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 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.

Effective  January 1, 2007,  the  Company  adopted  FASB  Interpretation No. 48,
"Accounting  for  Uncertainty   in  Income  Taxes-- an  interpretation  of  FASB
Statement  No. 109" ("FIN 48"). FIN  48 prescribes a comprehensive model for the
manner  in  which  a  company should recognize, measure, present and disclose in
its financial statements  all  material uncertain tax positions that the Company
has taken or expects to  take on a tax return. As of the date of adoption, there
were  no  tax  positions  for  which  it  is  reasonably possible that the total
amounts of unrecognized tax benefits  will  significantly  increase  or decrease
within twelve  months  from  the date of adoption of FIN 48 or from December 31,
2007. As of December 31, 2007,  the  only  tax jurisdiction to which the Company
is subject is the United States. Open tax  years relate to years in which unused
net operating losses were generated. Upon  the adoption of FIN 48, the Company's
open tax years extend back to 1998. In  the  event  that  the  Company concludes
that it is subject to interest  and/or  penalties  arising  form  uncertain  tax
positions, the Company will present interest and  penalties  as  a  component of
income taxes. No amounts  of  interest  or  penalties  were  recognized  in  the
Company's Statement  of  Operations  or Balance Sheet upon adoption of FIN 48 or
as of and for the year ended December 31, 2007.

Stock-Based Compensation

As of January 1, 2006, we adopted SFAS No. 123(R) which requires us  to  measure
compensation  cost  for  stock  awards  at fair value and recognize compensation
over the service period for awards expected  to vest. Determining the fair value
of stock- based  awards  at  the  grant  date  requires  considerable  judgment,
including estimating expected  volatility,  expected  term,  risk-free  interest
rate and expected  forfeitures.  If  factors  change  and  we  employ  different
assumptions,  stock-based  compensation  expense  may  differ significantly from
what we have recorded in the past.

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>
                                               2007                    2006                   2005
                                               ----                    ----                   ----
                                                   As a % of                As a % of               As a % of
                                                   Net Sales                Net Sales               Net Sales
<S>                                    <C>          <C>        <C>           <C>         <C>          <C>
Net sales                               $91,493      100.0%     $77,062       100.0%     $58,811      100.0%
Cost of sales                            58,754       64.2%      46,153        59.9%      35,816       60.9%
                                         ------                  ------                   ------
     Gross profit                        32,739       35.8%      30,909        40.1%      22,995       39.1%
Marketing expenses                       16,063       17.6%      14,196        18.4%       6,961       11.8%
Selling and fulfillment expenses         18,898       20.7%      15,808        20.5%      12,880       21.9%
General and administrative expenses      13,848       15.1%      13,001        16.9%       6,299       10.7%
                                         ------                  ------                    -----
     Total operating expenses            48,809       53.4%      43,005        55.8%      26,140       44.4%
Operating loss                          (16,070)     (17.6)%    (12,096)      (15.7)%     (3,145)      (5.3)%
Interest (expense) other income             241        0.3%         (97)       (0.1)%       (675)      (1.2)%
                                            ---                    ----                    -----
     Net loss                          $(15,829)     (17.3)%   $(12,193)      (15.8)%    $(3,820)      (6.5)%
</TABLE>

                                       20
<PAGE>

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>
                                                            2007        2006        2005
                                                            ----        ----        ----
<S>                                                      <C>         <C>         <C>
Average Order Size (including shipping & handling)       $276.58     $257.64     $220.17
New Customers Added during the Year*                     198,884     177,213     148,975
</TABLE>

* Based on unique email addresses

In addition, to the financial statement items and metrics listed  above, we also
report  gross  sales, which  is  a  non-GAAP  financial measure. We define gross
sales as the total dollar amount  of  orders  received  by  customers (including
shipping and handling) net of  customer  credits,  but  before  any reserves are
taken for returns or bad debt. We believe that the presentation  of  gross sales
is useful to investors because (a) it  provides an  alternative  measure  of the
total demand for the products sold by  the  Company  and (b) it provides a basis
upon with which to measure the percentage of total  demand  that is reserved for
both returns and bad debt. Management  uses the  gross  sales  measure for these
same reasons.

For The Year Ended December 31, 2007 Compared To The Year Ended December 31,
2006

Net  sales:  Gross  sales  for  the  year  ended  December 31, 2007 increased by
approximately  19% to $151,435,000 from $127,556,000 for the year ended December
31, 2006. The  increase  in  gross  sales was partially offset by lost sales and
cancelled orders  attributable  to  start-up  issues  at  our  new  distribution
center. The  provision for returns and credit card chargebacks and other credits
was  approximately  39.6%  for  2007  and  2006,  resulting  in  a  provision of
$59,942,000 for the year ended December 31, 2007 and  $50,494,000 for  the  year
ended December 31, 2006.

After  the  necessary  provisions  for  returns,  credit  card  chargebacks  and
adjustments  for  uncollected  sales  taxes,  our  net  sales for the year ended
December 31, 2007 were $91,493,000. This represents an  increase  of  nearly 19%
compared to the year  ended December  31,  2006,  in  which  net  sales  totaled
$77,062,000. The growth in net sales  was  largely  driven  by  the  increase in
gross average order size (approximately  7%  higher than the full year 2006) and
an increase in the number of new  customers  acquired  (approximately 12% higher
than the full year 2006). Shipping and handling revenue (which  is  included  in
net sales) increased by 9% to $4,798,000 for the year  ended  December 31, 2007,
from $4,403,000 for the year ended December 31, 2006. Revenue from shipping  and
handling increased at  a  lower  rate  than  overall  revenue  due  to  shipping
concessions made during the warehouse move.

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, 2007 totaled
$58,754,000, resulting in a gross margin  of  approximately 35.8%. Cost of sales
for the year ended December 31, 2006 totaled $46,153,000,  resulting  in a gross
margin of 40.1%. The decrease in gross margin percentage is  largely  attributed
to a write-off of inventory in the fourth quarter. The effect  of this write-off
on gross margin dollars was approximately $1.5 million. In  addition, the growth
in the high-end  designer  items  has  a  significant  impact on  the  Company's
overall merchandise mix,  which  continues to negatively impact the gross margin
percentage. The combination of  the  high  demand amongst retailers for high-end
merchandise and the decline in value of the  US  Dollar relative to the Euro had
a negative impact on our  gross  margins related  to  designer  accessory items.

                                       21
<PAGE>

In addition,  the  gross  margin was negatively affected by additional inventory
reserves, and expedited  shipping  expenses  that were recorded during the third
quarter and incurred in connection with our  transition  to  a  new  fulfillment
center.

Gross Profit: As a result of the increases in net sales, gross profit  increased
by nearly 6%, to  $32,739,000  for  the  year  ended  December  31,  2007,  from
$30,909,000 for the year ended December 31, 2006.

Marketing expenses:  Marketing expenses  increased by 13% to $16,063,000 for the
year ended December 31, 2007 from $14,196,000 for the  year  ended  December 31,
2006. This increase was  due  to  an  increase  in  online  advertising, offline
advertising and sponsorship  and  direct mail postcards. While overall marketing
expenses increased, marketing expenses  as  a  percentage of net sales decreased
to 17.5% for the  year  ended  December 31,  2007  from 18.4% for the year ended
December 31, 2006.  We  spent approximately $7.6 million and $7.1 million on our
national advertising campaign in 2007 and 2006, respectively.

Marketing expenses include expenses related to our national ad campaign,
sponsorships, online and print advertising, "sweepstakes" promotions as well as
staff related costs. Costs in connection with the national campaign are
recorded as the magazines and commercials are being released.

Selling and fulfillment expenses: Selling and fulfillment expenses  increased by
approximately 20% for the year ended 2007  compared  to  the  year  ended  2006.
Selling and fulfillment expenses were comprised of the following:

<TABLE>
<CAPTION>
                         Year Ended            Year Ended        Percentage Difference
                         ----------            ----------        ---------------------
                     December 31, 2007     December 31, 2006      increase (decrease)
                     -----------------     -----------------     ---------------------
<S>                        <C>                   <C>                               <C>
Operating                   10,554,000             8,353,000                       26%
Technology                   4,693,000             4,203,000                       12%
E-Commerce                   3,651,000             3,252,000                       12%
                           -----------           -----------
                           $18,898,000           $15,808,000                       20%
</TABLE>

Operating  expenses  include  all   costs  related  to   inventory   management,
fulfillment, customer service, and  credit  card processing.  Operating expenses
increased in 2007 by 26% compared  to  2006  as  a  result   of  variable  costs
associated with the  increased  sales  volume (e.g., picking and packing orders,
processing returns and credit card fees), and  an  increase  in customer service
and salary related  expenses  as  well  as  incremental costs  of  approximately
$721,000 incurred in  connection  with  our  transition  to  the new third party
distribution center. Variable  operating  expenses  as  a  percentage  of  sales
decreased in 2007 to approximately 7% from 8% in 2006.

Technology expenses  consist  primarily of staff related costs, amortization  of
capitalized costs and Web site hosting. For the year  ended  December 31,  2007,
technology expenses increased by approximately 12%  compared  to  the year ended
December 31, 2006. This increase was  attributed  to an  increase in  staff  and
related costs, software support, depreciation and  training  and  was  partially
offset  by a decrease in  consulting  expenses.  A  majority  of the  consulting
expenses  incurred for  the  year  ended  December  31, 2007 were related to the
continued development of  our  Web  site  and  capitalized  accordingly.  As  of
December  31, 2007,  approximately $3,633,000 was capitalized in connection with
the continued development of our Web site.

E-Commerce  expenses  include  expenses  related  to  our  photo  studio,  image
processing, third party software  and  Web  site  design.  For  the  year  ended
December 31, 2007, this amount  increased  by  approximately  12% as compared to
the year ended December 31, 2006.  This  increase is  due to  increased  expense
related to SFAS No. 123R costs, salary  related expenses, as well as an increase
in expenses associated with software used to support the Web site.

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, 2007 increased to $13,848,000 as compared to  $13,001,000  for  the
year ended  December 31,  2006.  The  increase  in  general  and  administrative
expenses  was  primarily  the  result  of  a $1,646,000 increase in equity based
compensation, $431,000 increase in salary and salary  related expense related to
additional   headcount   and  increased  consulting  and  professional  fees  of
$302,000. These increases were partially  offset  by  a  decrease  in  bad  debt
expense of $400,000 related to a  receivable  due  from a  third  party  service
provider that purchased inventory from us to be distributed  internationally  in
2006, public company expenses of $242,000 as well as a decrease in bonuses  paid
compared to 2006 of $1,016,000.

As a percentage of net sales, general and administrative expenses  decreased  to
15.1% in 2007 from 16.9% in 2006.

                                       22
<PAGE>

Loss from operations:   Operating  loss  increased  by  over  32%  in  2007,  to
$16,070,000 from $12,096,000 in 2006. While net sales increased this  year,  the
increase in net sales was  offset  by  the  recording  of  a  write-off  of  the
Company's  inventory  which resulted  in a charge of approximately $1.5 million,
additional  stock  based  compensation  expense of approximately $1.7 million in
accordance with SFAS No.123(R) and the $550,000 inventory charge.

Interest expense and interest, net: Interest  and  other  income  for  the  year
ended December 31, 2007 was relatively unchanged compared to December 31,  2006.
These amounts relate primarily to interest earned on our cash balances.

Interest expense, is comprised primarily of interest paid on  our  loan facility
and convertible notes which had been held by Soros. For  the  year  ended  2007,
interest expense decreased to $260,000 compared to $599,000 for  the year  ended
2006. The convertible notes were repaid in  June 2006,  which  resulted  in  the
decrease in interest expense for 2007.

Net loss per share: Net loss per share decreased to $0.12 per share  from  $0.23
per share, as the number of weighted  average shares  outstanding  increased  to
130.9 million in 2007 as a result of the  equity financing  consummated  in June
2006 and the conversion of the Company's  preferred  stock  into common stock in
connection with such financing.

For The Year Ended December 31, 2006 Compared To The Year Ended December 31,
2005

Net sales: Gross  sales for  the  year  ended  December 31,  2006  increased  by
approximately 35% to $127,556,000 from $94,586,000 for the year  ended  December
31, 2005. The provision  for  returns  and  credit  card  chargebacks and  other
credits was approximately  40%  for  2006  and  38%  for  2005,  resulting  in a
provision of $50,494,000 for the year ended December 31,  2006  and  $35,775,000
for the year ended December 31, 2005.

After  the  necessary  provisions  for  returns,  credit card  chargebacks   and
adjustments for uncollected sales taxes,  our  net  sales  for  the  year  ended
December 31, 2006 were $77,062,000. This  represented  an  increase  of over 31%
compared to the year  ended  December 31,  2005,  in  which  net  sales  totaled
$58,811,000.  The growth  in net  sales  was  largely  driven by the increase in
gross average order size (approximately 17% higher than the full year 2005)  and
an increase in the number of new customers acquired  (approximately  19%  higher
than the full year 2005). Shipping and handling  revenue  (which  is included in
net sales) increased by 14% to $4,403,000 for the year ended December 31,  2006,
from $3,874,000 for the year ended December 31, 2005. Revenue from  shipping and
handling increased at a lower rate than overall revenue, due to the  increase in
our average order size.

Cost of sales: Cost of sales  for  the  year  ended  December 31,  2006  totaled
$46,153,000, resulting  in  a gross margin of approximately 40.1%. Cost of sales
for the year  ended December 31, 2005 totaled $35,816,000,  resulting in a gross
margin of 39.1%. The increase in gross   margin  was  driven  by  our  focus  on
negotiating better prices with vendors as  well  as our strategy of selling more
in-season product, which has more value to our customer  and  therefore  demands
higher margins, and the timing of our promotions.

Gross Profit: As a result of the increases in net sales and gross  margin, gross
profit increased by over 34%, to $30,909,000 for  the  year  ended  December 31,
2006, from $22,995,000 for the year ended December 31, 2005.

Marketing expenses: Marketing expenses increased by 104% to $14,196,000  for the
year ended December 31, 2006 from $6,961,000 for  the  year  ended  December 31,
2005.

As a percentage of net sales, our marketing expenses increased to  18.4% for the
year ended December 31, 2006 from 11.8% for the year  ended  December  31, 2005.
The increase in marketing  expenses  as  a  percentage  of  net  sales  resulted
primarily from costs  associated  with  our national advertising campaign (which
was launched in September 2005).

Marketing expenses increased by a higher percentage than revenue as a result  of
the costs associated with our national marketing campaign.

Selling and fulfillment expenses: Selling and fulfillment  expenses increased by
approximately 23% for the year 2006 compared to the  year  ended  2005.  Selling
and fulfillment expenses were comprised of the following:

<TABLE>
<CAPTION>
                         Year Ended            Year Ended        Percentage Difference
                         ----------            ----------        ---------------------
                     December 31, 2006     December 31, 2005      increase (decrease)
                     -----------------     -----------------     ---------------------
<S>                        <C>                  <C>                                <C>
Operating                    8,353,000             6,925,000                       21%
Technology                   4,203,000             3,567,000                       18%
E-Commerce                   3,252,000             2,388,000                       36%
                           -----------          ------------
                           $15,808,000          $ 12,880,000                       23%
</TABLE>

                                       23
<PAGE>

Operating expenses increased in 2006 by 21% compared to  2005  as  a  result  of
variable costs associated with the  increased  sales  volume  (e.g., picking and
packing orders, processing returns  and  credit  card  fees), and an increase in
customer service and salary related expenses. Operating  costs  as  a percentage
of sales decreased as a result of economies of scale.  Variable expenses related
to picking and packing orders increased   by  24%  to  $2.1  million  from  $1.7
million. Credit card fees during 2006 and 2005  remained relatively unchanged at
$1.8 million, as the fees incurred in 2006 were partially offset by a  refund of
approximately $274,000 from one of our credit card  processors.   Both  expenses
remained relatively constant as a percentage of gross  sales  at 2% for 2006 and
2005.

For the  year  ended  December   31,  2006,  technology  expenses  increased  by
approximately 18% compared to the year ended December 31,  2005.  This  increase
resulted from an increase in headcount and salary related  expenses,  consulting
expenses and costs associated with software support and was partially offset  by
a decrease in depreciation expense and a decrease in web hosting expense.

For the year ended December 31, 2006,  this  amount  increased by  approximately
36% as compared to the year  ended  December  31,  2005,  primarily  due  to  an
increase in salary related  expenses  as  well as increased  expenses related to
photo shoots. These amounts were  partially  offset  by a  decrease  in expenses
associated with analytic tools.

General and administrative expenses:  General and  administrative  expenses  for
the year  ended  December  31,  2006  increased  to   $13,001,000 as compared to
$6,299,000 for the year ended December 31, 2005. The  increase  in  general  and
administrative expenses was primarily the result of the  recording of $3,895,000
of expense related to  restricted  stock, restricted  stock  units and  employee
stock options, an increase  of  $379,000  in  bad  debt  expense  related  to  a
receivable due from a third party  service  provider  that  purchased  inventory
from   us  to  be   distributed   internationally,   increased   consulting  and
professional fees of $392,000, increased public  company  expenses  of  $301,000
and increased  depreciation   expense  of  $278,000.   In  June  2006,  we  paid
approximately  $650,000  of  executive  bonuses in connection with the financing
that closed during the second quarter  of  2006.  Most  of  these  bonuses  were
included in general and administrative expenses.  In addition, in November 2006,
in connection with their new employment agreements, the company paid  bonuses in
the aggregate amount of $517,890 to the CEO and CFO intended to  compensate them
for the income taxes payable on restricted stock awards,  received  in  exchange
for their forfeiting their right to certain  fully  vested  and out-of-the-money
stock options that would have been exercisable.

As a percentage of net sales, general and administrative  expenses  increased to
16.9% in 2006 from 10.7% in 2005.

Loss from operations:  Operating  loss  increased  by  over  284%  in  2006,  to
$12,096,000 from $3,145,000 in 2005.

Interest expense and interest and other income, net:  Interest  and other income
for the year ended December 31, 2006 increased  to  $502,000 from  $181,000  for
the year ended December 31, 2005. Interest and  other income was higher in 2006,
compared to 2005 primarily due to an  increase  in interest income earned on our
cash balances.

For the year ended 2006, interest expense  decreased  to  $599,000  compared  to
$856,000 for the year ended 2005.  The  convertible  notes  were  repaid in June
2006, which resulted in the decrease in interest expense  for 2006  compared  to
2005.

Liquidity And Capital Resources

General

At December 31, 2007, we had approximately $6.7 million in the form of  cash and
cash equivalents, as compared to $20.2 million at December  31,  2006  and  $9.4
million at December 31, 2005. Working capital at December  31,  2007,  2006  and
2005 was  $20.9 million,  $34.0 million  and  $17.9  million,  respectively.  In
addition, as  of  December 31, 2007, we had approximately $3.7 million committed
under the Credit Facility,  leaving  approximately $3.8 million of availability,
compared to availability of $4.3 million and $3.75 million at December 31,  2006
and 2005, respectively.

In  March 2008, we entered into an agreement with Soros and Maverick pursuant to
which  they  agreed  to  provide  up to $3 million of debt financing to us, on a
standby basis, during the next year, provided that the commitment amount will be
reduced  by  the  gross  proceeds of any equity financing consummated during the
year.  We  can  draw   down debt in one or more tranches, provided that our cash
balances  are  less  than   $1  million  at the time of any draw down.  The draw
downs  will  be  evidenced  by subordinated

                                       24
<PAGE>

convertible notes  (the  "Subordinated  Notes") that have a term expiring on the
later  of  June  26,  2011  and three years from the date of the issuance of the
Subordinated  Notes and bear interest at the rate of 8%  per  annum,  compounded
annually. Interest is payable upon  maturity or  conversion.  The   Subordinated
Notes   are  convertible  (subject  to  stockholder  approval   to   the  extent
required   by   the  NASDAQ  Capital  Market),  at the holder's option (a)  into
equity  securities  that  the  Company  might  issue  in any subsequent round of
financing at  a  price  that was  equal  to  the  lowest  price  per  share paid
by  any  investor  in  such subsequent round  of  financing or  (b) into  Common
Stock at  a  price  per  share  equal  to  the  market  price (as defined in the
Subordinated Notes)  on the date of issuance of the note. In connection with the
Commitment, we  issued  warrants to Soros and  Maverick to purchase an aggregate
of  525,002   shares   of   Common  Stock  at  an  exercise  price  equal to the
trailing 20-day average stock price on the date of grant.

We fund our operations through  cash  on  hand,  operating  cash  flow  and  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 with  respect  to  these  financial  measures  would  have  a
negative impact on our liquidity.  Total  availability under our Credit Facility
with Wells Fargo is  based primarily upon  our  inventory  levels.  In addition,
both availability under the  Credit 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 Wells Fargo
to provide credit support under the Credit  Facility.  In  some  instances,  new
vendors may require prepayments. We may make prepayments in  order  to  open  up
these new  relationships,  or  to  gain  access  to  inventory  that  would  not
otherwise be available to us. In addition,  we  sometimes  make  prepayments  in
connection with our advertising campaign, as in  some  circumstances  we need to
pay in advance of production. As of December 31,   2007,  we  had  approximately
$294,000  of  prepaid  inventory  and  $483,000  of prepaid advertising  on  our
balance sheet, as compared to $616,000 and  $102,000 as of December 31, 2006 and
$485,000 and $677,000 as of December 31, 2005.

Our inventory levels as of December 31, 2007  were  approximately  $4.3  million
higher than at December 31, 2006. The increase  in  inventory generally reflects
a ramp up in connection with our sales  growth  but  also is a result of some of
our inventory not being available for sale during  our  move to  our  new  third
party fulfillment center. As a result we expect to carry some of this  inventory
into next season. However, the increased inventory level could adversely  affect
our flexibility in taking advantage  of  other  buying  opportunities  that  may
become available in the near term.

We believe that our current funds, together with working capital, and  operating
cash   flow,  and availability  under our existing credit  facility and  standby
commitment  from Soros and Maverick will  be sufficient to enable us to meet our
planned  expenditures   through at least the next twelve months.

Credit Facility

In July 2005, we entered into a new three  year  revolving  Credit Facility with
Wells Fargo. Pursuant to the Credit  Facility,  Wells Fargo  provides  us with a
revolving loan and issues letters of credit in favor  of suppliers  or  factors.
The Credit Facility is secured by a lien on all of  our  assets.   Historically,
the Credit Facility had also been secured by a letter of credit issued by  Soros
("the Soros LC"). In August 2006, Wells Fargo agreed to release  the  Soros  LC,
and that it would no longer require an  availability  reserve  (although it  has
the right under the Credit Facility to establish  reserves  in the future, as it
deems appropriate),  so   long   as  we  maintain   a minimum  cash  balance  of
$5,000,000.   Furthermore,  our Credit  Facility  prohibits  us from paying cash
dividends without the consent  of  our  lender.  See  Note 11  to the  Financial
Statements.

Availability under the Credit Facility is determined by a formula that considers
a certain  percentage of our  inventory  and a certain  percentage  of  accounts
receivable.  The  maximum  availability  is  currently  $7,500,000,  but  can be
increased to $12,500,000  at our request,  subject to certain conditions.  As of
December  31,  2007,  total   availability   under  the   Credit   Facility  was
approximately   $7,500,000   of   which   $3,700,000   was  committed,   leaving
approximately $3,800,000 available for further borrowings.

Interest accrues monthly  on  the  average  daily  amount  outstanding under the
Credit Facility during the preceding month at a  per annum  rate  equal  to  the
prime rate plus 0.75% or LIBOR plus 2.75% for average excess  availability  less
than $3.0 million and the prime rate plus 0.50% or LIBOR plus 2.50% for  average
excess availability greater than $3.0 million. We also pay a monthly  commitment
fee on the unused portion of the facility (i.e., $7,500,000  less the  amount of
loans outstanding) equal to 0.35%. We also pay Wells Fargo certain  fees to open
letters of credit and  guarantees  in an  amount  equal  to a  certain specified
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. Subsequent  to  year
end, we amended the agreement with Wells Fargo, see "Recent Developments"  for a
full description of the amendment.

Commitments and Long Term Obligations

As of December 31, 2007, we had the following commitments and long term
obligations:

<TABLE>
<CAPTION>
                                                                                       More
                                             Less than            1-3        3-5      than 5
                                 Total         1 year            years      years     years
<S>                          <C>             <C>              <C>           <C>       <C>
Marketing and Advertising      2,172,000       2,172,000             --        --         --
Purchase Orders               17,155,000       17,155,00             --        --         --
Operating Leases                 936,000         449,000         487,000       --         --
Employment Contracts           2,090,000       1,440,000         650,000       --         --
                             -----------     -----------      ----------    -----     ------
Grand total                  $22,353,000     $21,216,000      $1,137,000       --         --
</TABLE>

                                       25
<PAGE>

We believe that in order to grow our 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.

Off Balance Sheet Arrangements

Certain warrants issued in conjunction with  certain  preferred  stock financing
transactions are equity  linked  derivatives  and  accordingly  represent an off
balance sheet arrangement. Each of these warrants meet the  scope  exception  in
paragraph 11(a) of FAS 133 and are accordingly not accounted for as  derivatives
for purposes of FAS 133, but instead included  as  a  component  of  equity. See
Note 8 to the financial statements and  the  Statement  of  Shareholders' Equity
for more information.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"  ("SFAS
141R"), which requires the acquiring entity in a business combination to  record
all    assets   acquired   and   liabilities   assumed   at   their   respective
acquisition-date  fair values, changes  the  recognition  of assets acquired and
liabilities assumed arising  from  contingencies,  changes  the  recognition and
measurement of  contingent  consideration,  and  requires   the   expensing   of
acquisition-related  costs  as   incurred.   SFAS  141R also requires additional
disclosure of information surrounding a  business  combination,  such that users
of the entity's financial statements  can   fully understand   the   nature  and
financial impact of the business combination. SFAS 141R   applies  prospectively
to business  combinations  for  which  the  acquisition  date is on or after the
beginning of the first annual reporting period beginning on  or  after  December
15, 2008. The provisions of SFAS 141R will only impact  us if we are  party to a
business combination after the pronouncement has been adopted.

In September 2006, the  FASB  issued  SFAS  No.  157,  "Fair Value Measurements"
("SFAS No. 157"), which defines the fair  value,  establishes  a  framework  for
measuring fair value and expands disclosure about fair value measurements.  This
statement is  effective  for  financial  statements  issued  for  fiscal   years
beginning  after  November 15,  2007,  and  interim  periods within those fiscal
years. Relative to SFAS No. 157, FASB  Staff  Position  (FSP)  157-b  delays the
effective date of SFAS No. 157 for  all non-financial  assets  and  liabilities,
except those that  are  recognized  or disclosed  at fair value in the financial
statements  on  a  recurring  basis.  We are  evaluating  the  impact that  this
statement will have on our financial statements.

Effective January 1, 2007, the Company adopted  Financial  Accounting  Standards
Board ("FASB") Interpretation No. 48,  "Accounting  for  Uncertainty  in  Income
Taxes-- an  interpretation  of  FASB  Statement  No.  109"  ("FIN 48").  FIN  48
prescribes   a   comprehensive  model  for  the manner in which a company should
recognize, measure, present  and   disclose   in its  financial  statements  all
material uncertain tax positions that the Company has taken or expects  to  take
on a tax return. As of the date of adoption,  there  were  no tax  positions for
which it is reasonably possible that  the  total  amounts  of  unrecognized  tax
benefits will significantly increase or decrease within twelve months  from  the
date of adoption of FIN 48 or from December 31, 2007. As of  December 31,  2007,
the only tax jurisdiction to which the Company is subject is the United  States.
Open tax years relate to years in  which  unused   net   operating  losses  were
generated. Upon the adoption of FIN 48, the  Company's  open  tax  years  extend
back to 1998. In the event that the Company  concludes  that  it  is subject  to
interest and/or penalties arising  form uncertain  tax  positions,  the  Company
will present interest and penalties as a component of income  taxes.  No amounts
of interest  or  penalties  were  recognized  in   the  Company's  Statement  of
Operations  or  Balance  Sheet upon adoption of FIN 48 or as of and for the year
ended December 31, 2007.

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.  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.

                                       26
<PAGE>

Item 8. Financial Statements and Supplementary Data

The financial statements  and  supplementary  data  required  by   this item are
included in Part IV, Item 15 of this Form 10-K and are  presented  beginning  on
page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

Item 9A(T). Controls and Procedures

Disclosure 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 our 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 Chief  Executive  Officer  along  with  our  Chief
Financial  Officer  concluded  that  our  disclosure controls and procedures are
effective to ensure that information required to be  disclosed  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 Securities  and
Exchange Commission's rules and forms, and such information is  accumulated  and
communicated to our management,  as   appropriate,  to  allow  timely  decisions
regarding required disclosure.

Internal Control Over Financial Reporting

Management's Report on Internal Control Over Financial Reporting.

Our   management is  responsible  for  establishing  and  maintaining   adequate
internal  control over financial  reporting as defined in Rules 13a - 15(f)  and
15d - 15(f)  under  the  Securities  Exchange  Act  of  1934,  as  amended.  Our
management  has  assessed  the  effectiveness  of  our  internal  control   over
financial reporting based on the criteria set  forth  in   Internal    Control -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway Commission ("COSO"). Based on its  assessment under  the   criteria set
forth in Internal Control - Integrated Framework, our  management concluded that
our internal control over financial reporting was  effective  as of December 31,
2007. This annual  report  does   not  include  an  attestation  report  of  the
Company's  registered   public  accounting  firm regarding internal control over
financial reporting.  Management's report was not  subject to attestation by the
Company's registered public accounting firm pursuant  to  temporary rules of the
Securities and Exchange Commission that permit  the Company   to  provide   only
management's report in this annual report.

Changes in Internal Control Over Financial Reporting

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.

Item 9B. Other Information

In March 2008, we entered into an agreement with Soros and  Maverick pursuant to
which  they  agreed to  provide up to  $3 million  of debt financing to us, on a
standby basis, during the next year, provided that the commitment amount will be
reduced  by  the  gross proceeds  of any equity financing consummated during the
year.  We  can draw  down  debt  in one or more tranches, provided that our cash
balances are  less  than $1 million at the time of any draw down. The draw downs
will be evidenced by subordinated convertible notes that have a term expiring on
the later  of June 26, 2011 and three years from the date of the issuance of the
Subordinated  Notes  and bear  interest  at the rate of 8% per annum, compounded
annually.  Interest  is  payable upon  maturity  or conversion. The Subordinated
Notes are convertible (subject to stockholder approval to the extent required by
the NASDAQ  Capital Market),  at  the holder's option (a) into equity securities
that  the  Company  might  issue in any subsequent round of financing at a price
that  was  equal to  the lowest  price  per  share  paid by any investor in such
subsequent  round  of  financing  or (b)  into Common Stock at a price per share
equal to the market price  (as defined in the Subordinated Notes) on the date of
issuance of the note.  In  connection with the Commitment, we issued warrants to
Soros and Maverick to purchase an aggregate of 525,002 shares of Common Stock at
an  exercise  price equal to the trailing 20-day average stock price on the date
of grant.

                                       27
<PAGE>

In  March  2008, the  Company  amended  its Credit Facility with Wells Fargo to,
among  other  things,  (i)  extend the term until July 26, 2011; (ii) change the
rate  at  which  interest  accrues  on the average daily amount under the Credit
Facility  during the preceding month to a per annum rate equal to the prime rate
plus  0.75%  or  LIBOR  plus 3.25% on average excess availability less than $3.0
million  and   prime  rate  plus  0.50%  or  LIBOR  plus  3%  on  average excess
availability  greater  than  $3.0 million; (iii) increase the monthly commitment
fee  on  the  unused  portion  of  the Credit Facility to 0.50% from 0.35%; (iv)
include  a  servicing  fee  of  $3,333.33 per  month;  (v)  increase  the  early
termination  fee  to  1%  of  the  revolving  credit ceiling, from 0.50% through
maturity;  and  (vi)  amend the standby and documentary letter of credit fees to
3.25% and  2.75%,  respectively  on  average  excess availability less than $3.0
million,  and  3.00%  and  2.50%,  respectively  on  average excess availability
greater than $3.0 million.

In  March  2008,  the Company awarded a $200,000 bonus to Melissa Payner-Gregor,
its  Cheif  Executive  Officer.  The  bonus  is  payable  in nine equal  monthly
installments  commencing  April 2008, subject to her continued employment by the
Company.

                                    Part III
                                    --------

Item 10. Directors and Executive Officers and Corporate Governance

The  information  required  by  this  Item  is  incorporated by reference to the
Company's  definitive  proxy  statement   for   the   2008   annual   meeting of
stockholders.

Item 11. Executive Compensation

The  information  required  by  this  Item  is  incorporated by reference to the
Company's   definitive   proxy   statement   for   the   2008  annual meeting of
stockholders.

Item 12. Security Ownership of  Certain  Beneficial  Owners  and  Management and
Related Stockholder Matters

The  information  required  by  this  Item  is  incorporated by reference to the
Company's  definitive   proxy   statement   for   the   2008   annual meeting of
stockholders.

Item 13.  Certain   Relationships   and   Related   Transactions   and  Director
Independence

The  information  required  by  this  Item  is  incorporated by reference to the
Company's   definitive   proxy   statement   for   the 2008  annual  meeting  of
stockholders.

Item 14. Principal Accountant Fees and Services

The  information  required  by  this  Item  is  incorporated by reference to the
Company's  definitive  proxy   statement   for  the   2008   annual   meeting of
stockholders.

Item 15. Exhibits and Financial Statement Schedules

(a) 1. Financial Statements:
       --------------------

       Report of Independent Registered Public Accounting Firm
       Balance Sheets as of December 31, 2007 and 2006
       Statements  of  Operations  for  the three years ended December 31, 2007,
       2006 and 2005
       Statements  of  Changes in Shareholders' Equity for the three years ended
       December 31, 2007, 2006 and 2005
       Statements of  Cash  Flows  for  the three years ended December 31, 2007,
       2006 and 2005
       Notes to Financial Statements

2. Financial Statement Schedules:
   -----------------------------
          Schedule II - Valuation and Qualifying Accounts

3. Exhibits:
   --------

                                       28
<PAGE>

Exhibit No.   Description
----------    -----------

3.1           Certificate  of  Incorporation  of  the  Company  (incorporated by
              reference  to  the  Company's  Annual  Report on Form 10-K for the
              year ended December 31, 2000).

3.2           By-Laws of the Company.

3.3           Amendment to Bylaws of the Company.

3.4           Certificate  of  Powers,  Designations,  Preferences and rights of
              Series  F  Preferred   Stock   of   the  Company  (incorporated by
              reference  to  the Company' Current Report on Form 8-K, dated June
              28, 2005.

10.1          Amended  and  Restated  1997  Stock  Option  Plan (incorporated by
              reference  to the Company's Definitive Proxy Statement on Schedule
              14A, filed with the Commission on June 29, 2004).

10.2          Lease  Agreement  by  and between the Company and John R. Perlman,
              et al., dated as of May 5,  1997 (incorporated by reference to the
              Company's  Quarterly  Report  on  Form  10-QSB  for  the quarterly
              period ended March 31, 1997).

10.3          Lease  Agreement  by and between the Company and  Adams & Co. Real
              Estate,  Inc.,  dated March 22, 1999 (incorporated by reference to
              the  Company's Quarterly  Report on Form 10-QSB for  the quarterly
              period ended June 30, 1999).

10.4          Lease  Agreement  by and  between the Company and Adams & Co. Real
              Estate, Inc., dated  May 4, 2000 (incorporated by reference to the
              Company's  Quarterly  Report on Form 10-Q for the quarterly period
              ended June 30, 2000).

10.5          Bluefly,  Inc. 2000  Stock  Option Plan (incorporated by reference
              to the Company's  Quarterly  Report on Form 10-Q for the quarterly
              period ended June 30, 2000).

10.6          Investment  Agreement,  dated  November 13, 2000, by and among the
              Company,  Bluefly  Merger  Sub,  Inc., Quantum Industrial Partners
              LDC and SFM Domestic  Investments  LLC  (incorporated by reference
              to the  Company's  Quarterly Report on Form 10-Q for the quarterly
              period ended September 30, 2000).

*10.7         Software License and Services Agreement,  dated March 12, 2002, by
              and  among   the   Company   and   Blue   Martini  Software,  Inc.
              (incorporated by reference to the Company's Annual Report on  Form
              10-K for the year ended December 31, 2001).

10.8          Common Stock and Warrant Purchase Agreement,  dated  May 24, 2002,
              by  and  between  the  Registrant  and  the investors   listed  on
              Schedule 1 thereto (incorporated by  reference  to  the  Company's
              Quarterly Report on Form 10-Q for the quarterly  period ended June
              30, 2002).

10.9          Note and Warrant Purchase Agreement, dated  January 28,  2003,  by
              and between the Registrant and the investors listed on Schedule  1
              thereto (incorporated by reference to the Company's Annual  Report
              on Form 10-K for the year ended December 31, 2002).

10.10         Common Stock and Warrant Purchase Agreement  dated January 9, 2004
              by and among the Company and the Investors  listed  on  Schedule 1
              thereto  (incorporated  by  reference  to  the  Company's  Current
              Report on Form 8-K, dated January 13, 2004).

                                29
<PAGE>

*10.11        Master  Service Agreement, dated as of February  28, 2005, by  and
              between the Company and Level 3 Communications, LLC  (incorporated
              by reference to the Company's Current Report  on Form  8-K,  dated
              March 4, 2005).

*10.12        Customer Order Addendum, dated as of February  28,  2005,  by  and
              between the Company and Level 3 Communications, LLC  (incorporated
              by reference to the Company's Current Report  on  Form  8-K, dated
              March 4, 2005).

10.13         Preferred Stock and Warrant Purchase Agreement, dated as  of  June
              24, 2005, by and among the Company  and the  Investors  listed  on
              the signature page  thereto  (incorporated  by  reference  to  the
              Company's Current Report on Form 8-K, dated June 28, 2005).

10.14         Loan and Security  Agreement,  dated July 26, 2005, by and between
              the Company and Wells Fargo Retail Finance,  LLC  (incorporated by
              reference to the Company's Current Report on Form 8-K, dated  July
              29, 2005).

10.15         Employment  Agreement, dated  as of  September 19,  2005,  by  and
              between   the  Company  and  Bradford   Matson   (incorporated  by
              reference  to the Company's Current  Report  on  Form  8-K,  dated
              September 22, 2005).

10.16         Stock Purchase Agreement, dated  as  of June 5, 2006, by and among
              Bluefly, Inc., Quantum  Industrial   Partners  LDC,  SFM  Domestic
              Investments, LLC and the investors listed on the  signature  pages
              attached thereto (incorporated  by   reference  to  the  Company's
              Current Report on Form 8-K, dated June 7, 2006).

10.17         Form of Voting Agreement  by  and  among  Bluefly,  Inc.,  Quantum
              Industrial Partners LDC, SFM Domestic Investments,  LLC,  Maverick
              Fund USA, Ltd., Maverick Fund, L.D.C., Maverick Fund II, Ltd.  And
              Prentice-Bluefly, LLC (incorporated by reference to the Company's
              Current Report on Form 8-K, dated June 7, 2006).

10.18         Fee Letter, dated June 5,  2006,  by  and  among   Bluefly,  Inc.,
              Quantum Industrial Partners LDC and SFM Domestic Investments,  LLC
              (incorporated by reference to  the  Company's  Current  Report  on
              Form 8-K, dated June 7, 2006).

10.19         Waiver Letter, dated June 5, 2006, by and  between  Bluefly,  Inc.
              and Wells Fargo Retail Finance, LLC (incorporated by reference  to
              the Company's Current Report on Form 8-K, dated June 7, 2006).

10.20         First Amendment  to Loan  and  Security  Agreement,  dated  as  of
              August 14, 2006,  by  and  between the  Company  and  Wells  Fargo
              Retail Finance, LLC (incorporated by  reference  to the  Company's
              Current Report on Form 8-K, dated August 14, 2006).

10.21         Master License Agreement, dated as of September 28, 2006,  by  and
              between the Company and Art Technology Group,  Inc.  (incorporated
              by reference to the Company's Current Report  on  Form 8-K,  dated
              October 3, 2006).

10.22         Bluefly, Inc. Amended  and  Restated  2005  Stock  Incentive  Plan
              (incorporated  by  reference  to  the  Company's  Definitive Proxy
              Statement on Schedule 14A, filed with the Commission on April  16,
              2007).

10.23         Employment  Agreement,  dated  as of  November  14,  2006  by  and
              between Bluefly, Inc. and Melissa Payner-Gregor  (incorporated  by
              reference to the Company's Annual Report  on  Form  10-K  for  the
              year ended December 31, 2007).

*10.24        Fulfillment Services Agreement, dated as  of  April 11,  2007,  by
              and   between   the  Company  and  Fulfillment  Technologies,  LLC
              (incorporated  by  reference  to  the  Company's Current Report on
              Form 8-K, dated April 17, 2006).

10.25         Service  Agreement,  dated  as  of May 9, 2007, by and between the
              Company  and  VIPdesk Connect, Inc.  (incorporated by reference to
              the Company's Current Report on Form 8-K, dated May 10, 2007)

*10.26        Letter Agreement, dated  as  of  December 21, 2007, by and between
              the  Company  and  Fulfillment  Technologies, LLC (incorporated by
              reference  to  the  Company's  Current  Report  on Form 8-K, dated
              December 27, 2007).

                                30
<PAGE>

10.27         Employment  Agreement,  dated  as  of January 28,  2008,  by   and
              between  the Company and Barry Erdos (incorporated by reference to
              the Company's Current Report on Form 8-K, dated January 28, 2008).

10.28         Employment Agreement, dated as of January 28, 2008, by and between
              the Company  and  Patrick  Barry (incorporated by reference to the
              Company's Current Report  on  Form  8-K,  dated January 28, 2008).

10.29         Lease  Agreement  by and  between  the Company and 42-52 West 39th
              Street, LLC, dated February 7, 2008.

10.30         Second  Amendment  to  Loan  and  Security  Agreement, dated as of
              November  15, 2007,  by  and  between  the Company and Wells Fargo
              Retail Finance, LLC.

10.31         Third  Amendment  to  Loan  and  Security  Agreement,  dated as of
              January 17, 2008 and effective as  of  January 15,  2008,  by  and
              between  the  Company  and  Wells  Fargo   Retail  Finance,   LLC.

10.32         Amended and Restated Employment Agreement, dated as of  March  19,
              2008, by and between the Company and Kara B.  Jenny  (incorporated
              by reference to the Company's Current Report on  Form  8-K,  dated
              March 19, 2008).

10.33         Fourth  Amendment  to  Loan  and Security  Agreement,  dated as of
              March 26, 2008, by and  between the Company and Wells Fargo Retail
              Finance, LLC.

10.34         Standby Commitment Agreement,  dated  as  of  March 26,  2008,  by
              Quantum Industrial Partners LDC, SFM Domestic Investments LLC  and
              private  funds associated with  Maverick Capital, Ltd. in favor of
              the Company.

10.35         Warrant No. 1 dated March 26, 2008, issued to  Quantum  Industrial
              Partners LDC.

10.36         Warrant  No. 2  dated  March 26,  2008,  issued  to  SFM  Domestic
              Investments LLC.

10.37         Warrant No. 3  dated  March 26, 2008, issued to Maverick Fund USA,
              Ltd.

10.38         Warrant No. 4  dated  March 26, 2008, issued to Maverick Fund LDC.

10.39         Warrant No. 5  dated  March 26, 2008, issued to Maverick  Fund II,
              Ltd.

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.

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

                                       31
<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 27, 2008

              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.

Signature                         Title                           Date
---------                         -----                           ----
/s/ David Wassong                 Interim Chairman of Board       March 27, 2008
-----------------
David Wassong

/s/ Melissa Payner-Gregor         Chief Executive Officer         March 27, 2008
-------------------------         (Principal Executive Officer),
Melissa Payner-Gregor             President and Director

/s/ Barry Erdos                   President, and Chief            March 27, 2008
-------------------------         Operating Officer
Barry Erdos

/s/ Kara B. Jenny                 Chief Financial Officer         March 27, 2008
-----------------                 (Principal Accounting Officer)
Kara B. Jenny

/s/ Riad Abrahams                 Director                        March 27, 2008
-----------------
Riad Abrahams

/s/ Ann Jackson                   Director                        March 27, 2008
---------------
Ann Jackson

/s/ Martin Miller                 Director                        March 27, 2008
-----------------
Martin Miller

/s/ Neal Moszkowski               Director                        March 27, 2008
-------------------
Neal Moszkowski

/s/Christopher McCann             Director                        March 27,2008
---------------------
Christopher McCann

/s/ Anthony Plesner               Director                        March 27, 2008
-------------------
Anthony Plesner

/s/ Lawrence J. Zigerelli         Director                        March 27, 2008
-------------------------
Larry Zigerelli

                                       32
<PAGE>

             Report of Independent Registered Public Accounting Firm

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

In our opinion, the financial  statements  listed in the index  appearing  under
Item 15  present  fairly, in all material  respects, the  financial  position of
Bluefly, Inc. at December 31, 2007 and December 31, 2006, and the results of its
operations and its  cash flows for each of the  three years in the  period ended
December 31, 2007 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 index appearing under Item 15 presents  fairly,
in  all  material  respects,  the  information  set  forth  therein when read in
conjunction with the related 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.

As discussed in Note 2 to  the  financial  statements, the  Company  changed the
manner in which it accounts for uncertain tax positions in 2007 and  changed the
manner in which it accounts for stock-based compensation in 2006.

/s/ PricewaterhouseCoopers LLP

New York, New York
March 26, 2008

                                       F-1
<PAGE>

Bluefly, Inc.
Balance Sheets
December 31, 2007 and 2006
(dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                            2007                2006
<S>                                                                                    <C>                 <C>
Assets
Current assets
   Cash and cash equivalents                                                           $   6,730,000       $  20,188,000
   Inventories, net                                                                       28,492,000          24,189,000
   Accounts receivable, net of allowance for doubtful accounts                             2,102,000           2,719,000
   Prepaid expenses and other current assets                                               1,487,000           1,510,000
                                                                                       -------------       -------------
      Total current assets                                                                38,811,000          48,606,000
Property and equipment, net                                                                6,019,000           3,573,000
Other assets                                                                                 189,000             251,000
                                                                                       -------------       -------------
      Total assets                                                                     $  45,019,000       $  52,430,000
                                                                                       =============       =============
Liabilities and Shareholders' Equity
Current liabilities
   Accounts payable                                                                    $   8,460,000       $   4,822,000
   Allowance for sales returns                                                             4,204,000           5,043,000
   Accrued expenses and other current liabilities                                          2,052,000           1,908,000
   Deferred revenue                                                                        3,206,000           2,830,000
                                                                                       -------------       -------------
      Total current liabilities                                                           17,922,000          14,603,000

Other long-tern obligations                                                                   60,000                   -
                                                                                       -------------       -------------
      Total liabilities                                                                   17,982,000          14,603,000
                                                                                       =============       =============
Commitments and contingencies (Note 7)
Shareholders' equity
Series F Preferred Stock - $.01 par value; 7,000 shares authorized, 571.43
      issued and outstanding as of December 31, 2007 and 2006, respectively
      (liquidation preference at December 31, 2007: $571,000 plus $105,000 of
      accrued dividends, at December 31, 2006: $571,000
      plus accrued dividends of $62,000)                                                         -                   -
Common Stock - $.01 par value; 200,000,000 and 152,000,000 shares authorized,
      134,268,034 and 134,484,854 shares issued and 132,757,301 and 130,484,854
      shares outstanding as of December 31, 2007 and 2006, respectively                    1,328,000           1,305,000
Treasury Stock                                                                            (1,430,000)                -
Additional paid-in capital                                                               158,965,000         152,519,000
Accumulated deficit                                                                     (131,826,000)       (115,997,000)
                                                                                       -------------       -------------
      Total shareholders' equity                                                          27,037,000          37,827,000
                                                                                       -------------       -------------
      Total liabilities and shareholders' equity                                       $  45,019,000       $  52,430,000
                                                                                       =============       =============
</TABLE>

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

                                       F-2
<PAGE>

Bluefly, Inc.
Statements of Operations
Years Ended December 31, 2007, 2006 and 2005
(dollars Rounded to the nearest thousand)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 2007             2006             2005
<S>                                                          <C>              <C>              <C>
Net sales                                                    $ 91,493,000     $ 77,062,000     $58,811,000
Cost of sales                                                  58,754,000       46,153,000      35,816,000
                                                             ------------     ------------     -----------
      Gross profit                                             32,739,000       30,909,000      22,995,000
Marketing expenses                                             16,063,000       14,196,000       6,961,000
Selling and fulfillment expenses                               18,898,000       15,808,000      12,880,000
General and administrative expenses                            13,848,000       13,001,000       6,299,000
                                                             ------------     ------------     -----------
      Total operating expenses                                 48,809,000       43,005,000      26,140,000
                                                             ------------     ------------     -----------
      Operating loss                                          (16,070,000)     (12,096,000)     (3,145,000)
Interest expense                                                 (260,000)        (599,000)       (856,000)
Interest income                                                   501,000          502,000         181,000
                                                             ------------     ------------     -----------
      Net loss                                                (15,829,000)     (12,193,000)     (3,820,000)
                                                             ------------     ------------     -----------
Preferred stock dividends                                         (44,000)      (2,252,000)     (4,958,000)
Deemed dividend related to beneficial conversion feature
   on Series F Preferred Stock                                          -       (3,857,000)              -
                                                             ------------     ------------     -----------
      Net loss available to common shareholders              $(15,873,000)    $(18,302,000)    $(8,778,000)
                                                             ============     ============     ===========
      Basic and diluted loss per common share                $      (0.12)    $      (0.23)    $     (0.54)
                                                             ============     ============     ===========
Weighted average number of shares outstanding used in
   calculating basic and diluted loss per common share        130,911,295       80,170,532      16,153,020
                                                             ============     ============     ===========
</TABLE>

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

                                       F-3
<PAGE>

Bluefly, Inc.
Statements of Changes in Shareholders' Equity
Years Ended December 31, 2007, 2006 and 2005
(dollars rounded to the nearest thousand)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       Preferred Stock                    Common Stock
                                                                        $.01 Par Value                   $.01 Par Value
                                                                 ----------------------------      --------------------------
                                                                    Number of                        Number of
                                                                      Shares         Amount            Shares        Amount
                                                                 -------------     ----------      ------------    -----------
<S>                                                                <C>             <C>             <C>             <C>
Balance at January 1, 2005                                          9,358,550       94,000          15,241,756     $  152,000
                                                                 -------------     ----------      ------------    -----------
Sale of Series F Preferred Stock ($1,000 per share
   net of expenses of $249,000)                                         7,000          -                -              -
Shares Of Series D Preferred Stock
   Converted into Common Stock                                           (823)         -             1,454,645         15,000
Shares Of Series F Preferred Stock
   Converted into Common Stock                                         (1,720)         -               765,481          8,000
Expense recognized in connection with Issuance of Options               -              -                -              -
Exercise of Employee Options                                            -              -             1,597,284         16,000
Net Loss                                                                -              -                -              -
                                                                 -------------     ----------      ------------    -----------
Balance at December 31, 2005                                        9,363,007       94,000          19,059,166     $  191,000
                                                                 -------------     ----------      ------------    -----------
Conversion of Preferred Stock                                      (9,362,436)     (94,000)         48,545,527        485,000
Stock based compensation                                                -              -                -               -
Sale of Common Stock, net of issuance expenses
   of approximately $2.0 million                                        -              -            60,975,610        610,000
Issuance of Common Stock to Placement Agent                             -              -             1,000,000         10,000
Warrants Issued to Third-Party                                          -              -                -               -
Dividends Paid to Related Party Shareholders                            -              -                -               -
Deemed Dividends related to beneficial conversion on
   Series F Preferred Stock                                             -              -                -               -
Exercise of Employee Options                                            -              -                43,330          -
Issuance of Restricted Stock                                            -              -               861,221          9,000
Net Loss                                                                -              -                -               -
                                                                 -------------     ----------      ------------    -----------
Balance at December 31, 2006                                          571              -           130,484,854     $1,305,000
                                                                 -------------     ----------      ------------    -----------
Stock based compensation                                                -              -               (29,678)         -
Issuance of Restricted Stock                                            -              -               426,192          4,000
Delivery of Restricted Stock Units                                      -              -             1,846,012         19,000
Purchase of Treasury Stock                                              -              -                -               -
Exercise of Employee Options                                            -              -                28,061          -
Reversal of legal expenses related to June 2006 financing               -              -                -               -
Exercise of Related Party Warrant                                       -              -                 1,860          -
Net Loss                                                                -              -                -               -
                                                                 -------------     ----------      ------------    -----------
Balance at December 31, 2007                                          571              -           132,757,301     $1,328,000
                                                                 -------------     ----------      ------------    -----------

<CAPTION>
                                                                Treasury Stock
                                                           -------------------------   Additional                       Total
                                                            Number of                    Paid-in       Accumulated    Shareholders'
                                                              Shares       Amount        Capital         Deficit         Equity
                                                           -----------   -----------   ------------   -------------   ------------
<S>                                                          <C>         <C>           <C>            <C>             <C>
Balance at January 1, 2005                                      -        $    -        $107,270,000   $ (96,127,000)  $ 11,389,000
                                                           -----------   -----------   ------------   -------------   ------------
Sale of Series F Preferred Stock ($1,000 per share
   net of expenses of $249,000)                                 -             -           6,751,000          -           6,751,000
Shares Of Series D Preferred Stock
   Converted into Common Stock                                  -             -             (15,000)         -              -
Shares Of Series F Preferred Stock
   Converted into Common Stock                                  -             -              (8,000)         -              -
Expense recognized in connection with Issuance of Options       -             -              41,000          -              41,000
Exercise of Employee Options                                    -             -           1,488,000          -           1,504,000
Net Loss                                                        -             -                 -        (3,820,000)    (3,820,000)
                                                           -----------   -----------   ------------   -------------   ------------
Balance at December 31, 2005                                     -       $    -        $115,527,000   $ (99,947,000)  $ 15,865,000
                                                           -----------   -----------   ------------   -------------   ------------
Conversion of Preferred Stock                                    -            -            (391,000)         -              -
Stock based compensation                                         -            -           4,454,000          -           4,454,000
Sale of Common Stock, net of issuance expenses
   of approximately $2.0 million                                 -            -          47,420,000          -          48,030,000
Issuance of Common Stock to Placement Agent                      -            -           1,070,000          -           1,080,000
Warrants Issued to Third-Party                                   -            -              67,000          -              67,000
Dividends Paid to Related Party Shareholders                     -            -         (19,512,000)         -         (19,512,000)
Deemed Dividends related to beneficial conversion on
   Series F Preferred Stock                                      -            -           3,857,000      (3,857,000)        -
Exercise of Employee Options                                     -            -              36,000          -              36,000
Issuance of Restricted Stock                                     -            -              (9,000)         -              -
Net Loss                                                         -            -              -          (12,193,000)   (12,193,000)
                                                           -----------   -----------   ------------   -------------   ------------
Balance at December 31, 2006                                     -       $    -        $152,519,000   $(115,997,000)  $ 37,827,000
                                                           -----------   -----------   ------------   -------------   ------------
Stock based compensation                                         -            -           6,194,000          -           6,194,000
Issuance of Restricted Stock                                     -            -              (4,000)         -              -
Delivery of Restricted Stock Units                               -            -             (19,000)         -              -
Purchase of Treasury Stock                                   1,510,733    (1,430,000)        -               -          (1,430,000)
Exercise of Employee Options                                     -            -              25,000          -              25,000
Reversal of legal expenses related to June 2006 financing        -            -             250,000          -             250,000
Exercise of Related Party Warrant                                -            -              -               -              -
Net Loss                                                         -            -              -          (15,829,000)   (15,829,000)
                                                           -----------   -----------   ------------   -------------   ------------
Balance at December 31, 2007                                 1,510,733   $(1,430,000)  $158,965,000   $(131,826,000)  $ 27,037,000
                                                           -----------   -----------   ------------   -------------   ------------
</TABLE>

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

                                       F-4
<PAGE>

Bluefly, Inc.
Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                              2007           2006          2005
<S>                                                                                      <C>            <C>            <C>
Cash flows from operating activities
Net loss                                                                                 $(15,829,000)  $(12,193,000)  $(3,820,000)
Adjustments to reconcile net loss to net cash used in operating activities
   Depreciation and amortization                                                            1,726,000      1,532,000     1,259,000
   Non-cash expense related to warrants issued to supplier                                          -        153,000       347,000
   Provision for returns                                                                     (840,000)     1,636,000     1,233,000
   Bad debt expense                                                                           669,000        643,000       270,000
   Reserve for inventory obsolesence                                                        2,735,000      1,000,000       659,000
   Stock based compensation                                                                 6,194,000      4,454,000        41,000
   Warrant issued to consultant                                                                     -         67,000             -
   Changes in operating assets and liabilities
      (Increase) decrease in
         Inventories                                                                       (7,038,000)    (8,449,000)   (4,941,000)
         Accounts receivable                                                                  (52,000)    (1,645,000)     (778,000)
         Other current assets                                                              (1,293,000)      (134,000)      554,000
         Prepaid expenses                                                                    (114,000)       443,000    (1,020,000)
         Other assets                                                                               -              -      (187,000)
      (Decrease) increase in:
         Accounts payable                                                                   3,698,000       (840,000)    1,472,000
         Accrued expenses and other liabilities                                             1,839,000      1,932,000      (171,000)
         Interest payable to related party shareholders                                             -     (1,217,000)      559,000
         Deferred revenue                                                                     376,000      1,046,000        87,000
                                                                                         ------------   ------------   -----------
            Net cash used in operating activities                                          (7,929,000)   (11,572,000)   (4,436,000)
                                                                                         ------------   ------------   -----------
Cash flows from investing activities
Cash collateral in connection with Rosenthal Pledge Agreement                                       -              -     1,250,000
Purchase of property and equipment                                                         (4,110,000)    (2,148,000)   (2,194,000)
                                                                                         ------------   ------------   -----------
            Net cash used in investing activities                                          (4,110,000)    (2,148,000)     (944,000)
                                                                                         ------------   ------------   -----------
Cash flows from financing activities
Net proceeds from June 2006 financing                                                               -     48,030,000             -
Net proceeds from June 2005 financing                                                               -              -     6,751,000
Purchase of Treasury Stock                                                                 (1,430,000)             -             -
Net proceeds from exercise of Stock Options                                                    25,000         36,000     1,504,000
Payments of capital lease obligation                                                          (14,000)       (54,000)     (152,000)
Dividends paid to related party shareholders                                                        -    (19,512,000)            -
Repayment of related party notes                                                                    -     (4,000,000)            -
                                                                                         ------------   ------------   -----------
            Net cash provided by financing activities                                      (1,419,000)    24,500,000     8,103,000
                                                                                         ------------   ------------   -----------
            Net increase (decrease) in cash and cash equivalents                          (13,458,000)    10,780,000     2,723,000
Cash and cash equivalents
Beginning of year                                                                          20,188,000      9,408,000     6,685,000
                                                                                         ------------   ------------   -----------
End of year                                                                              $  6,730,000   $ 20,188,000   $ 9,408,000
                                                                                         ============   ============   ===========
Supplemental disclosure of cash flow information

Cash paid during the year for interest                                                   $    130,000   $  1,658,000   $   147,000
                                                                                         ------------   ------------   -----------
Non-cash investing and financing activites
   Deemed dividend related to beneficial conversion feature on Series F Preferred Stock  $          -   $  3,857,000             -
                                                                                         ------------   ------------   -----------
   Issuance of Common Stock to placement agent                                           $          -   $  1,080,000             -
                                                                                         ------------   ------------   -----------
   Conversion of Preferred Stock to Common Stock                                         $          -   $    391,000             -
                                                                                         ------------   ------------   -----------
</TABLE>

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

                                       F-5
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

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
       e-commerce Web  site  ("Bluefly.com"  or  "Web  site")  was  launched  in
       September 1998.  The Company operates in one business segment that has no
       operations outside the United States.

       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 its  cash requirements  through at  least December  31, 2008. The
       Company may  seek additional  equity or  debt financings  to maximize the
       growth  of  its business  or  if anticipated  operating  results are  not
       achieved. Subsequent to year end,  the Company received a commitment  for
       financing  in  the  amount  of  $3  million  from  two  of  its  majority
       shareholders and renewed its Credit Facility. See Note 12 for a  complete
       description.

       On August 16, 2007,  the Company was notified by The Nasdaq Stock Market,
       Inc. ("Nasdaq") that it was not in compliance with the continued  listing
       requirements for the Nasdaq Capital  Market because shares of its  Common
       Stock had closed at a per share bid price of less than $1.00 for at least
       30 trading  days.  Under  Nasdaq rules,  the Company  was given a 180-day
       grace period to regain compliance,  which extended to February 11,  2008.
       On February 13, 2008, the  Company received a Nasdaq Staff  Determination
       Letter  indicating  that  the Company's  common  stock  had not  regained
       compliance with the  $1 minimum bid  price continued listing  requirement
       set forth  in Marketplace  Rule 4310(c)(4)  during the  180-day extension
       period provided the Company in  August 2007. The Company would  have been
       entitled to an additional 180-day extension period had it met the initial
       listing criteria of the Nasdaq Capital Market (other than the minimum bid
       price requirement) as  of the expiration  of the initial  180-day period.
       For  a majority  of the  initial 180-day  period, the  Company met  these
       criteria and therefore expected that  it would be granted the  additional
       extension.  However, due  to the decrease  in the price  of the Company's
       common stock over the first few weeks of 2008, it did not meet the public
       float  requirement  of  Nasdaq's  initial  listing  criteria  as  of  the
       determination  date,  and  therefore  was  not  granted  the   additional
       extension.  Accordingly, the Nasdaq  Staff determined that the  Company's
       common stock was subject to delisting from the Nasdaq Capital Market. The
       Company requested a hearing before a Nasdaq Listing Qualifications  Panel
       to review the  Staff Determination, and  the delisting action  was stayed
       pending the issuance of a final decision by the Panel.

       In advance of the hearing, on  March 13,  2008,  the  Board  of Directors
       approved a 1-for-10  reverse stock split,  which will be  effective as of
       April 3, 2008.  Subsequently, the Company's common stock price per  share
       will increase to reflect the 1-for-10 reverse stock split.

       Although the Company has not received a formal  decision  from the Nasdaq
       Listing  Qualifications  Panel,  the  Company  expects  that  it  will be
       provided with a short grace period to regain compliance with the  minimum
       bid price requirement  following the effectiveness  of the reverse  stock
       split.  In  order  to  regain  compliance  with  the  minimum  bid  price
       requirement, the Company's common stock  would need to close at  or above
       $1 for 10 consecutive business days following the reverse stock split.

                                   F-6
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       The Company has not retroactively restated its  results  and  accordingly
       all amounts presented herein are on a pre-split basis.

2.     Summary of Significant Accounting Policies

       Revenue Recognition
       The  Company  recognizes  revenue  in  accordance  with  Staff Accounting
       Bulletin No. 104 "Revenue  Recognition" ("SAB 104") 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:

       o A customer executes an order.

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

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

       o 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").

       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, 2007 and 2006, the  allowance for
       doubtful  accounts  was  $106,000  and  $397,000,  respectively,  and the
       allowance for sales returns was $4,204,000 and $5,043,000, respectively.

       Deferred revenue, which consists primarily of goods shipped to  customers
       but  not  yet  received  and  customer  credits,  totaled   approximately
       $3,206,000 and $2,830,000 as of December 31, 2007 and 2006, 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

                                   F-7
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       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, 2007  and 2006,  inventories, net  consists of  the
       following:

                                                         2007          2006

       Inventory on hand                              $30,146,000   $23,150,000
       Inventory to be received due to returns          2,032,000     2,094,000
       Inventory reserves                              (3,686,000)   (1,055,000)
                                                      -----------   -----------
          Total inventories, net                      $28,492,000   $24,189,000
                                                      ===========   ===========

       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.

       Web Site Development Costs
       In September 2006,  the Company entered  into a Master  License Agreement
       (the "Master  License Agreement")  with a  service provider,  pursuant to
       which  the  Company will  license  certain technology  to  be used  as  a
       platform  for future  versions of  the Company's  Web site.  The service
       provider  will  provide  certain  support  and  consulting  services   in
       connection with  this project.   Beginning in  January 2007,  the Company
       began the process of developing an improved version of its Web site based
       on the new software.  In  connection with this Master License  Agreement,
       the Company has spent $3,633,000. The entire balance is being capitalized
       until put into service.

       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 36 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

                                   F-8
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

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

       Effective  January  1,  2007, the  Company  adopted  Financial Accounting
       Standards  Board ("FASB") -- Interpretation   No.  48,   "Accounting  for
       Uncertainty in Income Taxes-an interpretation of FASB Statement No.  109"
       ("FIN 48").  FIN 48  prescribes a  comprehensive model  for the manner in
       which a company  should recognize, measure,  present and disclose  in its
       financial  statements  all  material  uncertain  tax  positions  that the
       Company has taken or expects to take  on a tax return. As of the  date of
       adoption, there were no tax positions for which it is reasonably possible
       that the total  amounts of unrecognized  tax benefits will  significantly
       increase or decrease  within twelve months  from the date  of adoption of
       FIN 48 or from December 31, 2007.  As of December 31, 2007, the only  tax
       jurisdiction to which the Company  is subject is the United  States. Open
       tax  years relate  to years  in which  unused net  operating losses  were
       generated. Upon  the adoption  of FIN  48, the  Company's open  tax years
       extend back to 1998. In the  event that the Company concludes that  it is
       subject  to  interest  and/or   penalties  arising  form  uncertain   tax
       positions, the Company will present interest and penalties as a component
       of income taxes. No amounts  of interest or penalties were  recognized in
       the Company's Statement of Operations  or Balance Sheet upon adoption  of
       FIN 48 or as of and for the year ended December 31, 2007.

       Stock-Based Compensation
       The Company's Board of Directors  has adopted three stock based  employee
       compensation plans, one in April 2005, one in July 2000 and the other  in
       May 1997 (collectively  the "Plans"), which  are described more  fully in
       Note 8.  The Plans, which  provide for the granting of  restricted stock,
       deferred stock unit awards and  stock options, and other equity  and cash
       awards,  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, and are similar in
       nature.  Vesting  term  for restricted  stock  generally  range from  one
       quarter to one year, while deferred stock unit awards vest quarterly over
       one to three years.  Options are granted in terms not to exceed ten years
       and  become  exercisable as  specified  when the  option  is granted  and
       vesting terms range from immediately to a ratable vesting period of  four
       years.  The Plans have an  aggregate of 15,700,000 shares authorized  for
       issuance.

       Before  January   1,  2006,   the  Company   accounted  for   stock-based
       compensation  under  the   recognition  and  measurement   principles  of
       Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
       Issued to Employees" ("APB 25"), and related interpretations. The Company
       did not recognize compensation  expense related to stock  options granted
       to employees and directors where the exercise price was at or above  fair
       value at the date of  grant. Statement of Financial Accounting  Standards
       No.   123,   "Accounting  for   Stock-Based   Compensation,"  established
       accounting and disclosure requirements using a fair-value-based method of
       accounting for stock-based employee  compensation plans. As permitted  by
       SFAS No.  123, the  Company elected  to continue to apply  the intrinsic-
       value-based method of APB No.  25 described above,  and adopted  only the
       disclosure requirements  of SFAS  No. 123,  as amended  by SFAS  No. 148,
       "Accounting For Stock-Based Compensation - Transition and Disclosure."

       On January 1, 2006,  the start of the  first quarter of fiscal  2006, the
       Company  adopted  the  provisions of  Statement  of  Financial Accounting
       Standards  No.  123  (revised  2004),  "Share-Based  Payment"  ("SFAS No.
       123(R)"), which requires  that the costs  resulting from all  share-based
       payment transactions be recognized  in the financial statements  at their
       fair  values. The  Company adopted  SFAS No.  123(R) using  the modified
       prospective application method under which the provisions of

                                   F-9
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       SFAS No.  123(R) apply to new awards and to awards modified, repurchased,
       or cancelled after the adoption date. Additionally, compensation cost for
       the portion of  the awards for  which the requisite  service has not been
       rendered  that are outstanding  as of the adoption  date is recognized in
       the  Statement of Operations  over the remaining service period after the
       adoption  date  based on the  award's  original  estimate  of fair value.
       Results  for prior  periods  have not  been  restated.  Total share-based
       compensation  expense  recorded in the  Statement  of  Operations for the
       years  ended  December 31, 2007  and  2006 was $6,194,000 and $4,454,000,
       respectively.

       On March 29,  2005, the SEC  published Staff Accounting  Bulletin ("SAB")
       No.  107,  which provides  the  Staff's views  on  a variety  of  matters
       relating  to  stock-based  payments.  SAB  No.  107  requires stock-based
       compensation  be  classified  in  the same  expense  line  items  as cash
       compensation.  The application of SFAS  No. 123(R) had an effect  on full
       year  2006 reported  amounts relative  to amounts  that would  have been
       reported using the intrinsic value method under previous accounting. As a
       result of adopting SFAS No. 123(R), the Company's operating loss and  net
       loss for the year ended December  31, 2006 was $4,424,000 higher than  if
       it had continued  to account for  share-based compensation under  APB No.
       25. Basic and diluted loss per share for the year ended December 31, 2006
       would have been $0.06 per share, lower, respectively, if the Company  had
       not  adopted  SFAS  No.123(R).  There  was  no  effect  on  the Company's
       operating cash flows.

       The following table illustrates the effect  on net loss and net loss  per
       common  share  applicable  to  common  stockholders  for  the  year ended
       December  31,  2005  as  if  the  Company  had  applied  the  fair  value
       recognition provisions for stock-based employee compensation of SFAS  No.
       123(R). For  the year  ended December  31, 2005  compensation expense  of
       $30,000  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.   Except for  these options,  no
       compensation expense has  been recorded for  the year ended  December 31,
       2005 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. For purposes  of the
       pro  forma presentation,  option forfeitures  are accounted  for as  they
       occurred and  no amounts  of compensation  expense have  been capitalized
       into inventory  or other  assets, but  instead were  considered as period
       expenses (in thousands, except per share data):

                                   F-10
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

                                                                     Year Ended
                                                                    December 31,
                                                                        2005

       Net loss, as reported                                         (3,820,000)
       Deduct: total stock-based employee
          compensation expense determined
          under fair value based methods for all
          awards, net of related tax effects                         (2,731,000)
       Add: Stock-based employee compensation
          expense included in reported net loss                          30,000
       Adjusted for Preferred Stock Dividends                        (4,958,000)
                                                                    -----------
             Pro forma net loss available to
             common shareholders                                    (11,479,000)
       Loss per share
          Basic and diluted, as reported                                 ($0.54)
          Basic and diluted, pro forma                                   ($0.71)

           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
                                2007             2006            2005        Prices
<S>                           <C>             <C>             <C>          <C>
Security
Options                       3,428,777        5,417,116       8,038,528   $0.80 - $2.73
Restricted Stock Awards       7,543,963(2)    10,723,488(2)            -        n/a
Warrants                      1,214,249        1,695,893       1,883,393   $0.78 - $3.96
Preferred stock                 758,620(1)       758,620(1)   44,516,119
</TABLE>

       (1) At  December 31,  2007  and  2006,  there were 571 shares of Series F
           Convertible Preferred Stock  outstanding that  are  convertible  into
           approximately 696,341 shares of  Common Stock  (excluding dividends).

       (2) Includes both Restricted Stock and Restricted Stock Units

       As discussed in Note 12 below, in  March 2008, the Company announced that
       it would  effect a  reverse stock  split (the  "Reverse Stock Split"). In
       connection with the Reverse Stock  Split holders of the Company's  Common
       Stock would  receive one  share of  Common Stock  for every  10 shares of
       Common Stock that they held as of April 3, 2008, the record date.

                                  F-11
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       Upon  effectiveness of the Reverse Stock Split, the net loss per share on
       a proforma basis would be as follows:

<TABLE>
<CAPTION>
                                           2007 (Unaudited)   2006 (Unaudited)   2005 (Unaudited)
<S>                                            <C>                <C>                <C>
net loss per share - as reported               $(0.12)            $(0.23)            $(0.54)
net loss per share - after split               $(1.21)            $(2.28)            $(5.43)
</TABLE>

       Marketing Expenses
       In addition to marketing  salaries, marketing expenses consist  primarily
       of online advertising, print and media advertising, costs associated with
       sweepstakes,  direct  mail  campaigns as  well  as  the related  external
       production costs. In accordance  with SOP 93-7 "Reporting  on Advertising
       Costs,"  the  costs  associated with  online  and  print advertising  are
       expensed as incurred, with the  exception of production costs related  to
       print and television  advertising which are  expensed entirely the  first
       time the advertising takes place.  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,  2007 and 2006. For the  year ended
       December 31, 2007, 2006 and 2005 marketing spend (excluding staff related
       costs) were, $14.9 million, $13.0 million and $6.7 million, 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,  2007,
       2006 and  2005, fulfillment  expenses totaled  $4,390,000, $4,409,000 and
       $3,642,000, respectively.

       Fair Value of Financial Instruments
       The carrying  amounts of  the Company's  financial instruments, including
       cash and cash  equivalents, other assets,  accounts payable, and  accrued
       liabilities, approximate fair value due to their short maturities.

       Recent Accounting Pronouncements
       In December 2007, the FASB issued SFAS No. 141R, "Business  Combinations"
       ("SFAS  141R"),  which  requires  the  acquiring  entity  in  a  business
       combination  to record  all assets  acquired and  liabilities assumed  at
       their respective acquisition-date fair values, changes the recognition of
       assets  acquired  and  liabilities  assumed  arising  from contingencies,
       changes the recognition and measurement of contingent consideration,  and
       requires the  expensing of  acquisition-related costs  as incurred.  SFAS
       141R also  requires additional  disclosure of  information surrounding  a
       business  combination,  such  that   users  of  the  entity's   financial
       statements can fully  understand the nature  and financial impact  of the
       business  combination.  SFAS  141R  applies  prospectively  to   business
       combinations for which the acquisition date is on or after the  beginning
       of the first annual reporting  period beginning on or after  December 15,
       2008. The provisions of SFAS 141R  will only impact the Company if  it is
       party to a business combination after the pronouncement has been adopted.

       In  September  2006,   the  FASB  issued   SFAS  No.  157,   "Fair  Value
       Measurements" ("SFAS No. 157"), which defines the fair value, establishes
       a framework for  measuring fair value  and expands disclosure  about fair
       value measurements. This statement is effective for financial  statements
       issued for fiscal  years beginning after  November 15, 2007,  and interim
       periods within those fiscal years.  Relative to SFAS No. 157,  FASB Staff
       Position (FSP) 157-b delays  the effective date of  SFAS No. 157 for  all
       non-financial assets and liabilities, except those that are recognized or

                                  F-12
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       disclosed at fair value in the financial statements on a recurring basis.
       The Company is evaluating the impact that this statement will have on its
       consolidated financial statements.

       Effective  January  1,  2007, the  Company  adopted  Financial Accounting
       Standards  Board   ("FASB")  Interpretation   No.  48,   "Accounting  for
       Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109"
       ("FIN 48").  FIN 48  prescribes a  comprehensive model  for the manner in
       which a company  should recognize, measure,  present and disclose  in its
       financial  statements  all  material  uncertain  tax  positions  that the
       Company has taken or expects to take on a tax return.  As of the date  of
       adoption, there were no tax positions for which it is reasonably possible
       that the total  amounts of unrecognized  tax benefits will  significantly
       increase or decrease  within twelve months  from the date  of adoption of
       FIN 48 or from December 31, 2007.  As of December 31, 2007, the only  tax
       jurisdiction to which the Company  is subject is the United  States. Open
       tax  years relate  to years  in which  unused net  operating losses  were
       generated. Thus upon  adoptions of FIN  48, the Company's  open tax years
       extend back to 1998. In the  event that the Company concludes that  it is
       subject  to  interest  and/or   penalties  arising  from  uncertain   tax
       positions, the Company will present interest and penalties as a component
       of income taxes. No amounts  of interest or penalties were  recognized in
       the Company's Statement of Operations  or Balance Sheet upon adoption  of
       FIN 48 or as of and for the year ended December 31, 2007.

       Concentration
       The Company acquired approximately 38.3% and 27.5% of its inventory  from
       one supplier for fiscal 2007 and 2006, respectively.

       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, realization  of
       deferred  tax  assets,  and  the  calculations  related  to   stock-based
       compensation.  Actual results could differ from those estimates.

3.     Property and Equipment

       As  of December 31, 2007 and 2006, property and equipment consists of the
       following:

                                                         2007          2006

       Leasehold improvements                        $  1,853,000   $ 1,814,000
       Office equipment                                   627,000       594,000
       Computer equipment and software                 13,138,000     9,101,000
                                                     ------------   -----------
                                                       15,618,000    11,509,000

       Less:  Accumulated depreciation                 (9,599,000)   (7,936,000)
                                                     ------------   -----------
                                                     $  6,019,000   $ 3,573,000
                                                     ============   ===========

       Depreciation   and   amortization   of   property   and   equipment   was
       approximately  $1,639,000, $1,419,000 and $1,145,000, for the years ended
       December 31, 2007, 2006 and 2005, respectively.

                                      F-13
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

4.     Prepaid Expenses and Other Current Assets

       As of December 31, 2007  and  2006, prepaid  expenses and  other  current
       assets consist of the following:

                                                         2007            2006

       Prepaid expenses                               $  777,000      $  341,000
       Prepaid inventory                                 294,000         616,000
       Other current assets                              416,000         553,000
                                                      ----------      ----------
                                                      $1,487,000      $1,510,000
                                                      ==========      ==========

5.     Accrued Expenses and Other Current Liabilities

       As of December 31, 2007 and  2006,  accrued  expenses and  other  current
       liabilities consist of the following:

                                                         2007            2006

       Salary, vacation and bonus accrual             $  802,000      $  763,000
       Accrued media expenses                            977,000         667,000
       Other accrued expenses                            273,000         478,000
                                                      ----------      ----------
                                                      $2,052,000      $1,908,000
                                                      ==========      ==========

6.     Income Taxes

       Significant  components  of  the   Company's   deferred  tax   assets and
       liabilities as of December 31, are summarized as follows:

                                                        2007           2006

       Deferred tax assets
       Net operating losses                         $ 34,765,000   $ 33,437,000
       Depreciation and amortization                     213,000        285,000
       Accounts receivable and inventory reserves        374,000        587,000
       Other accruals                                    304,000        313,000
       Stock options                                   2,146,000     (2,201,000)
       Returns reserve                                 1,641,000      2,038,000
                                                    ------------   ------------
                                                      39,443,000     34,459,000
       Valuation Allowance                           (39,443,000)   (34,459,000)
                                                    ------------   ------------
          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

                                      F-14
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       $89,043,000 at December 31, 2007  which have  expiration  dates from 2018
       through 2027.  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 34% as follows:

                                                     2007      2006       2005

       Statutory federal income tax rate           (34.00)%   (35.00)%  (35.00)%
       State tax benefit, net of federal taxes      (5.04)%    (5.41)%   (5.41)%
       Other                                         0.93%      2.23%     0.27%
       Valuation allowance on deferred tax asset    38.11%     38.18%    40.14%
                                                   ------    -------    ------
          Effective tax rate                         0.00%      0.00%     0.00%
                                                   ======    =======    ======
7.     Commitments and Contingencies

       Employment Contracts
       The  Company  has  employment  agreements  with  certain of its executive
       officers.  These  employment  agreements have terms expiring through July
       2009.  As  of  December 31, 2007, the Company's aggregate cash commitment
       for future base salary under these employment contracts is:

       2008                                                           $1,440,000
       2009                                                              425,000
       2010                                                              225,000
                                                                      ----------
                                                                      $2,090,000
                                                                      ==========

       Leases
       The Company leases space under  operating  leases that expire  at various
       dates  through  2010. Future minimum lease payments under these operating
       leases,  excluding   utilities,  that  have  initial  or  remaining  non-
       cancelable terms in excess of one year are as follows:

                                                                       Operating
                                                                         Leases

        2008                                                            $449,000
        2009                                                             342,000
        2010                                                             145,000
        Thereafter                                                             -
                                                                        --------
           Total minimum payments                                       $936,000
                                                                        ========

                                      F-15
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       Rent   expense  (including   amounts  related  to  commercial  rent  tax)
       aggregated  approximately  $500,000,  $566,000 and $450,000 for the years
       ended December 31, 2007, 2006, and 2005, respectively.

       Marketing Commitments
       As of  December 31, 2007,  the  Company  has  advertising  and  marketing
       commitments  in  connection with email services, agency fees and costs in
       connection  with  a  national  ad  campaign  of  approximately $2,172,000
       through December 31, 2008.

       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.

8.     Shareholders' Equity

       Authorized Shares
       The Company is  incorporated  in  Delaware and has 200,000,000 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"); 7,000
       shares of Series F  Convertible  Preferred Stock (the "Series F Preferred
       Stock"); and 15,479,250 shares undesignated and available for issuance.

       Preferred Stock
       Outstanding Shares
       The Company's  currently  has  571.43  shares of Series F Preferred Stock
       outstanding  with a stated value of approximately $571,430. In June 2006,
       all of the  Series A, B, C, D and E shares of Preferred Stock, as well as
       a significant  portion of the Series F Preferred Stock, were converted in
       to shares of  Common Stock,  as more  fully  discussed  in the "June 2006
       Financing" below.

       Dividends
       Each share  of  Series  F  Preferred Stock bears a cumulative compounding
       dividend,  payable  upon  conversion  in  cash  or  Common  Stock, at the
       Company's option, at the rate of 7% per annum.

       Ranking
       The  Series F  Preferred  Stock  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.

       Conversion
       The  Series F  Preferred  Stock  is  convertible into Common Stock at the
       rate of $2.32 in stated value per share of Common Stock.

                                      F-16
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       The Series F Preferred  Stock contains anti-dilution provisions  pursuant
       to which, subject  to certain exceptions,  in the event  that the Company
       issues or sells its Common  Stock or new securities convertible  into its
       Common Stock  in the  future for  less than  the conversion  price of the
       Series F Preferred Stock, the conversion price of the Series F  preferred
       stock would be decreased to the price at which such Common Stock or other
       new securities are sold.  As  more fully described below, the  conversion
       price of the Series F Preferred Stock was reduced from $2.32 per share to
       $0.82 per share in connection with the June 2006 Financing as a result of
       these anti-dilution provisions.

       Voting Rights
       The  Series  F  Preferred  Stock  votes  with the Common Stock on  an as-
       converted basis.

       Redemption
       The Company is entitled to redeem the shares of Series F Preferred  Stock
       for cash at a  price equal to the  stated value, plus accrued  and unpaid
       dividends.

       June 2006 Financing
       On June 15,  2006 (the "Closing  Date"), the Company  completed a private
       placement (the "Private Placement") through the sale of 60,975,610 shares
       of its common stock, par value $0.01 per share (the "Common Stock"), at a
       price of $0.82 per share.   The Private Placement was made  to affiliates
       of Maverick Capital, Ltd.  ("Maverick") and Prentice Capital  Management,
       LP ("Prentice").  The aggregate proceeds from the Private Placement  were
       $50 million, almost half of which  was purchased by each of Maverick  and
       Prentice.  The  purchase price  of  $0.82 per  share  represented an  11%
       premium to the closing bid price of the Common Stock on June 5, 2006, the
       date of signing of the  definitive stock purchase agreement.  The  shares
       purchased  in the  Private Placement  included 203,016  shares of  Common
       Stock that were purchased by  a holder of Series D  Convertible Preferred
       Stock in connection with the exercise of such holder's preemptive rights.
       The amount purchased  by Maverick and  Prentice in the  Private Placement
       was reduced  on a  pro rata  basis as  a result  of the  exercise of such
       holder's preemptive rights.

       Concurrent with the closing of the Private Placement, affiliates of Soros
       Fund  Management  LLC  ("Soros")  converted  all  of  their   outstanding
       Preferred Stock into 44,729,960 shares of the Company's Common Stock. The
       remaining shares of Series D Convertible Preferred Stock, which were held
       by investors other than Soros, automatically converted into an  aggregate
       of 1,073,936 shares of Common Stock.  The placement agent for the Private
       Placement was  paid a  commission of  5% of  the gross  proceeds, half of
       which  was paid  by the  Company and  the other  half by  Soros.  Of  the
       commission paid by the Company, $1 million was paid through the  issuance
       of Common Stock and the remainder was paid in cash.

       On the Closing Date,  the Company paid Soros  $25 million in cash,  which
       represented $4,000,000  of the  principal and  $1,488,376 of  accrued but
       unpaid interest on the  outstanding convertible notes (the  "Notes") held
       by Soros  and the  majority of  the accrued  but unpaid  dividends on the
       shares of Preferred Stock that were converted by Soros in connection with
       the Private Placement, with the remaining accrued but unpaid dividends on
       such  shares of  Preferred Stock  paid in  shares of  Common Stock.   The
       remaining  proceeds  were  used  by  the  Company  for  general corporate
       purposes.  As a result of the Private Placement and the conversion of the
       Preferred  Stock,  Soros  collectively  owns  approximately  39%  of  the
       Company's  Common  Stock,   and  each  of   Maverick  and  Prentice   own
       approximately 24% of the Company's Common Stock.

                                      F-17
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       As  a  result of  the  Private Placement,  the  conversion price  of  the
       Company's Series F Convertible Preferred Stock, the majority of which was
       held by Soros, automatically decreased from $2.32 to $0.82. In accordance
       with FASB  Emerging Issue  Task Force  Issue No.  00-27, "Application  of
       Issue No. 98-5 to Certain Convertible Instruments," this reduction in the
       conversion price of  the Company's Series  F Preferred Stock  resulted in
       the Company recording a beneficial conversion feature in the  approximate
       amount  of  approximately $3.9  million  as part  of  its second  quarter
       financial  results.  This  non-cash  charge,  which  is  analogous  to  a
       dividend, resulted in an adjustment to the Company's computation of  Loss
       Per Share.

       The  Company  agreed to use its  commercially  reasonable  efforts to (i)
       prepare  and  file  with the  Securities  and  Exchange  Commission  (the
       "Commission") a registration statement (the "Registration Statement")  to
       register the shares of Common Stock sold in the Private Placement  within
       120 days of the Closing Date and (ii) cause the Registration Statement to
       be declared effective  by the Commission  within 180 days  of the Closing
       Date.  The  Registration  Statement  has  since been  filed  and declared
       effective.

       In  connection  with  the  June  2006  Private  Placement,  $603,928   of
       cumulative unpaid dividends was  settled through the issuance  of 794,642
       shares  of  Common  Shares.  These  shares  were  computed  by  using the
       conversion price of the Series  D Preferred Stock ($0.76) as  required by
       the terms of the Private Placement.

       In  connection  with the  June  2006 Financing,  the  Company repaid  the
       Convertible Promissory  Notes issued  to Soros  in July  and October 2003
       (the "Notes").  The Company  paid $4,000,000 of principal  and $1,488,376
       of interest. The Notes were set  to mature in May 2007 and  bore interest
       at 12% per annum.

       June 2005 Financing

       The Company raised over $7,000,000 in equity financing in June 2005.  The
       financing  was  effected  through a  private  placement  (the "June  2005
       Financing") that closed on June 24, 2005.  The Company raised  $7,075,431
       through the sale of 7,000  shares of newly designated Series  F Preferred
       Stock  for an  aggregate purchase  price of  $7,000,000 and  warrants to
       purchase an additional 603,448 shares of its common stock at an  exercise
       price of $2.87 per  share. The warrants have  an expiration date of  June
       24, 2008.  The aggregate purchase price for the warrants was $75,431,  or
       $0.125 per warrant,  and all of  the warrants were  purchased by the  New
       Investors described below.  The investors participating in the June  2005
       Financing included  eight private  equity funds  that had  not previously
       participated   in  the   Company's  financing   transactions  (the   "New
       Investors"),  and two  private equity  funds affiliated  with Soros.   In
       connection with the June 2005 Financing, the New Investors also purchased
       from Soros previously issued shares  of the Company's Series D  Preferred
       Stock with an aggregate  liquidation preference and accrued  dividends of
       $3,000,000.

       Warrants to Purchase Common Stock
       Warrants Issued to Investors
       The Company  used the  Black-Scholes option  pricing method  (assumption:
       volatility 79%, risk free  rate 3.86% one and  a half year expected  life
       and zero dividend yield) to  calculate the value of the  603,448 warrants
       issued  in  connection  with   the  June  2005  Financing.   Using  those
       assumptions  a  value  of  approximately  $423,000  was  assigned  to the
       warrant.  In accordance  with EITF  00-27,  Application of EITF Issue No.
       98-5, "Accounting for Convertible Securities  with Beneficial  Conversion
       Features  or  Contingently  Adjustable  Conversion  Ratios"  the  Company
       evaluated the total  value ascribed to  the warrants under  Black-Scholes
       and compared that to the  total proceeds raised. In connection  with that
       the Company recognized a  beneficial conversion feature of  approximately
       $87,000.

                                      F-18
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       Warrants to Soros
       The Company  has issued  warrants to  Soros in  connection with  past and
       recent financings as  well as in  connection with the  Company's previous
       Loan  Facility (which  has since  been refinanced).   Warrants issued  in
       connection with  the Company's  Loan Facility  are included  in the table
       below and are described more fully in Note 10.

       Warrants Issued to Consultant
       In  February  2006, the  Company  issued a  warrant  to a  consultant  in
       exchange for investor  relations services.  The Company  used the  Black-
       Scholes option  pricing method  (assumption:  volatility  118%, risk free
       rate  4.49%,  five  years  expected  life  and  zero  dividend  yield) to
       calculate the value of the  100,000 warrants issued in connection  with a
       warrant  issued  to a  consultant.  Using those  assumptions  a value  of
       approximately $67,000 was assigned to the warrant and charged to  general
       and administrative expenses. These warrants expire in February 2011.

       The following table represents  warrants issued to purchase  Common Stock
       as of December 31, 2007:

                    Number of
       Party        Warrants    Exercise Price Range      Expiration Dates

       Investors     989,249       $2.87 - $3.96      June 2008 - January 2009
       Soros         125,000       $0.78 - $0.88     September 2011 - March 2013
       Consultant    100,000           $1.00                 February 2011
                   ---------
                   1,214,249
                   =========

       Stock-Based Compensation Plans
       The Company's Board of Directors  has adopted three stock based  employee
       compensation  plans.   The  Plans,  which  provide  for  the  granting of
       restricted stock, restricted stock units, stock options and other  equity
       and  cash  awards,  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.

       In  November  2006,  the  Company  entered  into  three  year  employment
       contracts  with  its  Chief  Executive  Officer ("CEO")  and  then  Chief
       Financial Officer ("CFO"). In  connection with these agreements,  the CEO
       and CFO were entitled to, among other things, (i) restricted stock awards
       under our Plans for a total of 861,221 shares of our Common Stock, (which
       vested  in  full  on  January 1,  2007)  plus  cash  bonuses of  $517,890
       (intended  to  compensate  them  for the  income  taxes  payable  on such
       restricted stock awards) in exchange for the forfeiting of their right to
       certain fully vested and  out-of-the-money stock options that  would have
       been exercisable to purchase an  aggregate of 2,518,458 shares of  Common
       Stock;  (ii)  deferred  stock  unit awards  under  the  Plan  for 172,741
       underlying shares of Common Stock  (which vest quarterly over a  two year
       period),  in  exchange  for  the forfeiting  of  their  right  to certain
       unvested  and  out-of-the-money  stock  options  that  would  have   been
       exercisable to purchase an aggregate  of 326,454 shares of Common  Stock;
       and  (iii)  subject to  the  approval of  the  Company's stockholders  of
       certain amendments to the Plans, deferred stock unit awards  representing
       8,264,524 shares of  Common Stock with  one-third of such  deferred stock
       units vesting quarterly,  in equal amounts,  over a twelve  month period,
       one-third vesting quarterly, in  equal amounts, over a  twenty-four month
       period, and one-third vesting quarterly, in equal amounts, over a thirty-
       six month period. The vesting period for all awards

                                      F-19
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       commences on  October 1,  2006. In  May 2007  the Company's  stockholders
       approved these amendments to the Plans.

       The Company recorded the exchange of the options for restricted stock and
       deferred stock  unit awards  as replacement  awards, and  therefore under
       SFAS No.  123R treated  the exchange  as a  modification of  the original
       option grant and recorded  incremental compensation cost measured  as the
       excess of the fair value of the replacement awards, measured  immediately
       after modification, over the fair value of the cancelled award,  measured
       immediately  before  modification,   at  the  modification   date.  Total
       incremental   compensation   expense  was   approximately   $507,000.  In
       connection with these  new awards, the  Company recognized an  expense of
       $9.3  million  over  three years.  Approximately  $4.5  million and  $2.1
       million of this expense was recognized in 2007 and 2006, respectively.

       In connection with  these grants described  above, the Company  has given
       the employee  holders of  the shares  of Restricted  Stock and Restricted
       Stock Units the ability to settle  taxes due upon delivery of the  shares
       on a net share  basis. Shares used to  satisfy taxes are then  charged to
       Treasury Stock.  During 2007,  the Company  acquired 1,510,733  shares of
       Treasury Stock.

       Restricted Stock and Deferred Stock Unit Awards

       The following table is a summary of activity related to restricted  stock
       and deferred stock units grants for key employees at December 31, 2007:

<TABLE>
<CAPTION>
                                                            Weighted                      Weighted
                                                            Average                        Average
                                                             Grant          Deferred        Grant
                                            Restricted     Date Fair         Stock        Date Fair
                                               Stock         Value        Unit Awards       Value
<S>                                          <C>             <C>          <C>               <C>
Balance at January 1, 2006                      --                            --
   Shares/Units Granted                       861,221        $0.95         9,862,267        $0.94
   Shares/Units Forfeited                       --                            --
Balance at December 31, 2006                  861,221        $0.95         9,862,267        $0.94
   Shares/Units Granted                       426,192        $1.26           544,405        $1.22
   Shares/Units Forfeited                     (29,678)       $1.27           (29,381)       $1.27
   Shares/Units Restriction Lapses           (861,221)       $0.95        (3,229,842)       $0.94
Balance at December 31, 2007                  396,514        $1.26         7,147,449        $0.96

Aggregate Grant Date Fair Value              $499,608                     $6,861,551

Vesting Service Period of Shares Granted       1 year                       12 - 36
                                                                             months
Number of shares/units vested during
December 31, 2006                               --                            --
Number of shares/units unvested at
December 31, 2006                             861,221                      9,862,267
Number of shares/units vested during
December 31, 2007                             861,221                      3,229,842
Number of shares/units unvested at
December 31, 2007                             396,514                      7,147,449
</TABLE>

                                      F-20
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       For the  years ended  December 31,  2007 and  2006 the Company recognized
       expense of  approximately $5,678,000  and $2,159,000  in connection  with
       these awards.

       As of December 31, 2007 the total compensation cost related to non-vested
       restricted stock  and deferred  stock units  not yet  recognized was $3.8
       million.

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

                                                   Number           Weighted
                                                     of              Average
                                                   Shares         Exercise Price

       Balance at January 1, 2005                 9,813,379           $2.28

       Options granted                            2,039,000           $1.39
       Options canceled                          (2,216,567)          $3.56
       Options exercised                         (1,597,284)          $0.94
                                                 ----------
       Balance at December 31, 2005               8,038,528           $1.97
                                                 ----------

       Options granted                              521,000           $0.96
       Options canceled                          (3,099,082)          $2.32
       Options exercised                            (43,330)          $0.82
                                                 ----------
       Balance at December 31, 2006               5,417,116           $1.68
                                                 ----------

       Options granted                               60,000           $0.97
       Options canceled                          (2,020,278)          $2.76
       Options exercised                            (28,061)          $0.89
                                                 ----------
       Balance at December 31, 2007               3,428,777           $1.06
                                                 ----------

       Vested at December 31, 2005                4,969,929           $2.15
       Vested at December 31, 2006                3,682,877           $1.83
       Vested at December 31, 2007                2,871,126           $1.04

       The stock options are exercisable in different periods through 2017.
       Additional information with respect to the outstanding options as of
       December 31, 2007, is as follows:

                                      F-21
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

<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>
$0.51 - $1.00        2,006,331           5.5 Years           $0.91          1,842,691            $0.91
$1.01 - $1.50        1,373,644           7.4 Years           $1.24            992,177            $1.25
$1.51 - $2.00           41,302           4.3 Years           $1.66             27,758            $1.64
$2.01 - $2.50            3,750           3.1 Years           $2.16              3,750            $2.16
$2.51 - $3.00            3,750           2.9 Years           $2.73              3,750            $2.73

$0.51 - $3.00        3,428,777           6.2 Years           $1.06          2,870,126            $1.04
</TABLE>

       The total fair value of the 2,545,143 options that vested during the year
       was  approximately  $2,638,000.   At  December  31,  2007,  the aggregate
       intrinsic  value of  the fully  vested options  was $0  and the  weighted
       average remaining  contractual life  of the  options was  5.9 years.  The
       Company has not capitalized any compensation cost, or modified any of its
       stock  option grants  for the  years ended  December 31,  2007 and  2006,
       except for  those described  in connection  with the  Offer to  Exchange.
       Other selected information is as follows:

<TABLE>
<CAPTION>
                                                     2007         2006          2005
<S>                                                  <C>        <C>         <C>
Aggregate intrinsic value of outstanding options         $0     $881,000      $399,000
Aggregate intrinsic value of options exercised       $7,000       $7,000    $1,088,000
Weighted average fair value of options granted        $0.97        $0.79         $1.24
</TABLE>

       As of December  31, 2007,  the total  compensation cost  related to  non-
       vested  stock  option  awards not  yet  recognized  was $520,000.   Total
       compensation  cost is  expected to  be recognized  over 1.3  years  on  a
       weighted average basis.

       The fair value of options granted is estimated on the date of grant using
       a  Black-Scholes   option  pricing   model.  Expected   volatilities  are
       calculated based  on the  historical volatility  of the  Company's stock.
       Management  monitors  share  option  exercise  and  employee  termination
       patterns to  estimate forfeiture  rates within  the valuation  model. The
       expected holding  period of  options represents  the period  of time that
       options granted are  expected to be  outstanding. The risk-free  interest
       rate for periods within the expected  life of the option is based  on the
       interest rate of U.S. Treasury note  in effect on the date of  the grant.
       The Company had previously recorded expense in accordance with APB No. 25
       for  certain  options issued  to  its President  that  were issued  below
       market.  Prior  to the  adoption of  FAS 123(R),  the Company  recognized
       actual forfeitures when they occurred  but has not recorded a  cumulative
       effect adjustment to record estimated forfeitures related to these  below
       market options as the balance was immaterial.

       The table below presents the assumptions used to calculate the fair value
       of options granted for  the year ended December  31, 2007, 2006 and  2005
       respectively:

                                      F-22
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

                                                 Year Ended December 31,
                                          --------------------------------------
                                          2007            2006             2005

       Risk-free interest rates           4.56%           4.65%            4.22%
       Expected life (in years)            5.5               6                6
       Dividend yield                        0%              0%               0%
       Expected volatility                  94%            101%             138%

       In January  2007, the  Company commenced  an exchange  offer pursuant  to
       which it is offering to exchange certain outstanding stock options issued
       to  employees  and  non-employee directors  for  restricted  stock awards
       and/or deferred stock unit awards. See Note 9 below.

9.     Offer to Exchange

       In January 2007,  the Company commenced  an exchange offer  (the "Offer")
       pursuant  to  which  it offered  to  exchange  certain outstanding  stock
       options issued  to employees  and non-employee  directors for  restricted
       stock awards and/or deferred stock unit awards.

       Employees (other than the CEO and CFO, who already had exchanged  certain
       of their  options  pursuant  to  their  employment  agreements)  and non-
       employee directors who  held stock options with an exercise price greater
       than $1.50 were eligible to  participate in the Offer.  Eligible  options
       that were vested as of August 31, 2006 could be exchanged for  restricted
       stock awards, and eligible options that  were not vested as of that  date
       could be exchanged for deferred  stock unit awards.  Both the  restricted
       stock awards and  the deferred stock  unit awards are  subject to vesting
       provisions.  The number of restricted stock awards and/or deferred  stock
       unit  awards  issued  in  exchanged  for  an  eligible  option  grant was
       determined by the exchange ratio applicable to that particular option.

       The  Company had  instituted the  exchange offer  because a  considerable
       number of its employees had held options that had exercise prices  higher
       than  the current  and recent  trading prices  of its  common stock.  The
       purpose  of  the exchange  offer  was to  promote  the interests  of  the
       Company's  stockholders  by  strengthening its  ability  to  motivate and
       retain valued employees.

       The exchange offer began  on January 25, 2007  and ended on February  23,
       2007. In  connection with  the Offer,  an aggregate  of 1,562,000 options
       were  tendered  in  exchange  for  an  aggregate  of  472,471  shares  of
       restricted stock and 394,405 shares  of deferred stock unit awards.  This
       represented approximately 95% of the total options that were eligible for
       exchange.  The  Company  accounted  for  the  exchange  of  Options   for
       restricted stock and deferred stock unit awards as replacement awards  in
       accordance with SFAS No. 123(R) and recognized an expense of $436,000 for
       the year ended December 31, 2007.

       In February,  2008, the  Company delivered  268,572 shares  of Restricted
       Stock Issued in connection with this Offer.

10.    Financing Agreement

       In July 2005, the Company entered into a new three year revolving  credit
       facility ("Credit Facility") with Wells Fargo Retail Finance, LLC ("Wells
       Fargo"). The  Credit Facility  refinanced the  Company's previous  credit
       facility (the "Rosenthal Facility") with Rosenthal & Rosenthal, Inc.

                                      F-23
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       ("Rosenthal").  Under  the  terms of  the  Credit  Facility, Wells  Fargo
       provides the Company with a revolving credit facility and issues  letters
       of  credit in  favor of  suppliers or  factors.  The  Credit Facility  is
       secured  by a  lien on  all of  the Company's  assets. Historically,  the
       Credit Facility was also secured by a $2,000,000 letter of credit  issued
       by Soros in favor of Wells Fargo (the "Soros LC").  In August 2006, Wells
       Fargo  agreed  to  release  the  Soros  LC,  and  no  longer  requires an
       availability reserve (although it has the right under the Credit Facility
       to establish reserves in the future, as it deems appropriate) so long  as
       the Company maintains a minimum cash balance of $5,000,000.  Furthermore,
       our Credit Facility prohibits us  from paying cash dividends without  the
       consent of our lender.

       Availability under the  Credit Facility is  determined by a  formula that
       considers a certain percentage of our inventory and a certain  percentage
       of accounts receivable. The maximum availability is currently $7,500,000,
       but can be increased to $12,500,000 at the Company's request,  subject to
       certain conditions. As of December 31, 2007, total availability under the
       Credit Facility,  was  approximately  $7,500,000  of which $3,700,000 was
       committed,  leaving   approximately  $3,800,000  available  for   further
       borrowings.

       Interest accrues monthly  on the average  daily amount outstanding  under
       the Credit Facility during the preceding month at a per annum rate  equal
       to the  prime rate  plus 0.75%  or LIBOR  plus 2.75%  for average  excess
       availability less  than $3.0  million and  the prime  rate plus  0.50% or
       LIBOR  plus  2.50%  for average  excess  availability  greater than  $3.0
       million.  The Company  also pays a  monthly commitment fee  on the unused
       portion  of  the facility  (i.e.,  $7,500,000 less  the  amount of  loans
       outstanding) equal to 0.35%.  The  Company also pays Wells Fargo  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. For the years ended December 31, 2007, 2006 and 2005 total interest
       expense and fees related  to the credit facilities  totaled approximately
       $130,000, $170,000 and $196,000, respectively.

       Under the terms of the Credit  Facility, Soros has the right to  purchase
       all of the Company's  obligations from Wells Fargo  at any time if  it is
       then in  default under  the Credit  Facility. Subsequent  to year end the
       Credit Facility was Amended - See Note 12 below.

       Soros Warrants in Connection with Loan Facility
       Prior to April 2004, Soros guaranteed repayment of the Company's previous
       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.

       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 for
                 2001                               2011              Volatility - 117%            Soros establishing
                                                                        Term - 5 years             the Soros Guarantee

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

                                      F-24
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       (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.  These amounts  were amortized to interest expense  over
       the life of the Loan Facility.

11.    Quarterly Results of Operations (Unaudited)

       Amounts in thousands, except per share data:

<TABLE>
<CAPTION>

                                                                        Quarter Ended
                                                    ------------------------------------------------------
2007                                                March 31      June 30      September 30    December 31
<S>                                                 <C>           <C>             <C>            <C>
Net Sales                                           $22,108       $21,608         $18,079        $29,698
                                                    -------       -------         -------        -------
Gross Profit(2)                                     $ 8,374       $ 8,463         $ 5,728        $10,174
                                                    -------       -------         -------        -------
Net Loss(2)                                         $(3,103)      $(2,142)        $(5,028)       $(5,556)
                                                    -------       -------         -------        -------
Preferred stock dividends                           $   (11)      $   (11)        $   (11)       $   (11)
                                                    -------       -------         -------        -------
Net loss available to common shareholders(2)        $(3,114)      $(2,153)        $(5,039)       $(5,567)
                                                    -------       -------         -------        -------
Loss per common share - basic and diluted(2)        $ (0.02)      $ (0.02)        $ (0.04)       $ (0.04)
                                                    -------       -------         -------        -------

<CAPTION>
                                                                        Quarter Ended
                                                    ------------------------------------------------------
2006                                                March 31      June 30      September 30    December 31
<S>                                                 <C>           <C>             <C>            <C>
Net Sales                                           $16,876       $16,793         $16,322        $27,071
                                                    -------       -------         -------        -------
Gross Profit                                        $ 6,839       $ 7,046         $ 6,111        $10,913
                                                    -------       -------         -------        -------
Net Loss                                            $(3,264)      $(1,901)        $(3,485)       $(3,543)
                                                    -------       -------         -------        -------
Preferred stock dividends                           $(1,231)      $  (990)        $   (16)       $   (15)
                                                    -------       -------         -------        -------
Net loss available to common shareholders           $(4,495)      $(6,748)        $(3,501)       $(3,558)
                                                    -------       -------         -------        -------
Loss per common share - basic and diluted(1)        $ (0.22)      $ (0.17)        $ (0.03)       $ (0.03)
                                                    -------       -------         -------        -------
</TABLE>

       (1) Weighted average shares increased to 80.2 million for the year  ended
       December  31,  2006  as a  result  of  the June  2006  financing  and the
       conversion  of  the  Company's  preferred  stock  into  common  stock  in
       connection with the financing.
       (2)  Amount  includes  a   write-off  of  approximately  $1.5  million of
       inventory recorded in the fourth quarter.

12.    Subsequent Events

       2008 Financing
       In March 2008, the Company  entered into an agreement (the  "Commitment")
       Soros  and   private  funds   associated  with   Maverick  Capital,  Ltd.
       ("Maverick") pursuant to which they agreed to provide up to $3 million of
       debt financing  to the Company, on a standby basis, during the next year,
       provided that the

                                      F-25
<PAGE>

Bluefly, Inc.
Notes to Financial Statements
December 31, 2007
--------------------------------------------------------------------------------

       commitment amount  will be  reduced by  the gross  proceeds of any equity
       financing consummated during the year.  The Company can draw down debt in
       one or more tranches,  provided that our cash  balances are less than  $1
       million at the time of any  draw down.  The draw downs will  be evidenced
       by subordinated convertible notes (the "Subordinated Notes") that have  a
       term expiring on the later  of  June  26,  2011  and three years from the
       date of the issuance of the Subordinated  Notes and bear  interest at the
       rate of 8% per annum, compounded  annually.   Interest  is  payable  upon
       maturity  or  conversion.   The   Subordinated   Notes  are  convertible,
       (subject   to  stockholder  approval to the extent required by the NASDAQ
       Capital  Market)  at  the holder's option (a) into equity securities that
       the Company  might issue in any subsequent round of  financing at a price
       that  was  equal to  the  lowest  price  per share paid   by any investor
       in such subsequent round of financing or (b) into Common Stock at a price
       per  share  equal  to  the  market price (as  defined in the Subordinated
       Notes)  on  the  date of issuance of  the note.   In connection  with the
       Commitment, the Compnay issued warrants to Soros and Maverick to purchase
       an aggregate of 525,002 shares of Common Stock at an exercise price equal
       to  the trailing 20-day average stock price on the date of grant.

       Wells Fargo Amendment
       On  March 26,  2008, the  Company amended  its credit  facility ("Credit
       Facility") with Wells Fargo Retail  Finance, LLC. ("Wells Fargo") to  (i)
       extend  the term  until July  26, 2011;  (ii) change  the rate  at which
       interest accrues on  the average daily  amount under the  Credit Facility
       during the preceding month  to a per annum  rate equal to the  prime rate
       plus 0.75% or LIBOR plus  3.25% on average excess availability  less than
       $3.0 million and prime rate plus 0.50% or LIBOR plus 3% on average excess
       availability  greater  than  $3.0  million;  (iii)  increase  the monthly
       commitment fee on the unused portion of the Credit Facility to 0.50% from
       0.35%; (iv) include a servicing fee of $3,333.33 per month; (v)  increase
       the early  termination fee  to 1%  of the  revolving credit ceiling, from
       0.50% through maturity; and (vi) amend the standby and documentary letter
       of  credit  fees  to  3.25% and  2.75%,  respectively  on  average excess
       availability less than $3.0 million, and 3.00% and 2.50%, respectively on
       average excess availability greater than $3.0 million.

       In addition, the amendment calls for no revolving credit loans to be made
       unless  the  full amount  available  pursuant to  the  Subordinated Notes
       (described above) has  been advanced to  the Company and  is outstanding.
       Under the terms of a Subordination and Intercreditor Agreement, dated  as
       of March 26, 2008, Soros and  Maverick have the right to purchase  all of
       the Company's obligations from Wells  Fargo at anytime if the  Company is
       then  in  default under  the  Credit Facility.  In  connection with  this
       amendment, the Company paid Wells Fargo a $35,000 amendment fee.

       Reverse Stock Split
       In March 2008, the Company announced that it would effect a reverse stock
       split (the "Reverse Stock Split") in order to regain compliance with  the
       minimum bid price requirement of the Nasdaq rules. In connection with the
       Reverse Stock Split holders of  the Company's Common Stock would  receive
       one share of Common Stock for  every 10 shares of Common Stock  that they
       held as  of April  3, 2008,  the record  date. The  effective date of the
       Reverse Stock Split is expected to be April 3, 2008.

       Upon effectiveness  of the  Reverse Stock  Split, the  number of weighted
       shares outstanding and the loss per share on a proforma basis would be as
       follows:

<TABLE>
<CAPTION>
                                                          Unaudited
                             --------------------------------------------------------------
                             December 31, 2007      December 31, 2006     December 31, 2005
<S>                              <C>                     <C>                   <C>
Weighted Average Shares
Outstanding                      13,091,129              8,017,053             1,615,302

Loss Per Share                       $(1.21)                $(2.28)               $(5.43)
</TABLE>

                                      F-26
<PAGE>

Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended December 31, 2007

<TABLE>
<CAPTION>
                                                         -----------------------------------
            Column A                    Column B                      Column C                  Column D         Column E
                                                         -----------------------------------
                                                                (1)                (2)
----------------------------------------------------------------------------------------------------------------------------------
           Description              Beginning Balance    Charged to Costs   Charged to other    Deductions   Balance end of Period
--------------------------------    at January 1, 2007     and Expenses          Accounts       ----------     December 31, 2007
                                    --------------------------------------------------------                 ---------------------
<S>                                    <C>                  <C>                  <C>            <C>               <C>
Allowance for Sales Returns             (5,043,000)         (59,107,000)               -        59,946,000         (4,204,000)

Allowance for Doubtful Accounts           (397,000)            (669,000)               -           960,000           (106,000)

Inventory Reserves                      (1,055,000)          (2,735,000)               -           104,000         (3,686,000)

Deferred Tax Valuation Allowance       (34,459,000)          (5,460,000)         476,000                 -        (39,443,000)

<CAPTION>
                                                         -----------------------------------
            Column A                    Column B                      Column C                  Column D         Column E
                                                         -----------------------------------
                                                                (1)                (2)
----------------------------------------------------------------------------------------------------------------------------------
           Description              Beginning Balance    Charged to Costs   Charged to other    Deductions   Balance end of Period
--------------------------------    at January 1, 2006     and Expenses          Accounts       ----------     December 31, 2006
                                    --------------------------------------------------------                 ---------------------
<S>                                    <C>                  <C>                  <C>            <C>               <C>
Allowance for Sales Returns             (3,407,000)         (50,126,000)               -        48,490,000         (5,043,000)

Allowance for Doubtful Accounts            (78,000)            (643,000)               -           324,000           (397,000)

Inventory Reserves                        (782,000)          (1,000,000)               -           727,000         (1,055,000)

Deferred Tax Valuation Allowance       (30,712,000)          (4,656,000)         909,000                 -        (34,459,000)

<CAPTION>
                                                         -----------------------------------
            Column A                    Column B                      Column C                  Column D         Column E
                                                         -----------------------------------
                                                                (1)                (2)
----------------------------------------------------------------------------------------------------------------------------------
           Description              Beginning Balance    Charged to Costs   Charged to other    Deductions   Balance end of Period
--------------------------------    at January 1, 2005     and Expenses          Accounts       ----------     December 31, 2005
                                    --------------------------------------------------------                 ---------------------
<S>                                    <C>                  <C>                  <C>            <C>               <C>
Allowance for Sales Returns             (2,174,000)         (34,820,000)                -       33,587,000         (3,407,000)

Allowance for Doubtful Accounts            (44,000)            (270,000)                -          236,000            (78,000)

Inventory Reserves                        (835,000)            (659,000)                -          712,000           (782,000)

Deferred Tax Valuation Allowance       (28,738,000)          (1,533,000)         (441,000)               -        (30,712,000)
</TABLE>

                                       S-1