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


[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    For the transition period from ______ to ______

                        Commission File Number: 333-22895

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

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

               New York                                  13-3612110
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation or organization)
   42 West 39th Street, New York, NY                        10018
(Address of principal executive offices)                 (Zip Code)

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

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

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

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

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

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

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

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

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

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

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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

Bluefly, Inc. (the "Company" or "Bluefly") is a leading Internet retailer of
designer fashions and home furnishings at outlet store prices. The Company sells
over 300 brands of designer apparel and home accessories at 25 to 75 percent off
of retail prices via its Web Site ("Bluefly.com" or the "Web Site"). The Web
Site, which also offers a variety of fashion-related content, was launched in
September 1998.

The Company's goal is to create a superior marketplace for end-of-season and
excess apparel by addressing inherent deficiencies in the traditional market for
off-price apparel that limit its appeal to both customers and designers. The
Company believes that the economic advantages provided by Internet retailing,
including inventory management efficiencies resulting from centralized
warehousing and distribution and the ability to more easily maintain an upscale
atmosphere through the design of a single online storefront, provide a unique
opportunity to address these deficiencies. The Company's goal is to utilize
these economic advantages to create a new retail paradigm that combines the best
practices of a number of successful retail and fashion companies. Accordingly,
the Company strives to combine:

1. the breadth of product selection found at Bloomingdale's;
2. the quality of customer service provided by Nordstrom;
3. the type of values typically found at traditional off-price retailers such as
   T.J. Maxx;
4. the atmosphere of an upscale department store such as Barney's;
5. the type of content found at a national fashion magazine such as Vogue; and
6. the convenience of Amazon.com

In addition, Bluefly.com features MyCatalog(SM) - the Company's proprietary
database search technology which allows a user to create a personalized catalog
that features only the brands, sizes and styles in which the user is interested.
The Company believes that it has created a customer experience that is
fundamentally better than that offered by traditional off-price retailers.
Similarly, the Company believes that its upscale atmosphere, fashion content and
premium brand selection 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.

The Company was incorporated under the laws of the State of New York in 1991 as
Pivot Corporation. In 1994, the Company changed its name to Pivot Rules, Inc.,
and, in October 1998, changed its name to Bluefly, Inc. Bluefly.com was publicly
launched in September 1998. In June 1998, prior to the launch of Bluefly.com,
the Company discontinued its Pivot Rules division, which marketed a collection
of golf sportswear, in order to devote all of its energy and resources to
building Bluefly.com.


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MARKET OPPORTUNITY

THE ONLINE APPAREL MARKET

The dramatic growth of e-commerce has been widely reported and is expected to
continue. Forrester Research ("Forrester") estimates that online purchases by
U.S. consumers will grow from approximately $20 billion in 1999 to $184 billion
by 2004, representing a compound annual growth rate of 56%. International Data
Corporation estimates that the number of total online purchasers will grow from
approximately 31 million in 1998 to 183 million in 2003, representing a compound
annual growth rate of 43%. The Company believes that a number of factors will
contribute to the growth of e-commerce, including (i) shoppers' growing
familiarity and comfort with shopping online; (ii) the proliferation of devices
to access the Internet, and (iii) technological advances that make navigating
the Internet faster and easier.

The NDP Group ("NDP") reported that online apparel sales reached $1.1 billion in
1999, approximately twice the amount of 1998 sales. NPD expects triple digit
growth in online apparel sales again in 2000. According to Forrester
projections, apparel and accessory purchases will grow to $26 billion in 2004.
The Company believes that the market for online sales of apparel is growing
faster than many other categories as a result of a confluence of trends,
including (i) the growth of women online, (ii) the expansion of online traffic
from technology oriented users to users with mainstream demographics and (iii)
the development of sophisticated tools (such as the Company's MyCatalog) to
search complex product categories such as apparel.

As of January 1999, according to Jupiter Communications ("Jupiter"), women
comprised 48% of the online population, up from 45% as of January 1998.
According to Jupiter, by 2001, it is expected that women will represent over
half of the online population. Since women, according to Jupiter, spend almost
three times as much as men on the remote purchase of apparel, the Company
believes that the increasing number of women online is likely to fuel the growth
of online apparel sales. In addition, as the online audience expands from
technology savvy pioneers to include mainstream consumers, demand for online
goods and services should more closely mimic the general population's demands,
and categories such as apparel will likely benefit disproportionately. In light
of these factors, Jupiter projects that the apparel category will be one of the
fastest growing product categories online through 2002. Of course, there can be
no assurance that such expectations will prove to be correct or that they will
have a positive effect on the Company's business.

CATALOG SALES AS A PREDICTOR OF FUTURE GROWTH

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

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

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

THE MARKET FOR OFF-PRICE APPAREL

According to Discount Store News, traditional retailers of off-price apparel
such as T.J. Maxx, Marshalls and Loehmanns, Inc. sold approximately $18.5
billion dollars worth of goods in 1997. In addition, the International Council
of Shopping Centers reported that factory outlet sales of apparel and
accessories equaled $8.3 billion dollars in 1997. The Company believes that this
$26.8 billion dollar market has generally failed to address a number of consumer
needs, including convenience and customer service, and has created brand
dilution for designers who participate in the market.


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By offering only the best fashion brands and products at competitive prices in a
more convenient and compelling format with a high level of customer service, the
Company intends to provide a meaningful alternative to both consumers and
designers and revolutionize the off-price apparel industry.

THE BLUEFLY STRATEGY

The Company's objective is to become the preeminent Internet retailer of excess
and end-of-season apparel, fashion accessories, and home products. The Company
was the first to devote substantial time and resources to developing and
promoting the direct-to-consumer market for off-price name brand apparel and
accessories. This could be because, until recently, no medium existed that could
accommodate both a high volume of traffic and the logistical infrastructure
necessary to sell end-of-season and excess apparel inventory directly to
customers in an efficient and economical manner.

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

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

MARKETING INITIATIVES

The Company has implemented an aggressive advertising and marketing campaign to
increase awareness of the Bluefly brand and acquire new customers. The Company
is seeking to position the Bluefly brand as the world's first full service
outlet store, combining the service and selection found at the best high-end
retailers such as Saks Fifth Avenue or Nordstrom with savings typically
available only at off-price stores such as TJ Maxx, Ross or company-owned outlet
stores. The Company seeks to incorporate this branding effort into all aspects
of its operations, including advertising, customer service, site experience,
packaging and delivery.

The Company plans to acquire new customers through multiple channels, including
traditional and online advertising, direct marketing and the expansion of its
strategic online relationships. The Company has established strategic marketing
alliances with many of the top Internet portals, including AOL, Yahoo!, MSN,
Lycos and Excite, as well as with more targeted vertical portals such as
Women.com and Alloy Online and online search engines such as Inktomi. The
Company also obtains online advertisements through short-term agreements with a
variety of Web sites. The Company believes that it has been able to negotiate
favorable rates and positioning on most of these Web sites in part because the
portals may have recognized that online consumers will not be fully satisfied by
the single brands offered by vertical retailers such as Gap, Inc., J.Crew Group,
Inc., Spiegel, Inc. (i.e. Eddie Bauer), and Land's End, which have thus far
dominated apparel sales in the online apparel category's brief history. The
Company believes that, as an early leader in the online off-price apparel
category, it has been able to leverage its broad product offering and compelling
value for apparel to obtain favorable position on many of the major portals.

The Company's traditional advertising efforts have focused on print media. The
Company's current print media campaign, which commenced in May 1999, has run in
over 20 national magazines, including Vogue, Harper's Bazaar, Elle, InStyle,
Esquire, GQ and Seventeen. The Company also tested a radio campaign in the New
York metropolitan area during November and December 1999.

MERCHANDISING

The Company's merchandising efforts are led by a team of 7 buyers who hail from
such venerable retailers as Saks Fifth Avenue, Bergdorf Goodman and Henri
Bendel. The Company buys products directly from designer brands as well as from
retailers and other third party indirect resources. Currently, the Company
offers products from more than 300 top, name brand designers, which


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the Company believes to be the widest selection of designers available on the
Internet. It has established direct supply relationships with over 200 of such
designers. The Company believes that it has been successful in opening up more
than 200 direct relationships in part because it has devoted substantial
resources to establishing Bluefly.com as a high-end retail environment. In this
regard, the Company is committed to displaying all of its merchandise in an
attractive manner, offering superior customer service and gearing all aspects of
its business towards creating a better channel for top designers to liquidate
their excess inventory. In 1999, approximately 14.6% of the Company's inventory
was purchased from one supplier, down from 40.6% in 1998. Based upon its
successes to date in establishing both direct and indirect supply relationships,
the Company believes that it will be able to obtain the quantity, selection and
quality of fashion products necessary to operate its business, however there can
be no assurance that this will be the case.

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

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

(i)   By centralizing its inventory, the Company believes it will be able to
      optimize its inventory turns because it is not forced to anticipate sales
      by region or allocate merchandise between multiple locations.
(ii)  The Company's Web Site captures a tremendous amount of customer data
      that the Company intends to use to optimize its purchase of inventory. For
      example, as a customer navigates through the virtual store, the Company
      can track the customer's path and draw certain conclusions based on which
      departments, sizes, designers and product categories are clicked on as
      well as the products that are actually being purchased. This will
      significantly aid the Company in planning inventory purchases. In
      addition, the Company's MyCatalog feature also can facilitate better
      inventory planning. In order to use this service, customers enter their
      sizes, favorite departments, product categories and designers to produce a
      personalized catalog of all the products currently in stock that match
      their interest. As a result of this wealth of customer data, the Company
      may be able to better predict the demand for certain brands and product
      categories, as well as make more informed buying decisions.
(iii) Unlike traditional brick and mortar retailers, the Company can change
      the pricing of its products almost instantaneously and can price products
      based on supply and demand.
(iv)  Unlike traditional brick-and-mortar retailers, which have a limited
      amount of shelf space, significant rent payments and attendant sales
      personnel costs, the Company holds its inventory in a warehouse with a
      lower per square foot rental charge, minimal personnel costs and a vast
      amount of shelf space. These factors create lower inventory carrying
      costs.
(v)   The Internet is global and the Company ships products to over 20
      countries in the northern and southern hemisphere. Consequently, the
      Company may be less susceptible to seasonal markdowns, because, as the
      northern hemisphere is entering its Summer, the southern hemisphere is
      entering its Winter.

BLENDING COMMERCE AND CONTENT

The Company also believes that the Internet provides it with the opportunity to
create an innovative contextual merchandising environment by integrating its
product offerings into fashion content. As a result, the Company hopes to
collapse the opinion forming, browsing and buying stages of the purchase process
into a single step. As part of this effort, the Company has developed exclusive
content relationships with popular fashion magazines such as Harper's Bazaar,
Marie Claire, Esquire, Seventeen and Metropolitan Home. These magazines produce
co-branded pages displayed on Bluefly.com that present the latest fashion trends
and highlight products available for sale on Bluefly.com that allow readers to
keep up with those trends.

WAREHOUSING AND FULFILLMENT

The Company stores its inventory at a third party warehouse and fulfillment
center located in Niles, Illinois. When the Company receives an order, the
information is transmitted to the fulfillment center which picks and packs the
items included in the order and ships it directly to the customer. The Company's
inventory database is updated on a real-time basis, allowing the Company to
display on its Web Site only those styles, sizes and colors of product available
for sale. The Company strives to pick, pack and ship all of its orders within
two business days.


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CUSTOMER SERVICE

The Company believes that a high level of customer service and support is
critical to differentiating itself from traditional off-price retailers and
maximizing customer acquisition and retention efforts. The Company's customer
service effort starts with its 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 customers' most frequent questions.
For customers who prefer e-mail or telephone assistance, the Company's customer
service representatives are available seven days a week to provide assistance.
To insure that customers are satisfied with their shopping experience, the
Company generally allows returns for any reason within 90 days of the sale for a
full refund.

TECHNOLOGY

The Company has implemented a broad array of state-of-the-art technology that
facilitates Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technology includes a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, the Company
incorporates, for transmission of confidential personal information between
customers and the Company's Web server, Secure Socket Layer Technology ("SSL")
such that all data is transmitted via a fully DES 128-bit encrypted session.

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

COMPETITION

Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a new, dynamic, high growth market. The Company's
competition for online customers comes from a variety of sources, including
existing land-based retailers such as The Gap, Nordstrom, and Macy's which are
using the Internet to expand their channels of distribution, and less
established companies such as Boo.com, which are building their brands online.
In addition, the Company's competition for customers comes from traditional
direct marketers such as L.L. Bean, Lands' End, J.Crew and Spiegel's, television
direct marketers such as QVC, land-based off price retail stores, such as T.J.
Maxx, Marshalls, Filene's Basement and Loehmanns, which may or may not use the
Internet to grow their customer base, and real estate companies who own
land-based retail properties such as Prime Retail. Many of these competitors
have longer operating histories, significantly greater resources, greater brand
recognition and more firmly established supply relationships. Moreover, the
Company expects additional competitors to emerge in the future.

The Company believes that the principal competitive factors in its market
include: brand recognition, selection, convenience, order delivery performance,
customer service, site features, content and price. Although the Company
believes that it compares favorably with its competitors, it recognizes that
this market is relatively new and is evolving rapidly, and, accordingly, there
can be no assurance that this will continue to be the case.

INTELLECTUAL PROPERTY

The Company relies on various intellectual property laws and contractual
restrictions to protect its 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 the Company's intellectual
property without its authorization. In addition, the Company pursues the
registration of its trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which the Company's services are made available
online.

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

The Company does not believe that its 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 the Company's business, sales policies
or technologies


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infringe their rights. The Company expects 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 the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at all.
As a result, any such claim of infringement against the Company could have a
material adverse effect upon the Company's business, financial condition,
results of operations and cash flows.

GOVERNMENTAL APPROVALS AND REGULATIONS

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

EMPLOYEES

As of March 15, 2000, the Company had 75 full-time employees and 7 part-time
employees. None of the Company's employees are represented by a labor union and
the Company considers its relations with its employees to be good.


RISK FACTORS

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

LIMITED WORKING CAPITAL; NEED FOR ADDITIONAL FINANCING. The Company's business
is capital intensive, and it needs additional financing to effect its business
plan. The Company has obtained a commitment from affiliates of Soros Private
Equity Partners ("Soros"), the Company's largest shareholder, to provide, at the
Company's option, up to $15 million of financing at any time during 2000
on terms reflecting market rates for such finacings at the time that such
financing is provided (the "Soros Commitment"). The Company anticipates, based
on current plans and assumptions relating to its operations, that the proceeds
from the Series A Preferred Stock Financing, the Soros Note and the Company's
next round of financing (whether through the Soros Commitment or otherwise)
together with existing resources and cash generated from operations, should be
sufficient to satisfy the Company's current cash requirements through the end of
2000. However, the Company intends to seek additional debt and/or equity
financing during 2000 through a public offering, private placement or otherwise
in order to maximize the growth of its business. There can be no assurance that
additional financing will be available to the Company upon acceptable terms, or
at all. The failure to obtain additional financing, when needed, would have a
material adverse effect on the Company's business, financial condition and
results of operations, and significantly slow the pace of both customer and
revenue growth. See "Management's Discussion and Analysis - Liquidity and
Capital Resources."

POTENTIAL DILUTION. To the extent that the Company raises additional capital by
issuing equity securities (whether through the Soros Commitment or otherwise),
current shareholders of the Company may experience significant dilution.
Moreover, in connection with such a transaction, the Company could issue
securities that have rights senior to the rights of holders of the


                                       7

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Common Stock. In addition, in the event that, in connection with any private
financing, the Company issues (1) Common Stock at less than $10.50 per share or
(2) securities convertible into Common Stock at a rate of less than $10.50 per
share, the holders of the Series A Preferred Stock would be entitled to
additional securities as a result of their anti-dilution rights under the
Company's Certificate of Incorporation. See "Management's Discussion and
Analysis - Liquidity and Capital Resources."

LACK OF OPERATING HISTORY OF INTERNET BUSINESS; DIFFICULTY IN FORECASTING. The
Company initiated the planning of Bluefly.com in March 1998 and launched
Bluefly.com in September 1998. As a result of its limited operating history, it
is difficult for the Company to forecast its revenues accurately. Moreover, the
Company bases its current and future expense levels and operating plans on
expected revenues, and a significant portion of its expenses are, to a large
extent, fixed in the short term. Accordingly, the Company may be unable to
adjust its spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause its net loss in a given quarter to be
greater than expected and could also cause the Company's operating results in
some future quarter to fall below the expectations of securities analysts and
investors. In that event, the trading price of the Company's Common Stock could
decline significantly.

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

RECENT LOSSES; ANTICIPATED FUTURE LOSSES. The Company incurred a net loss from
continuing operations of $13,257,000 in 1999 and $2,478,000 in 1998. The Company
anticipates that losses will continue for the foreseeable future as it incurs
and expends substantial amounts on the development, marketing, advertising and
operations of Bluefly.com to build recognition and market share.

DEPENDENCE ON INDIRECT SUPPLY SOURCES; RISK OF LITIGATION. The Company purchases
products both directly from brand owners, and indirectly from retailers and
third party distributors. The purchase of product through indirect sources
increases the risk that the Company will mistakenly purchase and sell
non-authentic or damaged goods. The Company has taken steps to insure that it
sells only authentic, high quality name brand products and to avoid selling any
non-authentic or damaged goods. While the Company believes that its procedures
are effective, the possibility for error exists and therefore it faces potential
liability under applicable laws, regulations, agreements and orders for the sale
of non-authentic or damaged goods. Moreover, any claim by a brand owner, with or
without merit, could be time consuming, result in costly litigation and generate
bad publicity for the Company. In addition, brand owners could establish
procedures to limit or control the Company's ability to purchase products
indirectly, and 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.
In the event that the Company acquires 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, and the importer may have a civil action for damages against us.

DIFFICULTIES IN MANAGING GROWTH. The Company's historical growth has placed, and
any further growth is likely to continue to place, a significant strain on the
Company's management and administrative resources. Any failure to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has grown from 27
employees in March 1999 to 82 employees in March 2000. To be successful, the
Company must continue to implement management information systems and improve
its operating, administrative, financial and accounting systems and controls.
The Company will also need to train new employees and maintain close
coordination among its executive, accounting, finance, marketing, merchandising,
operations and technology organizations. Moreover, the Company's business is
dependent upon its ability to expand its third party fulfillment operations,
technology infrastructure and inventory levels to accommodate increases in
demand, particularly during the peak holiday selling season. In addition, the
Company's planned expansion efforts in these areas could cause disruptions in
its business. Any failure to expand the Company's third party fulfillment
operations, technology infrastructure and inventory levels at the pace needed to
support customer demand could have a material adverse effect on the Company's
business, financial condition and results of operations.

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


                                       8

<PAGE>

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

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

UNCERTAIN ACCEPTANCE OF BRAND. The Company believes that establishing,
maintaining and enhancing its brand is a critical aspect of its efforts to
attract and expand its online traffic. Promotion of Bluefly.com will depend
largely on the Company's success in providing a high-quality online experience
supported by a high level of customer service, which cannot be assured.
Establishing brand recognition will also require significant advertising and
marketing expenditures. The Company's future success, and in particular its
revenues and operating results, depend upon its ability to successfully execute
several key aspects of its business plan. The Company must continually increase
the dollar volume of transactions booked through Bluefly.com, either by
generating significantly higher and continuously increasing levels of traffic to
Bluefly.com or by increasing the percentage of visitors to its online sites who
purchase products, or through some combination thereof. The Company must also
achieve a high level of repeat purchasers. In addition, the Company must deliver
a high level of customer service and compelling content. Although the Company
has established relationships with portal companies such as, America Online,
Lycos, The Microsoft Network, Women.com, TheGlobe.com, Inktomi and Yahoo!, there
can be no assurance that these relationships can be maintained.

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

INFRASTRUCTURE NECESSARY TO SUPPORT EXPLOSIVE GROWTH OF INTERNET. The Internet
and other online services may not be accepted as a viable commercial marketplace
for a number of reasons, including potentially inadequate development of the
necessary network infrastructure or delayed development of enabling technologies
and performance improvements. To the extent that the Internet and other online
services continue to experience significant growth in their number of users,
their frequency of use or an increase in their bandwidth requirements, there can
be no assurance that the infrastructure for the Internet and other online
services will be able to support the demands placed upon them. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and Bluefly.com in particular.

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

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

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


                                       9

<PAGE>

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

DEPENDENCE ON KEY PERSONNEL. The Company believes its success will depend to a
significant extent on the efforts and abilities of its Executive Officers. The
Company has entered into employment agreements with Mr. Seiff, Mr. Barry, Mr.
Stevens and Mr. Morris which expire in December 2002, July 2002, November 2003
and July 2002, respectively. The Company maintains a $1.2 million key person
life insurance policy on the life of Mr. Seiff. The Company's operations will
also depend to a great extent on its ability to attract new key personnel with
Internet experience and retain existing key personnel in the future. The market
for personnel with Internet experience is extremely competitive.

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

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

SUBSTANTIAL OWNERSHIP BY SOROS. Soros currently owns 460,000 shares of the
500,000 outstanding shares of the Company's Series A Preferred Stock. The shares
of Series A Preferred Stock owned by Soros are convertible into 876,190 shares
of the Company's Common Stock (exclusive of any dividends on the Series A
Preferred Stock, which may be paid, at the option of the Company, through the
issuance of Common Stock), or approximately 15% of the Company's outstanding
Common Stock. The holders of the Series A Preferred Stock vote on an
"as-converted" basis with the holders of the Common Stock. In addition, in
connection with the Soros Note and the Soros Commitment, Soros received a
warrant to purchase up to 175,000 shares of Common Stock (subject to certain
vesting provisions relating to the timing of the Company's next round of
financing) at an exercise price equal to the value of a share of Common Stock as
determined in the Company's next round of financing (the "Soros Warrant"),
exercisable for a term of 5 years. By virtue of their ownership of the Series A
Preferred Stock, Soros has certain rights to appoint a designee to the Company's
Board of Directors, and the Company is required to get the approval of such
designee prior to taking certain actions. In addition, the holders of the Series
A Preferred Stock have certain pre-emptive rights to participate in future
equity financings and certain anti-dilution rights which could result in the
issuance of additional securities to such holders, and may purchase additional
equity securities of the Company pursuant to the Soros Note and the Soros
Commitment. Because of Soros' large percentage of ownership and its rights as
the holder of Series A Preferred Stock, Soros may have significant influence
over the Company's management and policies, such as the election of the
Company's directors, the appointment of new management and the approval of any
other action requiring the approval of the Company's shareholders, including any
amendments to the Company's certificate of incorporation and mergers or sales of
all or substantially all of the Company's assets.

SHARES ELIGIBLE FOR FUTURE SALE. The market price of the Company's Common Stock
could decline as a result of future sales of substantial amounts of its Common
Stock, or the perception that such sales could occur. Furthermore, the holders
of the Series A Preferred Stock have the right to require the Company to
register the shares of Common Stock underlying these securities under certain
circumstances, which may facilitate their sale of shares in the public market.


                                       10

<PAGE>

ITEM 2.  PROPERTIES

The Company leases approximately 17,300 square feet of office space in New York
City. The property is in good operating condition. The lease expires in 2009.
The Company's total lease payments for the current space during 2000 will be
approximately $214,000. The Company is currently seeking additional office
space.

ITEM 3.  LEGAL PROCEEDINGS

The Company was named as a defendant in an action commenced by Tommy Hilfiger
Licensing, Inc. ("Hilfiger") in August 1999 in the United States District Court
for the Southern District of New York. In its complaint, Hilfiger specifically
alleged that ten styles of Hilfiger product sold by the Company were not
authentic Hilfiger merchandise and also alleged, upon information and belief,
that the Company had sold other styles of Hilfiger merchandise that were not
authentic. The Company sold less than $5,000 of the styles of product that
Hilfiger has specifically alleged to be inauthentic. In March 2000, the Company
and Hilfiger settled the lawsuit on terms acceptable to both parties. The
Company does not believe that the settlement will have a material adverse effect
upon its business, financial condition or results of operations.

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

The Company's Annual Meeting of Shareholders (the "Meeting") was held on
December 9, 1999. At the close of business on the record date for the Meeting
(which was October 28, 1999) there were 4,920,206 shares of Common Stock issued
and outstanding, each entitled to one vote, and 500,000 shares of the Company's
Series A Preferred Stock, $.01 par value (the "Series A Preferred Stock"), each
entitled to two votes. The total number of votes entitled to vote at the Meeting
was therefore 5,920,206. Holders of Common Stock and/or Series A Preferred Stock
entitled to cast 5,533,418 votes were present at the Meeting, either in person
or by proxy. The following individuals were elected to the Company's Board of
Directors, to hold office until the Company's Annual Meeting of Shareholders in
the year indicated below and until their respective successors are duly elected
and qualified:

NOMINEE                    IN FAVOR        WITHHELD       TERM
-------                    --------        --------       ----

Red Burns                 5,510,093         23,325        2000
Martin Miller             5,510,093         23,325        2000
Robert G. Stevens         5,510,093         23,325        2000
E. Kenneth Seiff          5,510,093         23,325        2001
Mark H. Goldstein         5,510,093         23,325        2001
Ellin J. Saltzman         5,510,093         23,325        2001

In addition, prior to the Meeting, the holders of the Series A Preferred Stock
designated Neal Moszkowski to the Board of Directors pursuant to their rights
under the Company's Certificate of Incorporation.

At the Meeting, shareholders also approved certain amendments to the Company's
1997 Stock Option Plan (the "Plan") to (i) increase the aggregate number of
shares of Common Stock which may be the subject of options granted pursuant to
the Plan from 500,000 shares to 1,500,000 shares; (ii) decrease the number of
options initially granted pursuant to the Plan to each non-employee director
upon election or appointment as a director from 5,000 shares to 3,750 shares of
Common Stock; and (iii) increase the size of the annual option grant made
pursuant to the Plan to each non-employee director who is a member of the Board
of Directors on April 30 of each year during the term of the Plan from 2,500
shares to 3,750 shares of Common Stock. Voting on this matter was as indicated
below:

IN FAVOR          AGAINST        ABSTAINED        BROKER NON-VOTES
--------          -------        ---------        ----------------

2,744,864         62,558           7,751             2,718,245


                                       11

<PAGE>


                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock, par value $.01 per share ("Common Stock") is quoted
on The Nasdaq SmallCap Market. The following table sets forth the range of high
and low bid price information for the Common Stock based on quotations from the
Nasdaq SmallCap Market for the periods indicated:

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


          FISCAL 1999                     HIGH              LOW
          -----------                     ----              ---
          First Quarter                  $17.88            $8.69
          Second Quarter                 $12.88            $7.50
          Third Quarter                  $14.00            $8.00
          Fourth Quarter                 $16.69            $8.50

As of March 15, 2000, there were approximately 82 holders of record of the
Common Stock. The Company believes there were substantially in excess of 5,000
beneficial holders of the Common Stock as of such date.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

The Company is a leading Internet retailer of designer fashions and home
furnishings at outlet store prices. The Company offers an extensive selection of
designer products from over 300 brands, which the Company believes to be the
broadest selection of designer products available on the Internet.

The Company derives revenue primarily from the sale of designer products on its
Web Site. Merchandise revenue is recognized when goods are shipped to the
Company's customers from its third party warehouse, which occurs only after
credit card authorization. For sales of merchandise, the Company is responsible
for pricing, processing and fulfilling the orders. The Company processes
merchandise returns and bears the credit risk for these transactions. The
Company generally permits returns for any reason within 90 days of the sale.
Accordingly, the Company reserves for estimated future returns and bad debt at
the time of shipment based on historical data. Historically, the Company's rate
of product returns and bad debt has been approximately 27%. However, the
Company's future return and bad debt rates could differ significantly from
historical figures.

The Company has incurred substantial costs to develop its Web Site and
infrastructure. In order to expand its business, the Company intends to invest
heavily in sales, marketing, merchandising, operations, information systems,
site development and additional personnel to support these activities. The
Company, therefore, expects to continue to incur substantial operating losses
for the foreseeable future.

In June 1999, the Company launched a house and home division, and, in July 1999,
the Company launched a complete redesign of its Web Site, which, among other
things, introduced a teens department and a gifts department. The Company
believes that the redesigned Web Site offers consumers a better shopping
experience, including significantly improved navigation and search options,
larger image sizes and a faster checkout process. The redesigned Web Site can
also handler larger volumes of traffic and order flow. During July and August of
1999, the Company implemented real-time credit card authorization and fraud
screening software designed to increase the order fill rate and reduce
fraudulent credit card charges. Throughout 1999, the Company added additional
Web servers and technology to speed the Web Site's response time.

In July 1999, the Company leased an additional 8,300 square feet of space for
its corporate headquarters. This additional space allowed the Company to hire
more employees and move its customer service department in-house. As a result of
these changes, response times to customer inquiries have improved significantly.
The additional space also allowed the Company to expand its


                                       12


<PAGE>

production studio space in order to nearly triple the number of products it can
style, photograph and describe each week.

In August 1999, the Company moved to a larger, more robust third party warehouse
and fulfillment center in order to accommodate increased inventory levels and
higher order volume. The new facility has over three times the amount of square
footage as was available at the Company's previous third party warehouse and
fulfillment center.

In December 1999 and January 2000, the Company entered into a series of
strategic alliances with fashion magazines, including Harpers' Bazaar, Esquire,
Marie Claire, Metropolitan Home and Seventeen, through which the magazines
provide exclusive content for the Web Site highlighting current fashion trends
and products sold by Bluefly that help a customer to keep up with current
trends.

The Company's quarterly net sales grew throughout 1999, from $305,000 during the
first quarter, to $741,000 in the second quarter, to $863,000 in the third
quarter, to approximately $3 million in the fourth quarter.

Similarly, the Company's success at converting traffic into revenues has
continued throughout the year, with monthly average gross revenue per unique
visitor (as measured by Media Metrix) increasing from $.70 during the first
quarter, to $.93 during the second quarter, to $1.49 during the third quarter,
to $2.76 during the fourth quarter. The Company believes that this increase in
its ability to convert visitors into customers reflects the wide scale
improvements that it made to its Web site design, technology infrastructure and
merchandising mix throughout the year.

The Company also made significant strides in broadening its selection of
designer products to include over 300 brands, of which over 200 have entered
into direct supply relationships with the Company.

Bluefly.com was publicly launched in September 1998. In June 1998, prior to the
launch of Bluefly.com, the Company discontinued its Pivot Rules division, which
marketed a collection of golf sportswear in order to devote all of its resources
to building Bluefly.com.

The Company has presented its financial statements in order to reflect the
discontinued operations in accordance with generally accepted accounting
principles. Although the start-up phase of Bluefly.com did not begin until April
1998 and the site was not launched until September 8, 1998, in accordance with
generally accepted accounting principles, the Company reflected in continuing
operations for 1998 (i) general and administrative expenses, (ii) interest
income, and (iii) related tax provisions, all of which relate to on-going
corporate activities. Accordingly, net losses from continuing operations in
1998, attributable to those aspects of the business which have continued were
$197,000.

RESULTS OF OPERATIONS

NET SALES: For 1999, gross sales (revenue from product sales before any
adjustment for reserves) totaled $6,871,000. The Company recorded a provision
for returns and credit card chargebacks and other discounts of $1,920,000, or
approximately 27.9% of gross sales. The reserve allowance takes into account the
Company's 90-day return policy and actual experience to date, which may vary
over time. After the necessary provisions for returns and credit card
chargebacks and adjustments for uncollected sales taxes, the Company's net sales
for 1999 were $4,951,000. Bluefly.com was launched in September 1998. Net sales
for the period from launch to December 31, 1998 were $215,000.

COST OF SALES: Cost of sales for 1999 totaled $3,766,000, resulting in gross
margin of 23.9%. Cost of sales consists of the cost of product sold to
customers, in-bound shipping costs, inventory reserves and packing materials.
Bluefly.com was launched in September 1998. Cost of sales for the period from
launch to December 31, 1998 were $266,000, resulting in negative gross profit of
$51,000. The negative gross profit in 1998 was the result of inventory reserves
arising from situations during the start-up phase of Bluefly.com in which the
Company pre-paid for merchandise and (i) received merchandise from suppliers
that did not meet the high standards of quality set by the Company and (ii)
received less than the amount purchased.

SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses totaled $11,424,000 for 1999, representing costs associated with online
strategic marketing relationships, print and radio advertising, Web Site
hosting, inventory management, including outbound shipping costs, fulfillment
and customer service. Selling, marketing and fulfillment expenses for 1998 were
approximately $1,121,000.


                                       13


<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$3,460,000 for 1999, compared to $1,166,000 for 1998. General and administrative
expenses include salaries and related expenses, recruiting fees, insurance
costs, accounting and legal fees, depreciation and other office related
expenses. The increase in general and administrative expenses in 1999, as
compared to 1998, was largely the result of an increase in employees, fees paid
to consultants and search firms and legal expenses. The Company has increased
its head count across all departments, growing the Company from 12 employees as
of December 31, 1998 to 75 as of December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999 and March 29, 2000, the Company had approximately $7.9
million and $4.0 million, respectively, of liquid assets, entirely in the form
of cash and cash equivalents. As of December 31, 1999, the Company had
approximately $7,020,000 of inventory.

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

In July 1999, the Company entered into an Investment Agreement with an investor
group led by affiliates of Soros Private Equity Partners, LLC (the "Soros
Investment Agreement") pursuant to which it issued 500,000 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") for an aggregate
purchase price of $10 million. The Series A Preferred Stock is convertible into
shares of Common Stock at a rate of $10.50 per share, and bears a cumulative
compounding dividend of 8% per annum, payable upon conversion in cash or in
Common Stock, at the Company's option. The Series A Preferred Stock may be
converted into Common Stock at any time by the holders thereof and will
automatically be converted into Common Stock if the closing price of the Common
Stock is $31.50 or higher for 30 consecutive trading days, or immediately prior
to the consummation of a merger or sale of all or substantially all of the
assets of the Company, pursuant to which shareholders of the Company are to
receive cash, securities and/or other property worth at least $31.50 per share
of Common Stock. Excluding shares of Common Stock that may be issued as payment
for accrued dividends, the 500,000 shares of Series A Preferred Stock will be
convertible into 952,381 shares of Common Stock, subject to customary
anti-dilution provisions. The Series A Preferred Stock has a liquidation
preference equal to the face value of the Series A Preferred Stock plus accrued
dividends and ranks senior to the Common Stock with respect to the payment of
distributions on liquidation, dissolution or winding up of the Company and with
respect to dividends. The holders of the Series A Preferred Stock vote on an "as
converted" basis with holders of Common Stock and have certain rights to appoint
a designee to the Company's Board of Directors. Certain actions of the Company
may not be taken without the approval of such designee. In addition, holders of
the Series A Preferred Stock have certain registration rights with respect to
the Common Stock issuable upon conversion of the Series A Preferred Stock and
certain pre-emptive rights with respect to future issuances of capital stock by
the Company.

In April 1999, because it had divested its golf wholesale division, the Company
terminated its credit arrangement and Retail Collection Factoring Agreement with
its factor. All funds deposited with the factor were transferred to the Company.

In May 1997, the Company completed an initial public offering (the "IPO") of
equity securities. Pursuant to the IPO, the Company sold 1,500,000 units (the
"Units"), with each Unit consisting of one share of Common Stock and one
redeemable common stock purchase warrant entitling the holder thereof to
purchase one share of Common Stock at $5.00 per share during the four-year
period commencing on May 15, 1998 (the "Warrants"). In connection with the IPO,
the Company also sold to the underwriter of the IPO, for an aggregate purchase
price of $100, 150,000 Unit Purchase Options ("UPO's"), with each UPO entitling
the holder thereof to purchase one Unit at an initial price of $8.00 per Unit
during the four-year period commencing on May 15, 1998.

The Company had the right to redeem the Warrants at any time after they became
exercisable, at a price of $.01 per Warrant, provided that the market price of
the stock exceeded $8.25 for a specific period of time, and upon specific notice
provisions. In December 1998, the Company provided notice of its election to
redeem the Warrants. Included in the redemption were 1,500,000


                                       14


<PAGE>

outstanding Warrants that were issued in connection with the IPO in May, 1997,
363,000 outstanding Warrants that were issued in connection with the Company's
1997 bridge financing, and, 135,250 Warrants that were issued in connection with
the exercise of the UPO's. During December 1998, 573,250 Warrants were exercised
for gross proceeds of $2,867,000 and an additional 1,412,374 Warrants were
exercised in January 1999 for gross proceeds of $7,062,000. In addition,135,250
UPO's were exercised in December 1998 for gross proceeds of $1,082,000 and 900
UPO's were exercised in January 1999 for proceeds of $7,000. As of December 31,
1999, there were 11,500 UPO's outstanding.

The Company anticipates, based on current plans and assumptions relating to its
operations, that the proceeds from the Series A Preferred Stock financing, the
Soros Note, and the Company's next round of financing (whether through the Soros
Commitment or otherwise), together with existing resources and cash generated
from operations, should be sufficient to satisfy the Company's current cash
requirements through the end of 2000. However, the Company intends to seek
additional debt and/or equity financing during 2000 through a public offering,
private placement or otherwise in order to maximize the growth of its business.
There can be no assurance that any additional financing or other sources of
capital will be available to the Company upon acceptable terms, or at all. The
inability to obtain additional financing, when needed, would have a material
adverse effect on the Company's business, financial condition and results of
operations and significantly slow the pace of both customer and revenue growth.
See "Risk Factors - Limited Working Capital; Need for Additional Financing" and
"Potential Dilution."

As of December 31, 1999, the Company has marketing and advertising commitments
of $1,695,000 through December 31, 2000. In addition, the Company believes that
in order to grow the business, the Company will need to make additional
marketing and advertising commitments in the future.

In order to continue to expand its customer base and establish its brand name,
the Company intends over the next 12 months to expand its advertising and
commerce relationships with the major portals and national publications.
However, the Company's marketing budget is subject to a number of factors,
including the Company's results of operations as well as the Company's ability
to raise additional capital. See "Risk Factors - Limited Working Capital; Need
for Additional Financing."

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

The Company expects to hire and train additional employees for the operations
and development of Bluefly.com. However, the Company's ability to hire such
employees is subject to a number of factors, including the Company's results of
operations as well as the Company's ability to raise additional capital.

RECENT ACCOUNTING PRONOUNCEMENTS

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


                                       15

<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

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

       Report of Independent Accountant                                     F-2

       Independent Auditors' Report                                         F-3

       Consolidated Balance Sheets as of December 31, 1999 and 1998         F-4

       Consolidated Statements of Operations for the three years ended
                 December 31, 1999, 1998 and 1997                           F-5

       Consolidated Statements of Changes in Shareholders' Equity for
                 the three years ended December 31, 1999, 1998 and 1997     F-6

       Consolidated Statements of Cash Flows for the three years ended
                 December 31, 1999, 1998 and 1997                           F-7

       Notes to Consolidated Financial Statements                           F-9



                                       16






<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Bluefly, Inc.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 7 on page 16 present fairly, in all material respects, the
consolidated financial position of Bluefly, Inc. at December 31, 1999 and the
results of their operations and of their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.


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

                                      F-2
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Bluefly, Inc.

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

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

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

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


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

                                      F-3
<PAGE>

<TABLE>
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
---------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                    1999               1998
                                                                                ------------       ------------
<S>                                                                             <C>                <C>
Assets

Current assets:

    Cash and cash equivalents                                                   $  7,934,000       $  2,830,000
    Funds deposited with factor                                                            -          2,264,000
    Inventories, net                                                               7,020,000            429,000
    Prepaid expenses and other current assets                                      1,080,000            624,000
    Current assets of discontinued operations                                              -            553,000
                                                                                ------------       ------------
             Total current assets                                                 16,034,000          6,700,000

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

                                                                                $ 17,109,000       $  7,212,000
                                                                                ============       ============

LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

Commitments and contingencies (Note 7)

Shareholders' equity:
    Preferred stock - $.01 par value; 2,000,000 shares authorized,
      500,000 shares issued and outstanding in 1999,
      (liquidation preference: $20 per share plus accrued dividends)                   5,000                  -
    Common stock - $.01 par value; 15,000,000 shares authorized,
      4,924,906 and 3,433,255 shares issued and
      outstanding, respectively                                                       49,000             34,000
    Additional paid-in capital                                                    27,763,000         10,395,000
    Accumulated deficit                                                          (17,231,000)        (4,037,000)
                                                                                ------------       ------------
                                                                                  10,586,000          6,392,000
                                                                                ------------       ------------

                                                                                $ 17,109,000       $  7,212,000
                                                                                ============       ============

             The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                       F-4

<PAGE>

<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                           1999              1998             1997
                                                                       ------------      ------------     ------------
<S>                                                                    <C>               <C>              <C>
Net sales                                                              $  4,951,000      $    215,000     $          -
Cost of sales                                                             3,766,000           266,000                -
                                                                       ------------      ------------     ------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                          F-5

<PAGE>

<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                          PREFERRED STOCK,         COMMON STOCK,
                                           $.01 PAR VALUE         $.01 PAR VALUE
                                         ------------------    --------------------
                                         NUMBER OF             NUMBER OF                 ADDITIONAL      ACCUMULATED
                                          SHARES     AMOUNT     SHARES       AMOUNT    PAID-IN CAPITAL     DEFICIT         TOTAL
                                          ------     ------     ------       ------    ---------------     -------         -----
<S>                                      <C>        <C>        <C>          <C>         <C>             <C>             <C>
Balance at January 1, 1997                     -    $     -    1,200,000    $ 12,000    $   397,000     $          -    $   409,000

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

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

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

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

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

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

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

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

Issuance of Series A Preferred Stock
  ($20.00 per share) net of expenses
  of $57,000                             500,000      5,000            -           -      9,938,000                -      9,943,000

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

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

Net loss                                       -          -            -           -              -      (13,194,000)   (13,194,000)
                                         -------    -------    ---------    --------    -----------     ------------    -----------
BALANCE AT DECEMBER 31, 1999             500,000    $ 5,000    4,924,906    $ 49,000    $27,763,000     $(17,231,000)   $10,586,000
                                         =======    =======    =========    ========    ===========     ============    ===========


                The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                          F-6

<PAGE>

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

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

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

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

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

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

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

                The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                          F-7
<PAGE>

<TABLE>
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DOLLARS ROUNDED TO THE NEAREST THOUSAND
----------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                      1999            1998             1997
                                                                ---------------  --------------   --------------
<S>                                                                   <C>           <C>              <C>
Cash flows from investing activities - discontinued operations:
    Purchase of property and equipment                          $            -   $     (22,000)   $    (236,000)
    Trademark costs                                                          -          (1,000)          (7,000)
                                                                ---------------  --------------   --------------

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

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

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

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

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

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

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

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

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

Supplemental disclosure of cash flow information:

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

                The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                          F-8
<PAGE>

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

1.  THE COMPANY

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

    The Company has sustained net losses and negative cash flows from operations
    since the formation of Bluefly.com. The Company's ability to meet its
    obligations in the ordinary course of business is dependent upon its ability
    to establish profitable operations or raise additional financing through
    public or private equity financing, collaborative or other arrangements with
    corporate sources, or other sources of financing to fund operations. During
    1999, the Company received additional financing of approximately $17
    million. Should the need arise, the Company has received a commitment from a
    preferred stockholder to finance anticipated working capital deficiencies up
    to $15 million, if any, through December 31, 2000. Management believes that
    its current funds and the funds under commitment from a preferred
    stockholder will be sufficient to enable the Company to meet its planned
    expenditures through at least December 31, 2000. If anticipated operating
    results are not achieved, the Company intends to obtain additional equity or
    debt financings. If such financings are not available on terms acceptable to
    the Company, the Company will delay or reduce its expenditures in order for
    it to meet its obligations.

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

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

    REVENUE RECOGNITION
    The Company recognizes revenue on product sales when goods are shipped to
    the customer.

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

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

                                      F-9
<PAGE>

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

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

    USE OF ESTIMATES
    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    disclosures of contingent assets and liabilities at the date of the
    financial statements and the reported amounts of revenues and expenses
    during the reporting period. Significant estimates include inventory
    valuation and reserves for returns and allowance for doubtful accounts.
    Actual results could differ from those estimates.

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

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

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

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

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

    STOCK BASED COMPENSATION
    The Company applies Statement of Financial Accounting Standards No. ("SFAS")
    123 "Accounting for Stock Based Compensation," in accounting for its stock
    based compensation plan. In accordance with SFAS No. 123, the Company
    applies Accounting Principles Board Opinion No. 25 and related
    Interpretations for expense recognition. In connection with stock option
    grants to employees, no compensation expense has been recorded in fiscal
    years 1999, 1998 and 1997, because the exercise price of employee stock
    options equals or exceeds the market price of the underlying stock on the
    date of grant.

                                      F-10
<PAGE>

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

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

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

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

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

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

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

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

                                      F-11
<PAGE>

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

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

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

3.  PROPERTY AND EQUIPMENT

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

                                                  1999              1998

    Leasehold improvements                     $  488,000        $  287,000
    Office equipment                              308,000           167,000
    Computer equipment and software               471,000           142,000
                                               ----------        ----------
                                                1,267,000           596,000
        Less accumulated depreciation             230,000            99,000
                                               ----------        ----------
                                               $1,037,000        $  497,000
                                               ==========        ==========

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

4.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

                                                  1999              1998

    Due from credit card companies             $  350,000        $   27,000
    Other current assets                          453,000            68,000
    Prepaid expenses                              213,000           424,000
    Income taxes receivable                        34,000            55,000
    Other receivables                              30,000                 -
    Deferred income tax                                 -            50,000
                                               ----------        ----------
                                               $1,080,000        $  624,000
                                               ==========        ==========

                                      F-12
<PAGE>

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

5.  ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

                                                    1999              1998

    Accounts payable                             $4,287,000        $  489,000
    Accrued expenses                                646,000           105,000
    Provision for returns and bad debt              868,000            47,000
    Accrued media expenses                          407,000                 -
    Salary and bonus accrual                        315,000           115,000
                                                 ----------        ----------
                                                 $6,523,000        $  756,000
                                                 ==========        ==========

6.  INCOME TAXES

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

                                       CONTINUING OPERATIONS
                          ---------------------------------------------
                             1999              1998              1997
    Current
        Federal           $  (2,000)        $ (55,000)        $(220,000)
        State                     -                 -            (7,000)
                          ---------         ---------         ---------
                             (2,000)          (55,000)         (227,000)
                          =========         =========         =========
    Deferred
        Federal           $       -         $   3,000         $   1,000
        State                     -             2,000            (1,000)
                          ---------         ---------         ---------
                                  -             5,000                 -
                          ---------         ---------         ---------
                          $  (2,000)        $ (50,000)        $(227,000)
                          =========         =========         =========

                                      DISCONTINUED OPERATIONS
                          ---------------------------------------------
                             1999              1998              1997
    Current
        Federal           $       -         $  11,000         $  45,000
        State                     -                 -                 -
                          ---------         ---------         ---------
                                  -            11,000            45,000
                          ---------         ---------         ---------
    Deferred
        Federal           $       -         $  81,000         $       -
        State                     -            13,000                 -
                          ---------         ---------         ---------
                                  -            94,000                 -
                          ---------         ---------         ---------
                          $       -         $ 105,000         $  45,000
                          =========         =========         =========

                                      F-13
<PAGE>

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

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

                                                        1999           1998

    Deferred tax assets
        Net operating losses                        $ 6,222,000    $   920,000
        Foreign tax credits                              13,000              -
        Depreciation and amortization                   216,000              -
        Accounts receivable and inventory reserves       95,000         50,000
        Other                                             4,000              -
                                                    -----------    -----------
                                                      6,550,000        970,000
            Valuation Allowance                      (6,550,000)      (920,000)
                                                    -----------    -----------
                                                                        50,000
    Deferred tax liability
        Tax over book depreciation                            -        (64,000)
                                                    -----------    -----------

                 NET DEFERRED TAX ASSET (LIABILITY) $         -    $   (14,000)
                                                    ==========     ===========

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

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

                                                 1999       1998       1997

    Statutory federal income tax rate          (34.00)%   (34.00)%   (34.00)%
    State taxes, net of federal tax benefit     (5.40)      0.40       1.70
    Other                                        0.20          -          -
    Valuation allowance on deferred tax asset   39.18      35.10          -
                                                -----      -----      -----
    Effective tax rate                          (0.02)%     1.50%    (32.30)%
                                                -----      -----      -----

                                      F-14
<PAGE>

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

7.  COMMITMENTS AND CONTINGENCIES

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

    2000                                                          $1,045,000
    2001                                                           1,045,000
    2002                                                             767,000
    2003                                                             182,000
                                                                  ----------

               TOTAL                                              $3,039,000
                                                                  ----------

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

    2000                                                          $1,902,000
    2001                                                           1,150,000
    2002                                                             215,000
    2003                                                             219,000
    2004                                                             224,000
    Thereafter                                                       898,000
                                                                  ----------

               TOTAL                                              $4,608,000
                                                                  ----------

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

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

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

                                      F-15
<PAGE>

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

8.  SHAREHOLDER'S EQUITY

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

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

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

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

                                      F-16
<PAGE>

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

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

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

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

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

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

    STOCK OPTION PLAN
    In May 1997, the Company's Board of Directors adopted a stock option plan
    (the "Plan") for the purpose of encouraging key employees, consultants and
    directors who are not employees to acquire a proprietary interest in the
    growth and performance of the Company. Options are granted in terms not to
    exceed ten years and become exercisable as specified when the option is
    granted. Vesting terms of the options range from immediately to a ratable
    vesting period of four years. In 1999, the Company amended the plan in order
    to increase the maximum number of shares that may be granted under the Plan
    to 1,500,000.

                                      F-17
<PAGE>

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

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

                                                  NUMBER           WEIGHTED
                                                    OF              AVERAGE
                                                  SHARES        EXERCISE PRICE

Options granted                                      117,000       $    5.00
Options canceled                                     (24,500)           5.00
                                              ---------------

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

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

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

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

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

    Additional information with respect to the outstanding options as of
    December 31, 1999, is as follows:

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
                  ------------------------------------   --------------  -------------------------------
                                          WEIGHTED           WEIGHTED                         WEIGHTED
   RANGE OF                               AVERAGE             AVERAGE                          AVERAGE
   EXERCISE            OPTIONS           REMAINING           EXERCISE         OPTIONS         EXERCISE
    PRICES           OUTSTANDING      CONTRACTUAL LIFE         PRICE        EXERCISABLE         PRICE

<S>                      <C>             <C>                  <C>             <C>              <C>
$2.16-$3.22              163,600         8.52 Years           $ 2.59           80,542          $ 2.48
$5.00                     28,500         6.25 Years             5.00           26,750            5.00
$8.34-$9.66              169,250         9.60 Years             9.12            9,104            9.10
$10.28-$13.81            514,700         9.89 Years            11.24            5,942           10.77
$14.38-$16.60            234,100         9.13 Years            15.07           47,425           15.09
                       ---------                                              -------
$2.16-$16.60           1,110,150         9.43 Years            10.35          169,763            7.15
</TABLE>

                                      F-18
<PAGE>

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

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

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

    Had compensation expense for the Plan been determined consistent with the
    provisions of SFAS No. 123, the effect on the Company's basic and diluted
    net loss per share would have been as follows:

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

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

9.  DISCONTINUED OPERATIONS

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

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

                                      F-19
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                                                DECEMBER 31,
                                                                   1998

    Due from factor                                              $  171,000
    Non-factored receivables                                        187,000
    Income taxes receivable                                         195,000
                                                                 ----------
                 TOTAL CURRENT ASSETS OF
                   DISCONTINUED OPERATIONS                       $  553,000
                                                                 ----------

                                      F-20
<PAGE>

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

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

10. CONCENTRATION

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

11. SUBSEQUENT EVENTS

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


                                      F-21


<PAGE>

                                    PART III


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

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

<TABLE>
<CAPTION>
NAME                     AGE    POSITION
----                     ---    --------
<S>                     <C>    <C>
E. Kenneth Seiff         35     Chairman of the Board of Directors, Chief Executive Officer,
                                President and Treasurer

Patrick C. Barry         37     Chief Financial Officer and Executive Vice President

Jonathan B. Morris       32     Executive Vice President and Secretary

Robert G. Stevens        46     Executive Vice President and Director

Red Burns                74     Director

Mark H. Goldstein        38     Director

Martin Miller            69     Director

Neal Moszkowski          33     Director

Ellin J. Saltzman        62     Director
</TABLE>

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

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

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

ROBERT G. STEVENS has served as a Director of the Company since December 1996
and as an Executive Vice President of the Company since December 1999. From
December 1994 to December 1999, Mr. Stevens was a Vice President of Mercer
Management Consulting, Inc. ("Mercer"), a management consulting firm. From
November 1992 to December 1994, Mr. Stevens was a Principal at Mercer.

GOLDIE BURNS (AKA RED BURNS) has served as a Director of the Company since
August 1998. Since September 1993, Ms. Burns has served as the Chairman of the
Interactive Telecommunications Program at New York University, where she is
currently Chairman and Professor of the Interactive Telecommunications Program
and has been named the Tokyo Broadcasting System Chair.

MARK H. GOLDSTEIN has served as a Director of the Company since December 1999.
Since August 1999, Mr. Goldstein has served as an Internet Executive at Softbank
Holdings ("Softbank"), a venture capital fund that specializes in investments in
Internet companies, and since December 1999, he has served as the Chief
Executive Officer of Bluelight.com, a joint venture of K-Mart and Softbank. From
September 1997 to July 1999, Mr. Goldstein served as the Chief Executive Officer
of Impulse Buy Network, a developer of direct marketing applications for the
Internet, that was acquired by Inktomi Corporation in April 1999. From September
1995 to March 1997, Mr. Goldstein served as Executive Vice President of Firefly
Networks, a software development subsidiary of Microsoft Corporation.


                                       17

<PAGE>

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

NEAL MOSZKOWSKI has served as a Director of the Company since August 1999. Since
August 1998, Mr. Moszkowski has been a partner of Soros Private Equity Partners
LLC ("Soros"). Prior to joining Soros, Mr. Moszkowski was an Executive Director
of Goldman Sachs International and a Vice President of Goldman Sachs & Co., an
investment banking firm, in its Principal Investment Area. He joined Goldman
Sachs & Co. in August 1993. Mr. Moszkowski is also a Director of Integra Life
Sciences Holdings Corporation, a biotechnology company, and MedicaLogic, Inc., a
medical records company.

ELLIN J. SALTZMAN has served as a Director of the Company since December 1999.
From 1994 to 1997, Ms. Saltzman served as Vice President and Corporate Fashion
Director for The Limited, Inc. From 1992 to 1994, she served as Senior Vice
President and Fashion Director for Bergdorf Goodman. From 1989 to 1992, she
served as Senior Vice President and Corporate Fashion Director for R.H. Macy &
Co., and from 1974 to 1989, she held the same position with Saks Fifth Avenue.
Since 1997, Ms. Saltzman has been an independent consultant to various companies
in the fashion industry.

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

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

The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Ms. Burns and Messrs. Miller, Stevens and
Moszkowski hold office as a Director of the Company until the next annual
meeting of the Company or until their successors have been duly elected and
qualified, and Messrs. Seiff and Goldstein and Ms. Saltzman hold office as a
Director of the Company until the annual meeting of the Company in 2001 or until
their successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors and executive officers and persons who
beneficially own more than ten percent of the Common Stock (collectively, the
"Reporting Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock. Reporting Persons are required to
furnish the Company with copies of all such reports. To the Company's knowledge,
based solely on a review of copies of such reports furnished to the Company and
certain representations of the Reporting Persons, the Company believes that
during the 1999 fiscal year all Reporting Persons complied with all applicable
Section 16(a) reporting requirements, except as set forth in the following
sentence. Mr. Goldstein's and Ms. Saltzman's initial statements of beneficial
ownership on Form 3 were inadvertently filed late, but were filed on January 10,
2000, and a statement of change in beneficial ownership on Form 4 of Mr. Seiff,
reflecting the exercise of options to purchase 3,000 shares of Common Stock by
Mr. Seiff's wife, was inadvertently filed late, but was filed on September 21,
1999.

ITEM 10.  EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

The Company's directors are paid a cash stipend of $500 for each board or
committee meeting attended in person and are reimbursed for expenses incurred on
behalf of the Company. Prior to January 1999, each non-employee director
received an option to purchase 5,000 shares of Common Stock under the Plan at
the time that such director was appointed (the "Initial Grant") and an annual
grant of an option to purchase 3,750 shares of Common Stock under the Plan (the
"Annual Grant"). Commencing in January 1999, the Initial Grant for non-employee
directors was decreased from 5,000 shares to 3,750 shares, and the Annual Grant
for non-employee directors was increased from 3,750 shares to 5,000 shares. In
addition, on January 27, 1999, the Company's


                                       18

<PAGE>

then-current non-employee directors also received a one-time option grant of
2,000 shares.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning the compensation paid by
the Company during the fiscal years ended December 31, 1999, 1998 and 1997 to
the Company's Chief Executive Officer and the two other executive officers of
the Company who received a total compensation from the Company in excess of
$100,000 in 1999 (the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                               ANNUAL COMPENSATION                     LONG TERM COMPENSATION
                                                   ---------------------------------------------    ------------------------------
                                                                                                               AWARDS
                                                                                                               ------
                                                                                                                     SECURITIES
                                                                                OTHER ANNUAL         RESTRICTED      UNDERLYING
NAME AND PRINCIPAL POSITION                YEAR      SALARY        BONUS        COMPENSATION        STOCK AWARDS      OPTIONS
---------------------------                ----      ------        -----        ------------        ------------      -------
<S>                                       <C>      <C>           <C>              <C>                   <C>          <C>
E. Kenneth Seiff                           1999     $206,519      $25,491          $1,000                $--          100,000(1)(3)
Chief Executive Officer, President and     1998     $165,000      $25,000          $1,000                $--           25,000(1)
       Treasurer                           1997     $164,461      $ --             $1,000                $--             --

Patrick C. Barry                           1999     $150,958      $25,491          $  590                $--           99,900(2)(3)
Chief Financial Officer and Executive      1998     $ 59,076      $ --             $   --                $--           55,100(2)
       Vice President                      1997     $  --         $ --             $   --                $--             --

Jonathan B. Morris                         1999     $150,958      $25,491          $  330                $--          100,000(2)(3)
Executive Vice President                   1998     $ 47,423      $ --             $   --                $--           55,000(2)
                                           1997     $  --         $ --             $   --                $--             --
</TABLE>

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

(2) Options granted at an exercise price equal to 100% of the fair market value
    on the date of grant.

(3) Represents options granted in January 1999 for the 1998 fiscal year and
    options granted in December 1999 for the 1999 fiscal year.


EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of the Named
Executive Officers. Each such employment agreement provides for a base salary,
subject to increase by the Board of Directors, and an annual bonus to be
determined by the Board of Directors. Mr. Seiff's employment agreement provides
that, at the discretion of the Board of Directors, all or part of such bonus may
be paid through the issuance to Mr. Seiff of capital stock of the Company,
provided that at the request of Mr. Seiff, a portion of such bonus sufficient to
pay any income taxes arising from such bonus will be paid in cash rather than in
capital stock of the Company. Mr. Seiff's base salary under his employment
agreement is $250,000, and the base salaries of Messrs. Morris and Barry under
their respective employment agreements are currently $175,000. Mr. Seiff's
employment agreement expires in January 2003, Mr. Morris' employment agreement
expires in July 2002 and Mr. Barry's employment agreement expires in July 2002.
Each such employment agreement obligates the Company to make certain severance
payments in connection with a termination of such Named Executive Officer's
employment, other than for cause, not exceeding five months' salary, except as
set forth below. In the case of Mr. Seiff, the Company would be obligated to pay
Mr. Seiff an amount equal to the total amount due to him during the remaining
term of the contract. Mr. Seiff's employment agreement also provides for the
immediate vesting of any stock options held by him in the event that certain
events classified as a "Change In Control" occur. In addition, the Company
maintains a $1.2 million key person life insurance policy on the life of Mr.
Seiff.


                                       19

<PAGE>


OPTIONS GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the grant of stock options
under the Plan to the Named Executives Officers during the fiscal year ended
December 31, 1999:

                                INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
                       NUMBER OF SECURITIES        % OF TOTAL OPTIONS
                        UNDERLYING OPTIONS       GRANTED TO EMPLOYEES IN      EXERCISE OR
 NAME                       GRANTED (#)              FISCAL YEAR (%)         BASE PRICE ($)    EXPIRATION DATE
 ----                       -----------              ---------------         --------------    ---------------
<S>                          <C>                         <C>                   <C>                <C>
 E. Kenneth Seiff             50,000                      5.4%                  $16.60             1/22/04
                              50,000                      5.4%                  $12.34             12/22/04

 Patrick C. Barry             49,900                      5.4%                  $15.09             1/22/09
                              50,000                      5.4%                  $11.22             12/22/09

 Jonathan B. Morris           50,000                      5.4%                  $15.09             1/22/09
                              50,000                      5.4%                  $11.22             12/22/09
</TABLE>

 The Company does not currently grant stock appreciation rights.

 OPTION HOLDINGS

 The following table sets forth information with respect to the Named Executive
 Officers concerning the exercise of options during the last fiscal year and the
 unexercised options held at December 31, 1999. None of the Named Executive
 Officers exercised any outstanding options during the fiscal year ended
 December 31, 1999.

<TABLE>
<CAPTION>
                       SECURITIES UNDERLYING UNEXERCISED        VALUE OF UNEXERCISED IN-THE-MONEY
                        OPTIONS AT DECEMBER 31, 1999 (#)         OPTIONS AT DECEMBER 31, 1999 ($)
                        --------------------------------         --------------------------------
NAME                    EXERCISABLE         UNEXERCISABLE     EXERCISABLE           UNEXERCISABLE
                        -----------         -------------     -----------           -------------
<S>                      <C>                   <C>             <C>                    <C>
E. Kenneth Seiff          36,457                88,543          $203,825               $      0
Patrick C. Barry          30,945               124,055          $157,317               $286,954
Jonathan B. Morris        37,391               117,609          $193,057               $206,158
</TABLE>



                                       20

<PAGE>


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          COMMON STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of March 15, 2000,
for (i) each person who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) the Named
Executive Officers, and (iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                               NUMBER OF SHARES
NAME (1)                                                      BENEFICIALLY OWNED    PERCENTAGE (2)
--------                                                      ------------------    --------------
<S>                                                               <C>                  <C>
E. Kenneth Seiff                                                   545,780(3)(4)        11.0%
Red Burns                                                           10,750(5)             *
Mark H. Goldstein                                                      --                 --
Martin Miller                                                       16,250(6)(7)          *
Neal Moszkowski (8)                                                    --                 --
Ellin J. Saltzman                                                      --                 --
Robert G. Stevens                                                   40,687(9)             *
Patrick C. Barry                                                    39,694(10)            *
Jonathan B. Morris                                                  58,170(11)           1.2%
Quantum Industrial Partners LDC                                    848,400(12)          14.7%
George Soros                                                       876,190(13)          15.1%
All directors and executive officers as a group (9 persons)        711,330(14)          14.3%
</TABLE>

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

(1)  Except as otherwise indicated, the address of each of the individuals
     listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
     10018.

(2)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission ("Commission") and generally includes
     voting or investment power with respect to securities. Shares of Common
     Stock issuable upon the exercise of options or warrants currently
     exercisable or exercisable within 60 days are deemed outstanding for
     computing the percentage ownership of the person holding such options or
     warrants but are not deemed outstanding for computing the percentage
     ownership of any other person.

(3)  Includes 3,000 shares of Common Stock held by Nicole Seiff, the wife of E.
     Kenneth Seiff, as to which Mr. Seiff disclaims beneficial ownership.

(4)  Includes 40,623 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

(5)  Includes 10,750 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

(6)  Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
     Martin Miller, as to which Mr. Miller disclaims beneficial ownership.

(7)  Includes 13,250 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

(8)  Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
     Seventh Avenue, New York, New York 10106.

(9)  Includes 25,748 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

(10) Includes 39,694 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

(11) Includes 45,307 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

(12) Represents 848,400 shares of Common Stock issuable upon conversion of
     445,410 shares of Series A Preferred Stock (the "QIP Shares") held in the
     name of Quantum Industrial Partners LDC ("QIP"). QIP is a Cayman Islands
     limited duration company with its principal address at Kaya Flamboyan 9,
     Willemstad, Curacao, Netherlands Antilles. The sole general partner of QIP
     is QIH Management Investor L.P., a Delaware limited partnership ("QIHMI"),
     which is vested with investment discretion with respect to portfolio assets
     held for the account of QIP. The sole general partner of QIHMI is QIH
     Management, Inc., a Delaware corporation ("QIH Management"). George Soros,
     the sole shareholder of QIH Management, has entered into an agreement with
     Soros Fund Management LLC, a Delaware limited liability company ("SFM
     LLC"), pursuant to which Mr. Soros has agreed to use his best efforts to
     cause QIH Management to act at the direction of SFM LLC. Mr. Soros, as
     Chairman of SFM LLC, and Stanley F. Druckenmiller, as Lead Portfolio


                                       21


<PAGE>

     Manager of SFM LLC, may each be deemed to have shared voting power and
     shared investment power with respect to the QIP Shares. Accordingly, each
     of QIHMI, QIH Management, SFM LLC and Messrs. Soros and Druckenmiller may
     be deemed to be the beneficial owners of the QIP Shares. Each has their
     principal office at 888 Seventh Avenue, 33rd Floor, New York, New York
     10106. The foregoing information was derived, in part, from certain
     publicly available reports, statements and schedules filed with the
     Commission.

(13) Represents both (i) 27,790 shares of Common Stock issuable upon conversion
     of 14,590 shares of Series A Preferred Stock (the "SFMDI Shares") held in
     the name of SFM Domestic Investments LLC, a Delaware limited liability
     company ("SFMDI"), and (ii) the QIP Shares referenced in Note 13 above. As
     managing member of SFMDI, Mr. Soros may also be deemed the beneficial owner
     of the SFMDI Shares. The principal address of SFMDI is at 888 Seventh
     Avenue, 33rd Floor, New York, New York 10106. The foregoing information was
     derived, in part, from certain publicly available reports, statements and
     schedules filed with the Commission.

(14) Includes 175,372 shares of Common Stock issuable upon exercise of options
     granted under the Plan.

         SERIES A PREFERRED STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock of the Company as of March
15, 2000, for (i) each person who is known by the Company to own beneficially
more than 5% of the Series A Preferred Stock of the Company, (ii) each of the
Company's directors, (iii) the Named Executive Officers, and (iv) all directors
and executive officers as a group.

<TABLE>
<CAPTION>
                                                                NUMBER OF SHARES
NAME (1)                                                       BENEFICIALLY OWNED   PERCENTAGE (2)
--------                                                       ------------------   --------------
<S>                                                                <C>                <C>
E. Kenneth Seiff                                                       --               --
Red Burns                                                              --               --
Mark H. Goldstein                                                      --               --
Martin Miller                                                          --               --
Neal Moszkowski (3)                                                    --               --
Ellin J. Saltzman                                                      --               --
Robert G. Stevens                                                      --               --
Patrick C. Barry                                                       --               --
Jonathan B. Morris                                                     --               --
Quantum Industrial Partners LDC                                     445,410(4)         89.1%
George Soros                                                        460,000(5)         92.0%
All directors and executive officers as a group (9 persons)            --               --
</TABLE>

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

(1)  Except as otherwise indicated, the address of each of the individuals
     listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
     10018.

(2)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission ("Commission") and generally includes
     voting or investment power with respect to securities. Shares of Common
     Stock issuable upon the exercise of options or warrants currently
     exercisable or exercisable within 60 days are deemed outstanding for
     computing the percentage ownership of the person holding such options or
     warrants but are not deemed outstanding for computing the percentage
     ownership of any other person.

(3)  Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
     Seventh Avenue, 33rd Floor, New York, New York 10106.

(4)  Represents the QIP Shares held in the name of QIP. QIP is a Cayman
     Islands limited duration company with its principal address at Kaya
     Flamboyan 9, Willemstad, Curcao, Netherlands Antilles. The sole general
     partner of QIP is QIHMI, which is vested with investment discretion with
     respect to portfolio assets held for the account of QIP. The sole
     general partner of QIHMI is QIH Management. Mr. Soros, the sole
     shareholder of QIH Management, has entered into an agreement with SFM
     LLC, pursuant to which Mr. Soros has agreed to use his best efforts to
     cause QIH Management to act at the direction of SFM LLC. Mr. Soros, as
     Chairman of SFM LLC, and Stanley F. Druckenmiller, as Lead Portfolio
     Manager of SFM LLC, may each be deemed to have shared voting power and
     shared investment power with


                                       22


<PAGE>

     respect to the QIP Shares. Accordingly, each of QIHMI, QIH Management, SFM
     LLC and Messrs. Soros and Druckenmiller may be deemed to be beneficial
     owners of the QIP Shares. Each has their principal office at 888 Seventh
     Avenue, 33rd Floor, New York, New York 10106. The foregoing information was
     derived, in part, from certain publicly available reports, statements and
     schedules filed with the Commission.

(5)  Represents both (i) the SFMDI Shares held in the name of SFMDI and (ii)
     the QIP Shares referenced in Note 4 above. As managing member of SFMDI,
     Mr. Soros also may be deemed the beneficial owner of the SFMDI Shares.
     The principal office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New
     York, New York 10106.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1999, the Company entered into an employment agreement with Robert
G. Stevens, a director of the Company. Mr. Stevens has agreed to serve as the
Company's Executive Vice President for a term of four years, which began in
December 1999. Mr. Stevens will receive an annual base salary of $175,000,
subject to increase by the Board of Directors and an annual bonus to be
determined by the Board of Directors. Mr. Stevens has also been granted an
option to purchase 100,000 shares of Common Stock. Mr. Stevens' option is
exercisable at the fair market value of the Common Stock on the date of the
grant and vests monthly over a four year period according to the following
schedule: 12.5% of the option vests on the six-month anniversary of the date of
grant and 2.0833% of the option vests each month thereafter until the option has
completely vested.


                                       23

<PAGE>


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

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

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

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

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

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

  4.1         Form of Senior Convertible Note

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

  10.2        Amended and Restated 1997 Stock Option Plan.

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

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

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

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

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

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

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

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

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

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

  10.13       Note and Warrant Purchase Agreement, dated as of March 28, 2000, by and among The Company, Quantum
              Industrial Partners LDC and SFM Domestic Investments LLC.

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

  21.1        Subsidiaries of the Registrant.

  27          Financial Data Schedule.

</TABLE>

 (a) - Incorporated by reference to the Company's Form SB-2 registration
       statement and amendments thereto (File No. 333-22895).
 (b) - Incorporated by reference to the Company's Quarterly report filed on
       Form 10-QSB for the quarterly period ended March 31, 1997.
 (c) - Incorporated by reference to the Company's Quarterly report filed on
       Form 10-QSB for the quarterly period ended September 30, 1998.
 (d) - Incorporated by reference to the Company's Quarterly report filed on
       Form 10-QSB for the quarterly period ended June 30, 1999.
 (e) - Incorporated by reference to the Company's Quarterly report filed on
       Form 10-QSB for the quarterly period ended September 30, 1999.
 (f) - Incorporated by reference to the Company's report filed on Form 8-K,
       dated September 15, 1999.
 (g) - Incorporated by reference to the Company's report filed on Form 8-K,
       dated December 9, 1999.
  +    Confidential treatment granted as to certain portions of this Exhibit.
       Such portions have been redacted.

(b)  Reports on Form 8-K

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


                                       24

<PAGE>


                                   SIGNATURES

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


                                    BLUEFLY, INC.

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



________________, 2000

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


<TABLE>
<CAPTION>

Signature                     Title                                                Date
---------                     -----                                                ----

<S>                          <C>                                             <C>
/s/ E. Kenneth Seiff
-------------------------
E. Kenneth Seiff              Chairman of the Board of Directors, Chief       __________, 2000
                              Executive Officer, President,
                              and Treasurer (Principal Executive Officer)

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

/s/ Red Burns
-------------------------
Red Burns                                    Director                         __________, 2000

/s/ Martin Miller
-------------------------
Martin Miller                                Director                         __________, 2000

/s/ Robert G. Stevens
-------------------------
Robert G. Stevens                            Director                         __________, 2000

/s/ Neal Moszkowski
-------------------------
Neal Moszkowski                              Director                         __________, 2000


/s/ Mark H. Goldstein
-------------------------
Mark H. Goldstein                            Director                         __________, 2000


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













                                       25