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

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934 For the fiscal year ended December 31, 2002

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

                        Commission File Number: 001-14498

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

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

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

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

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

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

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

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

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

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

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

As of March 17, 2003, there were 11,024,568 shares of Common Stock, $.01 par
value, of the registrant outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates as of such date, based upon
the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market, was approximately
$4,750,000.

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                                     PART I

Item 1.  Description of Business

General

Bluefly, Inc. is a leading Internet retailer of designer fashion and home
accessories at discount prices. We sell over 350 brands of designer apparel,
accessories and home products at discounts up to 75% off retail value. In the 12
months of calendar year 2002, we offered over 69,000 different types of items
for sale in categories such as men's, women's and accessories as well as house
and home accessories. Since its inception, www.bluefly.com has served over
385,000 customers and shipped to over 20 countries.

We were incorporated in 1991 under the laws of the state of New York as Pivot
Corporation. In 1994, we changed our name to Pivot Rules, Inc. In May of 1997,
we completed our initial public offering, and our common stock is listed on the
Nasdaq SmallCap Market under the symbol "BFLY." In May of 1998, our Board of
Directors approved the development of the Bluefly.com Web site (the "Web site").
In June 1998, we discontinued our golf sportswear division, Pivot Rules, in
order to devote all of our energy and resources to building Bluefly.com. We
launched our Web site in September 1998. In October 1998, shortly after selling
the Pivot Rules brand and trademarks, we changed our name to Bluefly, Inc. to
match the name of our Web site. On February 2, 2001, we reincorporated in
Delaware through a merger with a wholly owned subsidiary. Our executive offices
are located at 42 West 39th Street, New York, New York 10018, and our telephone
number is (212) 944-8000. Our Internet address is www.bluefly.com. We make
available, free of charge, through our Web site, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.

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

Recent Developments

January 2003 Financing

In January 2003, we issued to Quantum Industrial Partners LDC, a Cayman Islands
limited duration company ("QIP"), and SFM Domestic Investments LLC, a Delaware
limited liability company ("SFMDI;" QIP and SFMDI are each affiliates of Soros
Private Equity Partners LLC and are collectively and individually sometimes
referred to herein as "Soros") $1 million of demand convertible promissory notes
that bore interest at a rate of 8% per annum and had a maturity date of July 28,
2003 (the "January 2003 Financing") and warrants to purchase 25,000 shares of
our Common Stock, exercisable at any time on or prior to January 28, 2007 at
$1.12 per share. The promissory notes together with any accrued interest were
convertible into equity securities that we might issue in any subsequent round
of financing, at the holder's option, at a price that was equal to the lowest
price per share accepted by any investor in such subsequent round of financing.
As described below, these promissory notes were converted into Series D
Preferred Stock in March 2003. For additional information on the terms of the
January 2003 Financing, see "Certain Relationships and Related Transactions."

March 2003 Financing

In March 2003, we entered into an agreement with Soros pursuant to which Soros:
(i) provided $2 million of new capital by purchasing 2,000 shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock"), (ii) converted the
promissory notes issued to it in the January 2003 Financing and all of its
Series 2002 Preferred Stock into 3,109.425 shares of Series D Preferred Stock,
and (iii) purchased 2,027.123 additional shares of Series D Preferred Stock for
approximately $2 million, with such $2 million in additional proceeds being
retained by Soros as payment in full of our obligations under the demand
promissory notes issued to Soros in September 2002 (the "March 2003 Financing").
For additional information on the terms of the March 2003 Financing, see
"Certain Relationships and Related Transactions."


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Additionally, Soros agreed to provide us with up to $1 million in additional
financing (the "2003 Standby Commitment Amount") on a standby basis at any time
prior to January 1, 2004, provided that our cash balances are less than $1
million (the "2003 Standby Commitment"). Such financing can be made in one or
more tranches as determined by the members of our Board of Directors who are not
Soros designees, and any and all draws against the 2003 Standby Commitment
Amount shall be effected through the purchase of newly-designated shares of
Series E Preferred Stock on terms and conditions substantially identical to the
Series D Preferred Stock, except that: (1) the conversion price of the Series E
Preferred Stock will be the lower of (a) the average closing price of the Common
Stock on the Nasdaq SmallCap Market for the ten trading days preceding the
issuance of the Series E Preferred Stock and (b) $0.76; and (2) the Series E
Preferred Stock will not be convertible into Common Stock (and will not be
entitled to vote with the Common Stock on matters submitted to a vote of the
holders of the Common Stock) until such time as the Company's stockholders
approve the conversion rights of the Series E Preferred Stock to the extent
required by the rules of the Nasdaq SmallCap Market or any other national
securities exchange or quotation system upon which the Common Stock may be
listed from time to time. Subject to certain limitations, the 2003 Standby
Commitment Amount shall be reduced on a dollar-for-dollar basis by the gross
cash proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 12, 2003. To the
extent that a draw down on the 2003 Standby Commitment Amount results in the
conversion price of the Series E Preferred Stock being less than $0.76, Soros
has agreed to waive its right to readjust the conversion price on the Series B,
C and D Preferred Stock in connection with the issuance of the Series E
Preferred Stock.

As a result of the March 2003 Financing, the conversion price of the Series B
Preferred Stock and the Series C Preferred Stock, all of which is held by Soros,
automatically decreased from $0.93 to $0.76. In accordance with EITF 00-27, the
reduction in the conversion price of the Series C Preferred Stock will result in
us recording a beneficial conversion feature in the approximate amount of
$225,000. This non-cash charge, which is analogous to a dividend, will result in
an adjustment to our computation of Loss Per Share in the first quarter of 2003.

Amendments to Rosenthal Financing Agreement

In December 2002 and March 2003, we amended our Financing Agreement (the
"Rosenthal Financing Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal"),
pursuant to which Rosenthal provides us with certain credit accommodations,
including loans and advances, factor-to-factor guarantees, letters of credit in
favor of suppliers or factors and purchases of payables owed to our suppliers
(the "Loan Facility"). Under the terms of these amendments, we: (i) extended the
term until June 30, 2004, (ii) increased the maximum amount available under the
Loan Facility (subject to an existing $10 million cap) to an amount equal to the
Soros Guarantee (as hereinafter defined) plus the lowest of (x) $2 million
(instead of the prior $1 million), (y) 20% of the book value of our inventory or
(z) the full liquidation value of our inventory, (iii) increased the tangible
net worth requirement to $5,000,000 from $1,500,000, (iv) redefined the working
capital definition to exclude short-term debt held by affiliates (effective as
of December 19, 2002), (v) increased the working capital requirement to
$4,000,000 from $3,500,000 , (vi) increased the annual fee we pay Rosenthal for
the Loan Facility to $30,000 from $10,000, (vii) agreed to maintain a cash
balance of at least $250,000 and (viii) obtained an agreement from Soros to
increase to $2.0 million from $1.5 million the amount of the standby letter of
credit that Soros is maintaining (the "Soros Guarantee") to help secure the Loan
Facility and to extend the term of the Soros Guarantee to November 15, 2004 from
November 15, 2003. In consideration for Soros' agreement to increase the amount
of and to maintain the Soros Guarantee until November 15, 2004, we issued to
Soros a warrant to purchase 25,000 shares of our Common Stock at an exercise
price equal to $0.78 per share (the 10 day trailing average of the closing sale
price of our Common Stock on the date of issuance), exercisable at any time
prior to March 17, 2013. For more information on the Loan Facility and the Soros
Guarantee, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources - Loan Facility" and
"Certain Relationships and Related Transactions."

Nasdaq

On March 11, 2003, we were advised by the Nasdaq Stock Market, Inc. ("Nasdaq")
that we were no longer in compliance with Nasdaq's continued listing
requirements (the "Listing Requirements") because shares of our common stock
have closed at a per share price of less than $1.00 for at least 30 days and
that, if we are unable to achieve compliance with the Listing Requirements by
September 8, 2003, the Nasdaq Staff will determine whether we meet certain of
the initial listing criteria of the Nasdaq SmallCap Market. In the event that we
meet such initial listing criteria, we will be granted an additional 180-day
grace period to regain compliance. In order to regain compliance, shares of the
Company's common stock would need to close at a price of $1.00 or more for at
least ten consecutive trading days. In the event that the Company does not
regain compliance within the requisite time period, it intends to appeal any
delisting. However, no assurance can be provided that any such appeal will be


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successful. The failure to maintain listing on the Nasdaq SmallCap Market may
have an adverse effect on the price and/or liquidity of the Company's common
stock.

General

Based on current plans and assumptions relating to our operations, we believe
that the proceeds from prior financings, together with the January 2003
Financing, the March 2003 Financing, the 2003 Standby Commitment, the Loan
Facility, existing resources and cash generated from operations, are sufficient
to satisfy our cash requirements through the end of 2003. Of course, there can
be no assurance that such expectations will prove to be correct. Moreover, we
may seek additional debt and/or equity financing in order to grow our business.
The environment for raising investment capital by companies in the Internet
industry has been difficult and there can be no assurance that additional
financing or other capital will be available upon terms acceptable to us, or at
all. The inability to obtain additional financing, if needed, would have a
material adverse effect on our business, prospects, financial condition and
results of operations. See, "Risk Factors -We Are Making A Substantial
Investment In Our Business And May Need To Raise Additional Funds" and "Risk
Factors -- Certain Events Could Result in Significant Dilution Of Your Ownership
Of Our Common Stock."

Business Strategy

Bluefly strives to be the "Store of First Resort for Fashion" by offering the
most compelling combination of selection, value, service and convenience. By
selectively acquiring end-of-season and excess inventory of high-end designer
fashion products and offering a friendly, convenient and upscale shopping
atmosphere, we believe that we are creating a hybrid retail environment that
combines the best of the three traditional retail channels: the selection of
full price department stores; the service and convenience of catalogs; and the
savings of traditional off-price stores.

Each of the three traditional retail channels offers something different to
consumers. Full price department stores typically offer a wide selection of top
designer products and make substantial efforts to provide good customer service.
Often missing from the full price department store experience are convenience
(of necessity, consumers must travel to and from the store, which in some
instances can take several hours) and discounts (while full price stores
generally have price mark-downs, the majority of their business is at full
price). While catalogs offer convenience and good customer service, they
generally do not offer discounts or a wide selection of designer products (many
catalogs, such as J.Crew, Lands' End, and Victoria Secret, are "vertical brands"
that sell only one brand of products). Off-price stores, such as T.J. Maxx and
Ross Stores, typically offer significant discounts to the customer but do not
offer the designer brand selection and customer service of full price department
stores or the convenience of catalogs.

Bluefly seeks to combine the best that these three traditional channels have to
offer with added benefits offered only by the Internet. At Bluefly.com, we aim
to offer the designer selection of a full price department store, the customer
service of a high-end retailer or catalog, the discounts of an off-price store,
the convenience of 24/7 shopping from home or the office, and sophisticated
search and sort functionality made possible by the Internet. We recognize that
we will not be able to satisfy all of our customers, all of the time, but then
no retailer can. Our proposition to the consumer is simply this: "Come to
Bluefly.com first for all of your fashion needs. We will do our best to exceed
your expectations and, if we have what you are looking for, you will receive top
designer merchandise at a discount and outstanding customer service in a
friendly, convenient, upscale environment. In those instances (which we hope to
be rare) where our designer selection does not meet your needs, the cost to you
will be the few minutes it took to browse or search our Web site. We, on the
other hand, will have the opportunity to complete many more sales with you if we
successfully build an experience that convinces you to visit us first to see if
we can fill your fashion needs." For these reasons, we hope to become the "Store
of First Resort for Fashion."

Our business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 350 top designer brands that we
offer on our Web site. We recognize that liquidating excess inventory can be a
"necessary evil" and that brand dilution can occur when a brand's product is
offered in a traditional discount environment. We would like to make the
liquidation of excess inventory a positive experience for our vendors rather
than a distasteful one. We intend to do this by treating our suppliers with
honesty and respect and by creating a high-end retail environment that offers
only a premium matrix of brands. In doing so, we hope that Bluefly's younger,
affluent customer base will come to understand our suppliers' brands as the
designer intended, thereby reducing the potential for brand dilution.


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We do not believe that we can become the "Store of First Resort for Fashion"
without using the Internet as a platform. The direct marketing of excess and
end-of-season apparel, fashion accessories and home products requires a
cost-effective medium that can display a large number of products, many of which
are in limited supply, and some of which are neither available in all sizes nor
easily replenished. We believe print catalogs are not well suited to this task.
The paper, printing, mailing and other production costs of a print catalog can
be significant and the lead times required to print a catalog make them
significantly inflexible in addressing inventory sell outs, price changes and
new styles. To work around these limitations, a traditional cataloger typically
requires products that are replenishable, available in a full range of sizes and
in substantial quantities. Similarly, retailing on television is costly and
requires substantial quantities of products that are available in all sizes in
order for it to be an economical medium. In addition, the number of items that
can be displayed on television is limited, and television does not allow viewers
to search for products that interest them. The availability of excess inventory
of high-end apparel and accessories is often at odds with these needs as such
merchandise is rarely replenishable and frequently offered in incomplete color
and size ranges.

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

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

E-Commerce And The Online Apparel Market

The dramatic growth of e-commerce has been widely reported and is expected to
continue. In June 2002, The Boston Consulting Group estimated that U.S. online
retail sales would increase approximately 41% from $51.3 billion in 2001 to
$72.1 billion in 2002. According to Forrester Research, by the end of 2003 the
number of households that will have bought online will have increased by 53%
since the start of 2000, to 43.3 million from 28 million. We believe that a
number of factors will contribute to the growth of e-commerce, including (i)
shoppers' growing familiarity and comfort with shopping online; (ii) the
proliferation of devices to access the Internet, and (iii) technological
advances that make navigating the Internet faster and easier.

According to a Shop.org survey, online apparel sales reached $4.4 billion in
2001 and are expected to reach over $5.2 billion in 2002. We believe that the
market for online sales of apparel is growing faster than many other retail
categories as a result of a confluence of trends, including (i) the growth of
the number of women online, who account for a larger share of retail apparel
purchases, (ii) the expansion of online traffic from technology oriented users
to users with mainstream demographic, (iii) the development of sophisticated
tools to search complex product categories such as apparel and (iv) the growing
adoption of high speed access of cable modems and DSL, which makes viewing large
numbers of photos much faster. Of course, there can be no assurance that such
expectations will prove to be correct or that they will have a positive effect
on our business.

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 we believe that sophisticated
database technology, personalization technology, and the interactivity of the
Web will ultimately make the Internet a far more compelling medium than
catalogs, we also believe 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 may be worth noting that, based on a 2000 report by the
Direct Marketing Association, of the $67.7 billion of U.S. catalog sales to
consumers, over $11 billion is attributable to apparel and apparel related
items. The success of companies such as J.Crew and Lands' End is perhaps the
best evidence that people are prepared to purchase clothing and accessories


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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.

Marketing

We are seeking to position ourselves as the fashion consumer's store of first
resort, combining the service and selection found at high-end retailers with
savings typically available only at off-price stores or company-owned outlet
stores. We seek to incorporate this branding effort into all aspects of our
operations, including advertising, customer service, site experience, packaging
and delivery. We acquire new customers through multiple channels, including
traditional and online advertising, direct marketing and print advertising.

Merchandising

Our merchandising efforts are led by a team of buyers who hail from such
venerable retailers as Saks Fifth Avenue, Barneys, Brooks Brothers and Henri
Bendel. We buy merchandise directly from designers as well as from retailers and
other third party, indirect resources. Currently, we offer products from more
than 350 name brand designers, which we believe to be the widest selection of
designers available from any online store. We have established direct supply
relationships with over 200 such designers. We believe that we have been
successful in opening up over 200 direct supply relationships, in part because
we have devoted substantial resources to establishing Bluefly.com as a high-end
retail environment. In this regard, we are committed to displaying all of our
merchandise in an attractive manner, offering superior customer service and
gearing all aspects of our business towards creating a better channel for top
designers to liquidate their excess inventory.

For a number of reasons, we believe that our inventory risk can be lower than
that of traditional retailers:

     o    By centralizing our inventory, we believe that we will be able to
          optimize inventory turns because we will not be forced to anticipate
          sales by region or allocate merchandise between multiple locations;

     o    Our Web site captures a tremendous amount of customer data that we can
          use to optimize our purchase of inventory;

     o    Unlike traditional brick-and-mortar retailers and catalogs, we can
          change the pricing of our products almost instantaneously and can
          price products based on supply and demand; and

     o    Unlike traditional brick-and-mortar retailers, which have a limited
          amount of shelf space, significant rent payments and attendant sales
          personnel costs, we hold inventory in a warehouse with a lower per
          square foot rental charge, lower personnel costs and more shelf space.

These factors can create lower inventory carrying costs. Of course, there can be
no assurance that we will be able to leverage successfully any of these
potential advantages.

Warehousing And Fulfillment

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

Our heavy focus on customer satisfaction is felt throughout our organization. In
December 2002, during our peak weeks of the holiday season, of the total orders
shipped, approximately 99% were shipped by the next business day from receipt of
the customer's order.

Customer Service

We believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service effort starts
with our Web site, which is designed to provide an intuitive shopping
experience. An easy to use help center is available on the Web site and is
designed to answer many of our customers' most frequently asked questions. For
customers who prefer e-mail or telephone assistance,


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customer service representatives are available seven days a week to provide
assistance. To insure that customers are satisfied with their shopping
experience, we generally allow returns for any reason within 90 days of the sale
for a full refund.

Technology

We have implemented a broad array of state-of-the-art technologies that
facilitate Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technologies include a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, we
incorporate, for transmission of confidential personal information between
customers and our Web server, Secure Socket Layer Technology ("SSL") such that
all data is transmitted via a 128-bit encrypted session.

In March 2002, we moved to another co-location facility 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. See,
"Risk Factor - We Are Heavily Dependent on Third-Party Relationships."

In March 2002, we also entered into a Software License and Service Agreement
with Blue Martini, Inc. ("Blue Martini"). Beginning in March 2002, with the
assistance of consultants from Blue Martini, we developed an improved version of
our Web site based on Blue Martini Software. The new version of Bluefly's Web
site was launched in the third quarter of 2002 and replaced the older version.
The launch of the new Web site involved the use of significant internal and
external resources and was a main focus of management's attention during the
second half of 2002. Among the improvements to the new Web site, are the
addition of keyword search, a more powerful version of the size finder tool that
enables shoppers to quickly locate products in their exact size, and more robust
analytical tools that should allow Bluefly to understand and serve its customers
better. In accordance with generally accepted accounting principles, costs
related to the development of the new Web site have been capitalized and are
being amortized over a 24-month period.

We expect that the more robust tools provided by the upgraded Web site will
allow us to better create and manage, and measure the performance of, on-site
marketing promotions. In addition, we believe that the new Web site is more
stable and provides a more efficient platform from which to scale our technology
infrastructure should any future growth in our business dictate such a need. Of
course, there can be no assurance that the new Web site will have a positive
effect on our business. See, "Risk Factor - The Implementation Of A New Web site
May Place A Significant Strain On Our Management And Certain Key Personnel."

Competition

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

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

Intellectual Property

We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in services and technology, including
confidentiality, invention assignment and nondisclosure agreements with
employees and contractors.


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Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our intellectual property without our authorization. In
addition, we pursue the registration of our trademarks and service marks in the
U.S. and internationally and the registration of our domain name and variations
thereon. However, effective intellectual property protection may not be
available in every country in which the services are made available online.

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

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

Governmental Approvals And Regulations

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

Employees

As of March 17, 2003, we had 80 full-time employees and three part-time
employees, as compared to 59 full-time and seven part-time employees as of March
15, 2002. None of our employees are represented by a labor union and we consider
our relations with our 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.

We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2002, we had an accumulated deficit of $85,742,000. We
incurred net losses of $6,479,000, $25,006,000 and $21,109,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. We have incurred
substantial costs to develop our Web site and infrastructure. In order to expand
our business, we intend to invest in sales, marketing, merchandising,
operations, information systems, site development and additional personnel to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future. Our ability to become profitable
depends on our ability to generate and


                                       8
<PAGE>

sustain substantially higher net sales while maintaining reasonable expense
levels, both of which are uncertain. If we do achieve profitability, we cannot
be certain that we would be able to sustain or increase profitability on a
quarterly or annual basis in the future.

We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may need additional financing to effect our business plan.
Soros provided us with approximately $3 million of additional capital in January
and March 2003 as well as a commitment to provide us with up to $1 million in
additional financing. See "Recent Developments." We anticipate, based on current
plans and assumptions relating to our operations, that the proceeds from prior
financings together with the 2003 Standby Commitment, the Loan Facility,
existing resources and cash generated from operations, should be sufficient to
satisfy our cash requirements through the end of fiscal 2003. However, we may
seek additional debt and/or equity financing in order to maximize the growth of
our business. The environment for raising investment capital by companies in the
Internet industry has been difficult and there can be no assurance that
additional financing or other capital will be available upon terms acceptable to
us, or at all. The inability to obtain additional financing, if capital is
needed, would have a material adverse effect on our business, prospects,
financial condition and results of operations. See, "Risk Factors - Certain
Events Could Result In Significant Dilution Of Your Ownership Of Common Stock."

We Have Granted Liens On Substantially All Of Our Assets. Under the terms of the
Loan Facility, Rosenthal provides us with certain credit accommodations,
including loans and advances, factor-to-factor guarantees, letters of credit in
favor of suppliers or factors and purchases of payables owed to our suppliers.
Pursuant to the Loan Facility, we gave a first priority lien to Rosenthal on
substantially all of our assets, including our cash balances. In connection with
the Loan Facility, we entered into a Reimbursement Agreement with Soros pursuant
to which Soros agreed to guarantee a portion of the Loan Facility, we agreed to
reimburse Soros for any amounts it paid to Rosenthal pursuant to such guarantee
and we granted Soros a subordinated lien on substantially all of our assets,
including our cash balances, in order to secure our reimbursement obligations.
If we were unable to meet certain obligations under the Loan Facility, Rosenthal
and Soros would be entitled, among other things, to sell the assets on which
liens have been granted to satisfy our obligations under the Loan Facility and
the Reimbursement Agreement. In addition, to the extent that Soros is required
to make any payments to Rosenthal under its guarantee of our obligations under
the Loan Facility, we would be required to issue an additional warrant to Soros,
which could result in a significant dilution of your ownership of our common
stock. See, "Risk Factors -- Certain Events Could Result In Significant Dilution
Of Your Ownership Of Our Common Stock."

We May Not Generate Sufficient Cash Flow To Pay Our Indebtedness Under The Loan
Facility. Our ability to make payments under the Loan Facility will depend on
our ability to generate cash in the future. To a certain extent, this is subject
to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business will
generate sufficient cash flow from operations to enable us to pay our
indebtedness under the Loan Facility throughout the term of the agreement. A
default under the Loan Facility could require us to issue an additional warrant
to Soros, which could result in a significant dilution of your ownership of our
common stock. See, "Risk Factors - We Have Granted Liens On Substantially All Of
Our Assets" and "- Certain Events Could Result In Significant Dilution of Your
Ownership of Our Common Stock."

We May Not Generate Sufficient Cash Flow To Comply With Our Financial Covenants
Under The Loan Facility. Our ability to comply with our financial covenants
under the Loan Facility depends on our ability to generate cash in the future.
To a certain extent, this is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that our business will generate sufficient cash
flow from operations to enable us to comply with our financial covenants under
the Loan Facility. In December 2002, the tangible net worth requirement under
the Loan Facility was increased to $6.0 million from $1.5 million, and the
working capital requirement was increased to $5.0 million from $3.5 million. In
March 2003, the tangible net worth requirement was reduced to $5 million from $6
million, the working capital requirement was decreased to $4 million from $5
million and the definition of working capital was amended (effective as of
December 19, 2002) to exclude short-term debt held by affiliates. As of December
31, 2002, our tangible net worth was approximately $9.1 million and our working
capital was approximately $6.7 million (excluding the $2.0 million in short-term
debt held by Soros as of such date). A default under the Loan Facility could
require us to issue an additional warrant to Soros, which could result in a
significant dilution of your ownership of our common stock. See, "Risk Factors -
We Have Granted Liens On Substantially All Of Our Assets" and "- Certain Events
Could Result In Significant Dilution Of Your Ownership Of Our Common Stock."


                                       9
<PAGE>

Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. As of March 17, 2003, there were outstanding options to purchase
9,525,412 shares of Common Stock issued under our 1997 and 2000 Stock Option
Plans, warrants to purchase 981,644 shares issued to Soros, and additional
warrants and options to purchase an aggregate of 137,500 shares of Common Stock.
The exercise of our outstanding options and warrants would dilute the then
existing stockholders' percentage ownership of our stock, and any sales in the
public market of Common Stock underlying such securities could adversely affect
prevailing market price of the Common Stock.

Moreover, if Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility, or if at any time the total amount outstanding
under the Loan Facility exceeds 90% of the undrawn amount of the Soros
Guarantee, we will be required to issue to Soros another warrant (each a
"Contingent Warrant") to purchase a number of shares of Common Stock equal to
the quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of
the average closing price of our Common Stock on the ten days preceding the date
of issuance of such warrant. Each Contingent Warrant will be exercisable for ten
years from the date of issuance at an exercise price equal to 75% of the average
closing price of our Common Stock on the ten days after the date of issuance.

Stockholders could also experience significant dilution as the result of the
conversion of, and/or anti-dilution adjustments to, our Series A, B, C and D
Preferred Stock. As of March 17, 2003: (i) the 460,000 shares of Series A
Preferred Stock outstanding were convertible into an aggregate of 3,931,624
shares of Common Stock (plus any shares of Common Stock issued upon conversion
in payment of any accrued and unpaid dividends on the Series A Preferred Stock);
(ii) the 8,889,414 shares of Series B Preferred Stock outstanding were
convertible into an aggregate of 27,370,038 shares of Common Stock (plus any
shares of Common Stock issued upon conversion in payment of any accrued and
unpaid dividends on the Series B Preferred Stock); (iii) the 1,000 shares of the
Series C Preferred Stock outstanding were convertible into an aggregate of
1,315,788 shares of Common Stock (plus any shares of Common Stock issued upon
conversion in payment of any accrued and unpaid dividends on the Series C
Preferred Stock) and; (iv) the 7,136.548 shares of Series D Preferred Stock
outstanding were convertible into an aggregate of 9,390,194 shares of Common
Stock (plus any shares of Common Stock issued upon conversion in payment of any
accrued and unpaid dividends on the Series D Preferred Stock.) The Series B
Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock
contain anti-dilution provisions pursuant to which, subject to certain
exceptions, in the event that we issue or sell Common Stock or new securities
convertible into Common Stock in the future for less than $0.76 per share of
Common Stock, the number of shares of Common Stock to be issued upon the
conversion of the Series B Preferred Stock, the Series C Preferred Stock and the
Series D Preferred Stock would be increased to a number equal to the face amount
of the Series B, C and D Preferred Stock divided by the price at which such
Common Stock or other new securities are sold.

Finally, stockholders could be subject to significant dilution to the extent
that we raise additional equity financing, as a result of both the issuance of
additional equity securities and the anti-dilution provisions of the Series B, C
and D Preferred Stock described above. See "Certain Relationships and Related
Transactions" and "Recent Developments."

Our Limited Operating History Makes Forecasting Our Revenues Difficult. Having
launched Bluefly.com in September 1998, we have a limited operating history and
it is therefore difficult for us to forecast our revenues accurately. We base
our current and future expense levels and operating plans on expected revenues,
but in the short term a significant portion of our expenses are fixed.
Accordingly, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could have a
negative impact on our operating results and cash flow in a given quarter, and
could also cause our operating results in some future quarter to fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock could decline significantly.

We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation. We purchase merchandise both directly from brand owners and
indirectly from retailers and third party distributors. The purchase of
merchandise from parties other than the brand owners increases the risk that we
will mistakenly purchase and sell non-authentic or damaged goods. We have taken
steps to ensure that we sell only authentic, high quality name brand products
and to avoid selling any non-authentic or damaged goods. While we believe that
our procedures are effective, the possibility for error exists and therefore we
face potential liability under applicable laws, regulations, agreements and
orders for the sale of non-authentic or damaged goods. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of operations.


                                       10
<PAGE>

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

Our Growth May Place A Significant Strain On Our Management And Administrative
Resources And Cause Disruptions In Our Business. Our historical growth has
placed, and any further growth is likely to continue to place, a significant
strain on our management and administrative resources. Any failure to manage
growth effectively could have a material adverse effect on our business,
financial condition and results of operations. To be successful, we must
continue to implement information management systems and improve our operating,
administrative, financial and accounting systems and controls. We will also need
to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, merchandising, operations and technology
functions. Moreover, our business is dependent upon our ability to expand our
third-party fulfillment operations, customer service operations, technology
infrastructure, and inventory levels to accommodate increases in demand,
particularly during the peak holiday selling season. Our planned expansion
efforts in these areas could cause disruptions in our business. Any failure to
expand our third-party fulfillment operations, customer service operations,
technology infrastructure or inventory levels at the pace needed to support
customer demand could have a material adverse effect on our business, prospects,
financial condition and results of operations.

The Implementation Of The New Web Site May Place A Significant Strain On Our
Management And Certain Key Personnel. During 2002, we entered into a Software
License and Service Agreement with Blue Martini. Beginning in March 2002, with
the assistance of consultants from Blue Martini, we developed an improved
version of our Web site based on Blue Martini Software. In the third quarter
2002 we launched the new Web site. We have begun, and will need to continue, to
develop new internal procedures to operate the new Web site and to make the most
effective use of the improvements available on the new Web site. As with any new
technology, we may experience instability and performance issues in the
foreseeable future. While we believe that this project was a wise investment in
our future, the return on this investment is not certain and the time and
attention required to build out and learn how to best use the new Web site could
result in our inability to undertake certain initiatives that could have a more
immediate, positive impact on our business and/or distract us from other areas
of our business that require the time and attention of those involved in the
continued development of the new Web site.

We Are Heavily Dependent On Third-Party Relationships. We are heavily dependent
upon our relationships with our fulfillment operations provider and Web hosting
provider, delivery companies like UPS and the United States Postal Service, and
credit card processing companies such as Paymentech and Cybersource to service
our customers' needs. To the extent that there is a slowdown in mail service or
package delivery services, whether as a result of labor difficulties, terrorist
activity or otherwise, our business, prospects, financial condition and results
of operations could be adversely impacted. We began using a new fulfillment
operations provider in August 2000 and a new Web hosting facility in March 2002
and have a limited operating history with each of these service providers. The
failure of our fulfillment operations provider, credit card processors or Web
hosting provider to properly perform their services for us could have a material
adverse effect on our business, prospects, financial condition and results of
operations. Our business is also generally dependent upon our ability to obtain
the services of other persons and entities necessary for the development and
maintenance of our business. If we fail to obtain the services of any such
person or entities upon which we are dependent on satisfactory terms, or we are
unable to replace such relationship, it would have a material adverse impact on
our business, prospects, financial condition and results of operations.

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

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

     o    less established companies, such as eLuxury, which are building their
          brands online;

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


                                       11
<PAGE>

     o    television direct marketers such as QVC; and

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

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

     o    brand recognition;

     o    merchandise selection;

     o    price;

     o    convenience;

     o    customer service;

     o    order delivery performance;

     o    site features; and

     o    content.

Although we believe we compare favorably with our competitors, we recognize that
this market is relatively new and is evolving rapidly. There can be no assurance
that we will be able to compete successfully against competitors and future
competitors, and competitive pressures faced by us may have a material adverse
effect on our business, prospects, financial condition and results of
operations.

We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. Although we believe we can establish and
maintain relationships with brand owners and third-party distributors of
merchandise who will offer competitive sources of merchandise, there can be no
assurance that we will be able to obtain the quantity, selection or brand
quality of items that we believe is necessary. We have no agreements controlling
the long-term availability of merchandise or the continuation of particular
pricing practices. Our contracts with suppliers typically do not restrict such
suppliers from selling products to other buyers. There can be no assurance that
our current suppliers will continue to sell products to us on current terms or
that we will be able to establish new or otherwise extend current supply
relationships to ensure product acquisitions in a timely and efficient manner
and on acceptable commercial terms. Our ability to develop and maintain
relationships with reputable suppliers and obtain high quality merchandise is
critical to our success. If we are unable to develop and maintain relationships
with suppliers that would allow us to obtain a sufficient amount and variety of
quality merchandise on acceptable commercial terms, our business, prospects,
financial condition and results of operation would be materially adversely
affected. See, "Risk Factors - Brand Owners Could Establish Procedures to Limit
Our Ability to Purchase Products Indirectly."

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

We May Not Be Able To Implement Our Growth Strategy. Our future success, and in
particular our revenues and operating results, depend upon our ability to
successfully execute several key aspects of our business plan. We must
continually increase


                                       12
<PAGE>

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 our online site who
purchase products, or through some combination thereof. We must also achieve a
high level of repeat purchasers and/or new customers and gross margin. In
addition, we must deliver a high level of customer service and compelling
content. There can be no assurance that we will be effective in increasing:

     o    the dollar volume of products purchased through Bluefly.com;

     o    traffic to Bluefly.com;

     o    the percentage of visitors who purchase products;

     o    the gross profit;

     o    the number of repeat purchasers; or

     o    the number of new customers.

The failure to do one or more of the foregoing would likely have a material
adverse effect on our business, prospects, financial condition and results of
operations.

Due To Our Use Of The Internet And Web Servers As Presentation Vehicles, Our
Success Depends On Continued Development And Maintenance Of These Technologies
By Other Companies. 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 technologies that provide access to the Internet and
improve the performance of Internet services. To the extent that the Internet
and other online services, such as AOL, 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 have sufficient bandwidth or other
technical features to support the increased 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. If
use of the Internet and other online services does not continue to grow or grows
more slowly than expected or if the infrastructure for the Internet and other
online services does not effectively support growth that may occur, our
business, prospects, financial condition and results of operations would be
materially adversely affected.

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

We Will Be Subject To Cyclical Variations In The Apparel And E-Commerce Markets.
The apparel industry historically has been subject to substantial cyclical
variations. Furthermore Internet usage slows down in the summer months. We and
other apparel vendors rely on the expenditure of discretionary income for most,
if not all, sales. Recently, the retail apparel market has suffered a downturn
in sales requiring many retailers to significantly reduce prices and discount
merchandise. The current downturn and any future downturn, whether real or
perceived, in economic conditions or prospects could adversely affect consumer
spending habits and, therefore, have a material adverse effect on our business,
prospects, financial condition and results of operations. Alternatively, any
upturn, whether real or perceived, in economic conditions or prospects could
adversely impact our ability to acquire merchandise and, therefore, have a
material adverse effect on our business, prospects, financial condition and
results of operations, as our supply of merchandise is dependent on the
inability of designers and retailers to sell their merchandise in full-price
venues. See, "Risk Factors - We Do Not Have Long Term Contracts With Our Vendors
And Therefore The Availability of Merchandise Is At Risk."

There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic. A key element of our strategy is to generate a high volume of
traffic on, and use of, Bluefly.com. Accordingly, the satisfactory performance,


                                       13
<PAGE>

reliability and availability of Bluefly.com, transaction processing systems and
network infrastructure are critical to our reputation and our ability to attract
and retain customers, as well as maintain adequate customer service levels. Our
revenues will depend on the number of visitors who shop on Bluefly.com and the
volume of orders we can handle. Unavailability of our Web site or reduced order
fulfillment performance would reduce the volume of goods sold and could also
adversely affect consumer perception of our brand name. We may experience
periodic system interruptions from time to time. If there is a substantial
increase in the volume of traffic on Bluefly.com or the number of orders placed
by customers, we will be required to expand and upgrade further our technology,
transaction processing systems and network infrastructure. There can be no
assurance that we will be able to accurately project the rate or timing of
increases, if any, in the use of Bluefly.com or expand and upgrade our systems
and infrastructure to accommodate such increases on a timely basis.

We Operate In A Rapidly Changing, Highly Competitive Market And We May Not Have
Adequate Resources To Compete Successfully. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com. The online commerce industry is characterized by:

     o    rapid technological change;

     o    evolving user and customer requirements and preferences;

     o    frequent new product, service and technology introductions; and

     o    the emergence of new industry standards and practices.

Each of these characteristics could render the technology we use obsolete. Our
future success will depend, in part, on our ability to:

     o    license leading technologies useful in our business;

     o    enhance our Web site;

     o    develop new services and technologies that address the increasingly
          sophisticated and varied needs of our prospective customers; and

     o    respond to technological advances and emerging industry standards and
          practices on a cost effective and timely basis.

If we are unable, for technical, legal, financial or other reasons, to adapt in
a timely manner in response to changing market conditions or customer
requirements, our business, prospects, financial condition and results of
operations would be materially adversely affected.

Our Business Will Suffer If Online Apparel Commerce Is Not Widely Accepted. Our
future revenues and any future profits are dependent upon the widespread
acceptance and use of the Internet and other online services as an effective
medium of commerce by consumers. Rapid growth in the use of and interest in the
Web, the Internet and other online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce and, in particular,
online apparel commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty and there exist few proven services and products. We rely, and will
continue to rely, on consumers who have historically used traditional means of
commerce to purchase merchandise. Our success depends on consumer acceptance and
utilization of the Internet as a place to shop for apparel.

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

Our Success Is Largely Dependent Upon Our Executive Personnel. We believe our
success will depend to a significant extent on the efforts and abilities of our
executive personnel. We have entered into employment agreements with each of our
executive officers, all of which expire on June 30, 2005. We maintain a
$1,200,000 key person life insurance policy on our


                                       14
<PAGE>

Chief Executive Officer. The loss of the services of any of our executive
officers could have a material adverse effect on our business, prospects,
financial condition and results of operations.

Our Success Is Dependent Upon Our Ability To Attract New Key Personnel. Our
operations will also depend to a great extent on our ability to attract new key
personnel with relevant experience and retain existing key personnel in the
future. The market for qualified personnel is extremely competitive. Our failure
to attract additional qualified employees could have a material adverse effect
on our business, prospects, financial condition and results of operations.

There Are Inherent Risks Involved In Expanding Our Operations. We may choose to
expand our operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding our market presence through
relationships with third parties, adopting non-Internet based channels for
distributing our products, or consummating acquisitions or investments.
Expansion of our operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
our management, financial and operational resources. There can be no assurance
that we would be able to expand our efforts and operations in a cost-effective
or timely manner or that any such efforts would increase overall market
acceptance. Furthermore, any new business or Web site that is not favorably
received by consumer or trade customers could damage our reputation.

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

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

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

If The Co-Location Facility Where Substantially All Of Our Computer And
Communications Hardware Are Located Fails, Our Business, Results of Operations
and Financial Condition Will Be Harmed. The Company's ability to receive and
fulfill orders successfully and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of our computer and
communications hardware systems. Substantially all of our computer and
communications hardware is located at a single co-location facility in Secaucus,
New Jersey. Our systems and operations are vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, terrorist attacks,
acts of war, break-ins, earthquake and similar events. We do not presently have
redundant systems in multiple locations or a formal disaster recovery plan and
our business interruption insurance may be insufficient to compensate us for
losses that may occur. The occurrence of


                                       15
<PAGE>

any of the foregoing could have a material adverse effect on our business,
prospects, financial condition and results of operations.

Security Breaches To Our Service Could Harm Our Business. A fundamental
requirement for online commerce and communications is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. In addition, we maintain an
extensive confidential database of customer profiles and transaction
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of the algorithms we use to protect
customer transaction and personal data contained in our customer database. A
party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. If any such
compromise of our security were to occur, it could have a material adverse
effect on our reputation, business, prospects, results of operations and
financial condition. In addition, we may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches.

Our Business Could Be Harmed By Consumers' Concerns About The Security of
Transactions Over the Internet. Concerns over the security of transactions
conducted on the Internet and commercial online services, the increase in
identity theft and the privacy of users may also inhibit the growth of the
Internet and commercial online services, especially as a means of conducting
commercial transactions.

We Face Legal Uncertainties Relating To The Internet In General and To Our
Industry In Particular And May Become Subject To Costly Government Regulation.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. However, it is
possible that laws and regulations may be adopted that would apply to the
Internet and other online services. Furthermore, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The adoption of any additional laws or regulations may decrease
the growth of the Internet or other online services, which could, in turn,
decrease the demand for our products and services and increase our cost of doing
business, or otherwise have a material adverse effect on our business,
prospects, financial condition and results of operations.

The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could have a material adverse effect on our business, prospects, financial
condition and results of operations. If we were alleged to have violated
federal, state or foreign, civil or criminal law, even if we could successfully
defend such claims, it could have a material adverse effect on our business,
prospects, financial condition and results of operations.

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

Soros Owns A Majority Of Our Stock. As of March 17, 2003, through its holdings
of Common Stock, as well as Preferred Stock, and warrants convertible into
Common Stock, Soros beneficially owned, in the aggregate, approximately 89.7% of
our Common Stock. The holders of Preferred Stock vote on an "as-converted" basis
with the holders of the Common Stock. By virtue of their ownership of Preferred
Stock, Soros has the right to appoint two designees to our Board of Directors,
each of whom has seven votes on any matter voted upon by our Board of Directors.
Collectively, these two designees have 14 out of 19 possible votes on each
matter voted upon by our Board of Directors. In addition, we are required to
obtain the approval of holders of Preferred Stock prior to taking certain
actions. The holders of the 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. In view
of their large percentage of ownership and rights as the holders of Preferred
Stock, Soros effectively


                                       16
<PAGE>

controls our management and policies, such as the election of our directors, the
appointment of new management and the approval of any other action requiring the
approval of our stockholders, including any amendments to our certificate of
incorporation, a sale of all or substantially all of our assets or a merger. The
draw down of funds by the Company under the 2003 Standby Commitment will result
in additional issuances of equity securities to Soros that will increase Soros'
ownership interest. See, "Risk Factors - Certain Events Could Result In
Significant Dilution of Your Ownership Of Common Stock" and "Recent
Developments."

Change Of Control Covenant And Liquidation Preference of Preferred Stock. We
have agreed with Soros, that for so long as any shares of their Preferred Stock
are outstanding, we will not take any action to approve or otherwise facilitate
any merger, consolidation or change of control, unless provisions have been made
for the holders of such Preferred Stock to receive from the acquirer an amount
in cash equal to the respective aggregate liquidation preferences of such
Preferred Stock. The aggregate liquidation preference of the Preferred Stock is
equal to the greater of (i) Approximately $55,000,000 (plus any accrued and
unpaid dividends) and (ii) the amount that the holders of shares of Preferred
Stock would receive if they were to convert such shares of Common Stock
immediately prior to liquidation.

The Holders Of Our Common Stock May Be Adversely Affected By The Rights Of
Holders Of Preferred Stock That May Be Issued In The Future. Our certificate of
incorporation and by-laws, as amended, contain certain provisions that may
delay, defer or prevent a takeover. Our Board of Directors has the authority to
issue up to 15,487,250 additional shares of preferred stock, and to determine
the price, rights, preferences and restrictions, including voting rights, of
those shares, without any further vote or action by the stockholders.
Accordingly, our Board of Directors is empowered, without approval of the
holders of Common Stock, to issue preferred stock, for any reason and at any
time, with such rates of dividends, redemption provisions, liquidation
preferences, voting rights, conversion privileges and other characteristics as
they may deem necessary. The rights of holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future.

Item 2.  Properties

We lease approximately 26,000 square feet of office space in New York City. The
property is in good operating condition. The lease expires in 2010. Our total
lease payments for the current space during 2002 were approximately $412,000.

Item 3.  Legal Proceedings

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

Item 4.  Submission Of Matters To A Vote Of Security Holders

On November 18, 2002, we held our annual meeting of stockholders. At the
meeting, our stockholders voted for five directors, electing E. Kenneth Seiff,
Josephine Esquivel, Alan Kane, Martin Miller and Robert Stevens as members of
our board of directors. In addition, our stockholders voted in favor of
proposals to (i) approve an amendment to our certificate of incorporation, which
increased the number of shares of common stock that we are authorized to issue
to 92,000,000 from 40,000,000 (the "Charter Amendment"), (ii) approve an
amendment to our 1997 Stock Option Plan, which increased the number of shares of
common stock that could be the subject of options granted under the plan to
12,200,000 from 5,400,000 (the "Plan Amendment"), (iii) approve the conversion
provisions of our Series 2002 Convertible Preferred Stock, (iv) approve the
conversion provisions of our Series C Convertible Preferred Stock and (v) ratify
the appointment of PricewaterhouseCoopers LLP ("PwC") as our independent
accountants for the fiscal year ending December 31, 2002. The results of the
voting were as follows:

<TABLE>
<CAPTION>
              Proposal                       Votes For             Votes Withheld
              --------                       ---------             --------------
<S>                                         <C>                            <C>
Election of E. Kenneth Seiff                41,998,000                     37,760

Election of Josephine Esquivel              41,998,000                     37,760

Election of Alan Kane                       41,998,000                     37,760


                                       17
<PAGE>

Election of Martin Miller                   41,998,000                     37,760

Election of Robert Stevens                  41,998,000                     37,760

<CAPTION>

                                             Votes For              Votes Against           Abstentions and
                                             ---------              -------------           ---------------
                                                                                           Broker Non-Votes
                                                                                           ----------------
<S>                                         <C>                           <C>                        <C>
Approval of Charter Amendment               41,888,492                    130,423                    21,600

Approval of Plan Amendment                  38,352,090                    152,536                 3,537,409

Approval of Conversion Provisions           37,303,414                    114,753                 3,544,243
of Series 2002 Preferred Stock

Approval of Conversion Provisions           37,303,314                    116,133                 3,542,963
of Series C Preferred Stock

Ratification of PwC as                      42,005,118                     19,842                    10,900
Independent Accountants
</TABLE>

In addition to the directors elected at the meeting, Neal Moszkowski and David
Wassong were elected to the Board of Directors as the designees of the Series A
Preferred Stock and the Series B Preferred Stock, respectively.

                                     PART II

Item 5.  Market For Common Equity And Related Stockholder Matters

Market Information

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

               Fiscal 2002                High              Low
               -----------                -----            -----
               First Quarter              $2.25            $1.30
               Second Quarter             $1.94            $1.15
               Third Quarter              $1.29            $0.55
               Fourth Quarter             $1.75            $0.63

               Fiscal 2001                High              Low
               -----------                -----            -----
               First Quarter              $2.41            $0.50
               Second Quarter             $1.82            $0.93
               Third Quarter              $1.09            $0.51
               Fourth Quarter             $2.65            $0.62

On March 11, 2003, we were advised by Nasdaq that we were no longer in
compliance with Nasdaq's continued listing requirements because shares of our
common stock have closed at a per share price of less than $1.00 for at least 30
days and that, if we are unable to achieve compliance with the Listing
Requirements by September 8, 2003, the Nasdaq Staff will determine whether we
meet certain of the initial listing criteria of the Nasdaq SmallCap Market. In
the event that we meet such initial listing criteria, we will be granted an
additional 180-day grace period to regain compliance. In order to regain
compliance, shares of our common stock would need to close at a price of $1.00
or more for at least ten consecutive trading days. In the event that we do not
regain compliance within the requisite time period,


                                       18
<PAGE>

we intend to appeal any delisting. However, no assurance can be provided that
any such appeal will be successful. The failure to maintain listing on the
Nasdaq SmallCap Market may have an adverse effect on the price and/or liquidity
of our common stock.

Holders

As of March 17, 2003, there were approximately 107 holders of record of the
Common Stock. We believe that there were more than 5,000 beneficial holders of
the Common Stock as of such date.

Dividends

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

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information (as of December 31, 2002)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Plan Category                   Number of securities to be   Weighted-average exercise    Number of securities
                                issued upon exercise of      price of outstanding         remaining available for
                                outstanding options,         options, warrants and        future issuance under
                                warrants and rights(a)       rights (b)                   equity compensation plans
                                                                                          (excluding securities
                                                                                          reflected in column (a))
                                                                                          (c)
----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                            <C>                        <C>
Equity compensation plans                7,273,912                      $2.45                      4,926,088
approved by security holders

----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not            1,234,500                      $1.25                       265,500
approved by security holders

----------------------------------------------------------------------------------------------------------------------
Total                                    8,508,412                      $2.27                      5,191,588
----------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

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

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


                                       19
<PAGE>

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

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

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

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

Recent Sale Of Unregistered Securities

In March 2003, we sold 4,027.123 shares of Series D Preferred Stock to Soros for
an aggregate purchase price of approximately $4 million, with Soros retaining
approximately $2 million of such proceeds as payment in full of our obligations
under the demand promissory notes issued to Soros in September 2002.
Additionally, Soros converted the promissory notes issued to it in January 2003
and all of its Series 2002 Preferred Stock into 3,199.425 shares of Series D
Preferred Stock. The Series D Preferred Stock is convertible, at any time and
from time to time, at the option of the holder, into Common Stock at the rate of
one to 1,315.79. The conversion price of the Series D Preferred Stock is subject
to an anti-dilution adjustment, pursuant to which, subject to certain
exceptions, to the extent that the Company issues Common Stock or securities
convertible into Common Stock at a price per share less than the Series D
Preferred Stock conversion price in the future, the conversion price of the
Series D Preferred Stock would be decreased so that it would equal the
conversion price of the new security or the price at which shares of Common
Stock are sold, as the case may be. However, to the extent required by the rules
of the Nasdaq SmallCap Market or any other national securities exchange or
quotation system upon which the Common Stock may be listed from time to time,
until such time as such conversion provisions are approved by our stockholders,
the total number of shares of Common Stock issuable upon conversion of the
Series D Preferred Stock may not exceed 2,204,803 shares (which represents
19.99% of our currently outstanding Common Stock), regardless of any adjustment
to the Series D Preferred Stock conversion price. See "Certain Relationships and
Related Transactions."

Also in March 2003, in exchange for Soros' agreement to maintain the Soros
Guarantee until November 15, 2004, we issued to Soros warrants to purchase
25,000 shares of our Common Stock at an exercise price of $0.78 per share,
exercisable at any time prior to March 17, 2013. See, "Certain Relationships and
Related Transactions."

On January 28, 2003 we sold $1,000,000 of demand convertible promissory notes
and warrants to purchase 25,000 shares of our Common Stock to Soros for an
aggregate purchase price of $1,000,000. The promissory notes, and any interest
accrued thereon, were convertible into equity securities that issued in any
subsequent round of financing, at the holder's option, at a price equal to the
lowest price per share paid by any investor in such subsequent round of
financing. The warrants are exercisable at any time on or prior to January 28,
2007 at an exercise price of $1.12 per share. As part of the March 2003
Financing, the January 2003 promissory notes were converted into Series D
Preferred Stock. See, "Certain Relationships and Related Transactions."

Each such sale was exempt from registration under the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) of the Act, as it was a
transaction not involving a public offering.


                                       20
<PAGE>

Item 6.   Selected Financial Data

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

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                             -----------------------
                                                             2002         2001         2000         1999          1998
                                                             ----         ----         ----         ----          ----
<S>                                                        <C>          <C>          <C>           <C>            <C>
   Statement of Operations Data:

   Net sales                                               $ 30,606     $ 22,950     $ 17,512      $ 5,109        $243
   Cost of sales                                             20,571       15,954       14,018        4,554         297
                                                           --------     --------     --------      -------        ----
            Gross profit (loss)                              10,035        6,996        3,494          555        (54)

   Selling, marketing and fulfillment expenses               11,493       13,765       18,797       10,794       1,118
   General and administrative expenses                        4,740        5,098        5,296        3,450       1,166
   Internet business start up costs                               -            -            -            -         332
                                                           --------     --------     --------      -------        ----
            Total operating expenses                         16,233       18,863       24,093       14,244       2,616

   Operating loss from continuing operations                (6,198)     (11,867)     (20,599)     (13,689)     (2,670)
   Interest (expense)/other income                            (281)     (13,139)        (510)          430         142
            Loss from continuing operations                 (6,479)     (25,006)     (21,109)     (13,257)     (2,478)
            Net loss                                        (6,479)     (25,006)     (21,109)     (13,194)     (3,656)
   Basic and diluted loss from continuing                   $(2.44)      $(3.41)      $(4.45)      $(2.83)     $(0.89)
   operations per share

   Basic and diluted loss per share:                        $(2.44)      $(3.41)      $(4.45)      $(2.82)     $(1.32)

   Basic and diluted weighted average number of
   common shares outstanding available to common          9,927,027    8,185,065    4,924,906    4,802,249   2,770,869
   stockholders

   Balance Sheet Data:

<CAPTION>
                                                                                 As of December 31,
                                                                                 ------------------
                                                              2002         2001         2000         1999        1998
                                                              ----         ----         ----         ----        ----
<S>                                                          <C>         <C>          <C>          <C>          <C>
   Cash                                                      $1,749      $ 5,419      $ 5,350      $ 7,934      $2,830
   Inventories, net                                          10,868        6,388        7,294        7,020         429
   Other current assets                                       1,473        1,671        1,614          739         601
   Total assets                                              16,909       14,826       15,778       16,768       7,189
   Current liabilities                                        7,386        6,242        6,041        6,182         733
   Short-term convertible notes payable, net                      -            -       19,698            -           -
   Long term liabilities                                      2,439          182            -            -           -
   Redeemable preferred stock                                     -            -       11,088       10,286           -
   Shareholders' equity (deficit)                             7,084        8,402     (21,049)          300       6,392
</TABLE>


                                       21
<PAGE>

Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations

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

Overview

We are a leading Internet retailer of designer fashions and home accessories at
outlet store prices. We sell over 350 brands of designer apparel, accessories
and home products at discounts up to 75% off retail value. We were incorporated
in 1991 under the laws of the state of New York as Pivot Corporation. In 1994,
we changed our name to Pivot Rules, Inc. We had our initial public offering in
May of 1997. In June 1998, we discontinued our golf sportswear line to devote
our time and resources to building Bluefly.com, a Web site to sell end of season
and excess inventory of apparel and accessories. We launched the Web site in
September 1998 and changed our name to Bluefly, Inc. in October 1998. In
February 2001, we changed our state of incorporation from New York to Delaware.

We have grown rapidly since launching our Web site in September 1998. Our net
sales increased over 33% to $30,606,000 for the year ended December 31, 2002
from $22,950,000 for the year ended December 31, 2001. In the fourth quarter of
2002, our net sales increased by approximately 25% to $9,856,000 from $7,906,000
in the fourth quarter of 2001. Our net loss for the year ended December 31, 2002
decreased by 74% to $6,479,000 from $25,006,000 for the year ended 2001,
although our net loss for the fourth quarter of 2002 increased by 20% to
$1,660,000 from $1,379,000 in the fourth quarter of 2001.

We believe that the launch of our new Web site on September 15, 2002 was the
most significant factor in the increase in net and operating losses for the
fourth quarter of 2002. Our costs were increased during the fourth quarter of
2002 as a result of the amortization of our investment in the new Web site
(which prior to the launch of the Web site were treated as a capitalized cost),
as well as additional technology and operational expenses incurred in connection
with resolving the post-launch problems we encountered in September and October
of 2002 and increased customer service costs associated with our efforts to
minimize the impact of these problems on our customers. Costs were also
increased as a result of the addition of 16 employees during 2002, four of whom
joined in the fourth quarter of 2002. In addition, while we believe that many of
the post-launch Web site problems were resolved in the second half of October,
we believe that the problems that customers faced in September and October had a
lingering effect throughout the fourth quarter of 2002, and, as a result, we
lost sales during the fourth quarter. However, we do not believe that those
problems will have any material adverse effect on our results in 2003.

We incurred a net loss of $6,479,000, for the year ended December 31, 2002 as
compared to $25,006,000 for the year ended December 31, 2001. This decrease in
net loss is primarily the result of the following: (i) the 2001 results include
a non-cash charge of $13,007,000 related to the conversion of debt and
redeemable preferred equity into permanent equity and (ii) an increase in gross
margin percentage in 2002 of over 2 percentage points (from 30.5% to 32.8%) and
a reduction in selling, marketing and fulfillment and general and administrative
expenses as a percentage of net sales of 22 percentage points (from 59.9% to
37.5%) and 6 percentage points (from 22.2% to 15.5%), respectively. At December
31, 2002 we had an accumulated deficit of $85,742,000. The net losses and
accumulated deficit resulted primarily from the costs associated with developing
and marketing our Web site and building our infrastructure. In order to expand
our business, we intend to invest in sales, marketing, merchandising,
operations, information systems, site development and additional personnel to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future. Although we have experienced
revenue growth in recent years, this growth may not be sustainable and therefore
should not be considered indicative of future performance.


Significant Accounting Policies

Management Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting


                                       22
<PAGE>

periods. The most significant estimates and assumptions relate to the adequacy
of the allowances for returns and recoverability of inventories. Actual amounts
could differ significantly from these estimates.

Revenue Recognition

Gross sales consists primarily of revenue from product sales and shipping and
handling revenue on our Web site, and is net of promotional discounts. Revenue
is recognized when goods are received by our customers, which occurs only after
credit card authorization. Net sales represent gross sales, less provisions for
returns, credit card chargebacks, and adjustments for uncollected sales taxes.

Provision for Returns and Doubtful Accounts

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

Inventory Valuation

Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and use
markdowns to clear merchandise. Markdowns may be used if inventory exceeds
customer demand for reasons of style, changes in customer preference or lack of
consumer acceptance of certain items, or if it is determined that the inventory
in stock will not sell at its currently marked price. Such markdowns may have an
adverse impact on earnings, depending on the extent of the markdowns and amount
of inventory affected.

Deferred Tax Valuation Allowance

We assessed the future taxable income and have determined that a 100% deferred
tax valuation allowance is deemed necessary. In the event that we were to
determine that we would be able to realize our deferred tax asset, an adjustment
to the deferred tax valuation allowance would increase income in the period such
determination is made.

Results Of Operations

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

<TABLE>
<CAPTION>
                                                                2002                   2001                   2000
                                                                ----                   ----                   ----

                                                                   As a % of              As a % of              As a % of
                                                                   Net Sales              Net Sales              Net Sales

<S>                                                       <C>         <C>        <C>         <C>        <C>         <C>
   Net sales                                              $ 30,606     100.0%    $ 22,950     100.0%    $ 17,512     100.0%
   Cost of sales                                            20,571      67.2%      15,954      69.5%      14,018      80.0%
                                                          --------               --------               --------
            Gross profit                                    10,035      32.8%       6,996      30.5%       3,494      20.0%

   Selling, marketing and fulfillment expenses              11,493      37.5%      13,765      59.9%      18,797     107.3%
   General and administrative expenses                       4,740      15.5%       5,098      22.2%       5,296      30.2%
                                                          --------               --------               --------
            Total operating expenses                        16,233      53.0%      18,863      82.1%      24,093     137.5%

   Operating loss                                          (6,198)    (20.2)%    (11,867)    (51.6)%    (20,599)   (117.6)%
   Interest (expense) other income                           (281)     (0.9)%    (13,139)    (57.3)%       (510)     (2.9)%

            Net loss                                      $(6,479)    (21.1)%   $(25,006)   (108.9)%   $(21,109)   (120.5)%
</TABLE>


                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                         2002         2001         2000
                                                                                         ----         ----         ----
<S>                                                                                   <C>          <C>          <C>
Average Order Size (including shipping & handling)                                    $167.20      $143.71      $111.03
Average Order Size Per New Customer (including shipping & handling)                   $149.74      $127.41       $98.77
Average Order Size Per Repeat Customer  (including shipping & handling)               $177.31      $156.85      $128.67

Total Customers                                                                       388,700      287,637      185,240
Customers Added during the Year                                                       101,063      102,397      130,359
Revenue from Repeat Customers as a % of total Revenue                                     67%          60%          48%
Customer Acquisition Costs                                                             $17.04       $39.32       $71.18
</TABLE>

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

For The Year Ended December 31, 2002 Compared To The Year Ended December 31,
2001

Net sales: Gross sales for the year ended December 31, 2002 increased by
approximately 40% to $47,491,000, from $33,833,000 for the year ended December
31, 2001. For the year ended December 31, 2002, we recorded a provision for
returns and credit card chargebacks and other discounts of $16,885,000, or
approximately 36% of gross sales. For the year ended December 31, 2001, the
provision for returns and credit card chargebacks and other discounts was
$10,883,000, or approximately 32% of gross sales. The increase in this provision
as a percentage of gross sales was related primarily to an increase in the
return rate. We believe that the increase in return rate was partly the result
of a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates, but also higher gross margins
and average order size. Accordingly, we believe that this shift has had a
positive impact on the per order economics.

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2002 were $30,606,000. This represents an increase of approximately
33% compared to the year ended December 31, 2001, in which net sales totaled
$22,950,000. The growth in net sales was largely driven by the increases in
average order size and sales to repeat customers. We believe that the decrease
in the amount of advertising that we do that is directed at potential customers
contributed to the fact that the number of new customers acquired in 2002
decreased by 1% from that of 2001. We believe that the increase in sales to
repeat customers (67% of total sales in 2002, compared to 60% of total sales in
2001) was the result of increased marketing efforts to repeat customers.

Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the year ended December 31, 2002 totaled
$20,571,000, resulting in gross margin of approximately 33%. Cost of sales for
year ended December 30, 2001 totaled $15,954,000, resulting in gross margin of
30.5%. Gross profit increased by 43%, to $10,035,000 for the year ended December
31, 2002 compared to $6,996,000 for the year ended December 31, 2001. The
increase in gross margin resulted primarily from improved product margins.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses decreased by approximately 16.5% for the year 2002 compared to the year
ended 2001. As a percentage of net sales, our selling, marketing and fulfillment
expenses decreased to 37.5% in 2002 from approximately 60% in 2001. The decrease
resulted primarily from a more targeted marketing strategy aimed at our existing
customer base and the cost savings we derived from our move to a new web hosting
facility. Selling, marketing and fulfillment expenses were comprised of the
following:

<TABLE>
<CAPTION>
                                     Year Ended                 Year Ended           Percentage Difference
                                  December 31, 2002          December 31, 2001        increase (decrease)
                                  -----------------          -----------------        -------------------
<S>                                    <C>                        <C>                          <C>
    Marketing                            $2,328,000                 $4,858,000                   (52.1%)
    Operating                             4,532,000                  3,939,000                     15.0%
    Technology                            3,552,000                  3,733,000                    (4.8%)
    Creative Services                     1,081,000                  1,235,000                   (12.5%)
                                        -----------                -----------                   -------
                                        $11,493,000                $13,765,000                   (16.5%)
</TABLE>


                                       24
<PAGE>

Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The decrease in marketing
expenses of approximately 52% was largely related to a shift in our customer
acquisition strategy. Consistent with our streamlined operating plan announced
in June 2001, we significantly reduced our advertising expenditures and focused
more on email and direct mail programs. Primarily as a result of this shift, we
were able to decrease our customer acquisition costs for the year ended December
31, 2002 by approximately 57% to $17.04 per new customer from $39.32 per new
customer for the year ended December 31, 2001. However, in the event that we
attempt to accelerate revenue growth, it may be necessary to utilize less cost
efficient methods of customer acquisition, and accordingly there can be no
assurance that customer acquisition costs will not increase in the future.

Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in 2002 by approximately 15% compared to 2001 as a result of variable
costs associated with the increased sales volume (e.g., picking and packing
orders, processing returns and credit card fees).

Technology expenses consist primarily of Web site hosting and staff related
costs. For year ended December 31, 2002, technology expenses decreased by
approximately 5% compared to the year ended December 31, 2001. This reduction
was primarily related to a reduction in our Web site hosting costs in connection
with our move to a new web hosting facility. These cost savings were offset by
increased amortized expenses resulting from the launch of the new Site.
Effective September 15, 2002 (the launch date of the new Web site) costs that
were previously being capitalized are now being amortized over the estimated
useful life of the new Web site.

Creative services expenses include expenses related to our photo studio, image
processing, online retail and Web site design. For the year ended December 31,
2002, this amount decreased by approximately 12.5% as compared to the year ended
December 31, 2001, primarily due to a headcount reduction in the creative
services department in June 2001.

General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2002 decreased by approximately 7% to $4,740,000 as compared to
$5,098,000 for the year ended December 31, 2001. As a percentage of net sales,
general and administrative expenses decreased to 15.5% in 2002 from 22.2% in
2001.

The decrease in general and administrative expenses was the result of decreased
salary and benefit expenses related to the headcount reduction that was put into
place in connection with the Company's June 2001 streamlined operating plan, in
which the Company eliminated approximately 32 jobs or, approximately 34% of the
Company's workforce.

Loss from operations: Operating loss decreased by approximately 48% in 2002, to
$6,198,000 from $11,867,000 in 2001 as a result of the increase in sales and
gross margin and decreases in selling, marketing and fulfillment expenses and
general and administrative expenses.

Interest expense and other income, net: Interest expense for the year ended
December 31, 2002 totaled $349,000, and consisted primarily of fees paid in
connection with our Loan Facility. For the year ended December 31, 2001,
interest expense totaled $13,379,000. This amount consisted principally of
approximately $13,007,000 of non-cash, one-time charges that were incurred in
connection with the conversion of certain notes payable and redeemable equity
into permanent equity. This amount also included interest expense of $175,000,
related to the interest on the notes payable that were issued during fiscal 2000
and converted to permanent equity in fiscal 2001.

Interest income for the year ended December 31, 2002 decreased to $68,000 from
$240,000 for the year ended December 31, 2001. The decrease is related to the
decrease in our cash balance as interest income primarily represents interest
earned on our cash balance.


                                       25
<PAGE>

For The Year Ended December 31, 2001 Compared To The Year Ended December 31,
2000

Net sales: Gross sales for the year ended December 31, 2001, increased by 35% to
$33,833,000, compared to $25,006,000, for the year ended December 31, 2000. For
the year ended December 31, 2001, we recorded a provision for returns and credit
card chargebacks and other discounts of $10,883,000, or approximately 32% of
gross sales. For the year ended December 31, 2000, the provision for returns and
credit card chargebacks and other discounts was $7,494,000 or approximately 30%
of gross sales. The increase in the provision as a percentage of gross sales,
was related primarily to an increase in the return rate. The increase in average
order size was related to our change in product mix, which is now focused on
higher priced goods. Accordingly, we believe that there is a direct relationship
between the increase in the average order size and the increase in return rate.

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2001 were $22,950,000. This represents an increase of over 31%
compared to the year ended December 31, 2000, in which net sales totaled
$17,512,000. The increase in net sales was primarily the result of increases in
average order size and sales to repeat customers. We believe that both of these
measures increased as a result of our strategy to focus more of our marketing
efforts on existing customers. Although the number of new customers acquired in
2001 decreased by approximately 21%, we believe that this was a result of a
significant reduction of marketing expenses, and that the effect on net sales
was more than offset by the increases in average order size and sales to repeat
customers.

Cost of sales: Cost of sales for the year ended December 31, 2001 totaled
$15,954,000, resulting in gross margin of approximately 30.5%. Cost of sales for
the year ended December 31, 2000 totaled $14,018,000, resulting in gross margin
of 20.0%. Gross profit increased by 100%, to $6,996,000 in 2001 compared to
$3,494,000 in 2000. The increase in gross margin resulted primarily from
improved product margins.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses decreased by approximately 27% in 2001 compared to 2000. Selling,
marketing and fulfillment expenses were comprised of the following:

<TABLE>
<CAPTION>
                                      Year Ended                Year Ended            Percentage Difference
                                   December 31, 2001          December 31, 2000        increase (decrease)
                                   -----------------          -----------------        -------------------
<S>                                       <C>                       <C>                           <C>
    Marketing                            $ 4,858,000                $10,178,000                   (52.3%)
    Operating                              3,939,000                  4,050,000                    (2.7%)
    Technology                             3,733,000                  3,455,000                      8.0%
    Creative Services                      1,235,000                  1,114,000                     10.9%
                                         -----------                -----------                   -------
                                         $13,765,000                $18,797,000                   (26.8%)
</TABLE>

The decrease in marketing expenses of 52% was largely related to a shift in our
customer acquisition strategy. Consistent with our streamlined operating plan
announced in June 2001, we significantly reduced our advertising expenditures
and focused more on email and direct mail programs. Primarily as a result of
this shift, we were able to decrease our customer acquisition costs for the year
ended December 31, 2001 by approximately 45% to $39.32 per customer from $71.18
per customer for the year ended December 31, 2000.

Operating expenses decreased in 2001 by approximately 3% compared to 2000.
Although variable costs associated with the increased sales volume (picking and
packing orders, processing returns and credit card fees) increased on an
absolute basis, these amounts were more than offset by a decrease in the costs
that were incurred in 2000 as a result of our need to maintain two fulfillment
centers during the months of August and September when we were transitioning our
operations to our current third party provider.

For the year ended December 31, 2001, technology expenses increased slightly,
with decreased Web site hosting costs being offset by severance payments made to
several members of our technology staff whose jobs were eliminated in June 2001.

In 2001, Creative Services expenses increased by approximately 11% primarily due
to the increase in the number of styles of products processed.

As a percentage of net sales, our selling, marketing and fulfillment expenses,
decreased to 59.9% in 2001 from 107.3% in 2000. The decrease resulted primarily
from a more targeted marketing strategy aimed at our existing customer base and
improved efficiencies in the order fulfillment process resulting from our
transition to our current third party provider in August and September 2000.


                                       26
<PAGE>

General and administrative expenses: General and administrative expenses for the
year ended December 31, 2001 decreased by 4% to $5,098,000 as compared to
$5,296,000 for the year ended December 31, 2000. The decrease in general and
administrative expenses was largely the result of jobs that were eliminated in
connection with the Company's June 2001 streamlined operating plan, and their
related benefits. This decrease was partially offset by severance payments paid
to these individuals. The number of employees categorized as general and
administrative for the year ended December 31, 2001 was 23, compared to 28 for
the year ended December 31, 2000. As a percentage of net sales, general and
administrative expenses decreased to 22.2% in 2001 from 30.2% in 2000.

Loss from operations: Operating loss decreased by 42% in 2001 to $11,867,000
from $20,599,000 in 2000 as a result of the increase in gross margin and
decreases, as a percentage of net sales, in selling, marketing and fulfillment
expenses and general and administrative expenses.

Interest expense and other income, net: Interest expense for the year ended
December 31, 2001 totaled $13,379,000. This amount consists principally of
approximately $13,007,000 of non-cash, one-time charges that were incurred in
connection with the conversion of our notes payable and redeemable equity into
permanent equity. This amount also includes interest expense of $175,000,
related to the interest on the notes payable that were issued during fiscal 2000
and converted in fiscal 2001. For the year ended December 31, 2000 interest
expense totaled $676,000, and related to the interest on the notes payable that
were issued during fiscal 2000.

Interest income for the year ended December 31, 2001 increased to $240,000 from
$166,000 for the year ended December 31, 2000, which represents interest earned
on our cash balance.

Liquidity And Capital Resources

General

At December 31, 2002, we had approximately $1.7 million of liquid assets,
entirely in the form of cash and cash equivalents, and working capital of
approximately $6.7 million. In addition, as of December 31, 2002, we had
approximately $2.2 million of borrowings committed under the Loan Facility,
leaving approximately $300,000 of availability.

We fund our operations through cash on hand, operating cash flow and the Loan
Facility. In addition, during 2002, we sold an additional $1.9 million of Common
Stock and warrants, $3.1 million of Preferred Stock and $2.0 million of
Promissory Notes to Soros. See "Certain Relationships and Related Transactions."
In March 2003, we entered into an agreement with Soros pursuant to which Soros
provided $2 million of new capital by purchasing 2,000 shares of Series D
Convertible Preferred Stock. See, "Recent Developments."

Operating cash flow is affected by revenue and gross margin levels, as well as
return rates, and any deterioration in our performance on these financial
measures would have a negative impact on our liquidity. Total availability under
the Loan Facility is based upon our inventory levels and dependent, among other
things, on our compliance with the financial covenants contained in the Loan
Facility. In December 2002, the tangible net worth requirement under the Loan
Facility was increased to $6 million from $1.5 million, and the working capital
requirement was increased to $5.0 million from $3.5 million. In March 2003, the
tangible net worth requirement was reduced to $5 million from $6 million, the
working capital requirement was decreased to $4 million from $5 million and the
definition of working capital was amended (effective as of December 19, 2002) to
exclude short-term debt held by affiliates. As of December 31, 2002, our
tangible net worth was approximately $9.1 million and our working capital was
approximately $6.7 million (excluding the $2.0 million in short-term debt held
by Soros as of such date). In addition, both availability under the Loan
Facility and our operating cash flows are affected by the payment terms that we
receive from suppliers and service providers, and the extent to which suppliers
require us to request Rosenthal to provide credit support under the Loan
Facility. We believe that our suppliers' decision-making with respect to payment
terms and/or the type of credit support requested is largely driven by their
perception of our credit rating, which is affected by information reported in
the industry and financial press and elsewhere as to our financial strength.
Accordingly, negative perceptions as to our financial strength could have a
negative impact on our liquidity.


                                       27
<PAGE>

Loan Facility

Pursuant to the Loan Facility, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers. The Rosenthal Financing Agreement was amended in December
2002 and March 2003 to: (i) extend the term until June 30, 2004; (ii) increase
the maximum amount available under the Loan Facility (subject to an existing $10
million cap) to an amount equal to the Soros Guarantee plus the lower of (x) $2
million (instead of the prior $1 million), (y) 20% of the book value of our
inventory or (z) the full liquidation value of our inventory; (iii) increased
the tangible net worth requirement to $5,000,000 from $1,500,000; (iv) redefine
the working capital definition to exclude short-term debt held by affiliates
(effective as of December 19, 2002), (v) increase the working capital
requirement to $4,000,000 from $3,500,000; (vi) increase the annual fee we pay
Rosenthal for the Loan Facility to $30,000 from $10,000, (vii) require us to
maintain a cash balance of at least $250,000 and; (viii) require Soros to
increase from $1.5 million to $2.0 million the amount of the standby letter of
credit that Soros is maintaining to help secure the Loan Facility and extend the
term of the Soros Guarantee to November 15, 2004 from November 15, 2003. In
consideration for Soros' agreement to increase the amount of and to maintain the
Soros Guarantee until November 15, 2004, we issued to Soros a warrant to
purchase 25,000 shares of our Common Stock at an exercise price equal to $0.78
per share (the 10 day trailing average of the closing sale price of our Common
Stock on the date of issuance), exercisable at any time prior to March 17, 2013.
As of December 31, 2002, the maximum availability under the Loan Facility was
approximately $2.5 million, of which $2.2 million was outstanding. As of March
17, 2003, maximum availability under the Loan Facility was approximately $3.7
million, of which $2.1 million was outstanding.

Interest accrues monthly on the average daily amount outstanding under the Loan
Facility during the preceding month at a per annum rate equal to the prime rate
plus 1%. In addition to the annual facility fee of $30,000, we also pay
Rosenthal certain fees to open letters of credit and guarantees in an amount
equal to a certain percentage of the face amount of the letter of credit for
each thirty (30) days such letter of credit, or a portion thereof, remains open.

In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts upon an event of default and certain of our
cash accounts in the event that the total amount of monies loaned to us under
the Loan Facility exceeds 90% of the maximum amount available under the Loan
Facility for more than 10 days. We also issued to Rosenthal a warrant to
purchase 50,000 shares of Common Stock at an exercise price of $2.34,
exercisable, as amended, for six years from the date of issuance.

Subject to certain conditions, if we default on any of our obligations under the
Loan Facility, Rosenthal has the right to draw upon the Soros Guarantee to
satisfy any such obligations. If and when Rosenthal draws on the Soros
Guarantee, pursuant to the terms of the Reimbursement Agreement, we would have
the obligation to, among other things, reimburse Soros for any amounts drawn
under the Soros Guarantee plus interest accrued thereon. In addition, to the
extent that Rosenthal draws on the Soros Guarantee during the continuance of a
default under Loan Facility or at any time that the total amount outstanding
under the Loan Facility exceeds 90% of the Soros Guarantee, we will be required
to issue to Soros a warrant (each a "Contingent Warrant") to purchase a number
of shares of Common Stock equal to the quotient of (a) any amounts drawn under
the Soros Guarantee and (b) 75% of the average of the closing price of our
Common Stock on the ten days preceding the date of issuance of such warrant.
Each Contingent Warrant will be exercisable for ten years from the date of
issuance at an exercise price equal to 75% of the average closing price of our
Common Stock on the ten days preceding the ten days after the date of issuance.

Under the terms of the Loan Facility, Soros has the right to purchase all of our
obligations from Rosenthal at any time during its term (the "Buyout Option").
With respect to such Buyout Option, Soros has the right to request that
Rosenthal make a draw under the Soros Guarantee as consideration to Soros for
the purchase of such obligations. See, "Risk Factors - "Certain Events Could
Result in Significant Dilution of Your Ownership of Our Common Stock" and
"Certain Relationships and Related Transactions."

Commitments And Long Term Obligations

As of December 31, 2002, we had the following commitments and long term
obligations:

<TABLE>
<CAPTION>
                                        2003              2004          2005         2006        2007    Thereafter     Total
<S>                                 <C>              <C>            <C>           <C>          <C>        <C>          <C>
Marketing and Advertising           $  440,000             --            --          --           --          --      $   440,000
Operating Leases                       431,000          437,000       443,000      450,000     452,000     816,000    $ 3,029,000
Capital Leases                         190,000          190,000        67,000        --           --          --      $   447,000
Employment Contracts                 1,200,000        1,160,000       391,000        --           --          --      $ 2,751,000
Notes payable to shareholders        2,000,000  *          --         182,000        --           --          --      $ 2,182,000
                                    ----------        ---------     ---------      -------     -------     -------    -----------
     Grand total                    $4,261,000        1,787,000     1,083,000      450,000     452,000     816,000    $ 8,849,000
</TABLE>

*Amount was converted into equity in March 2003


                                       28
<PAGE>

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

In order to continue to expand our product offerings, we intend to expand our
relationships with suppliers of end-of-season and excess name brand apparel and
fashion accessories. We expect that our suppliers will continue to include
designers and retail stores that sell excess inventory as well as third-party
end-of-season apparel aggregators. To achieve our goal of offering a wide
selection of top name brand designer clothing and fashion accessories, we may
acquire certain goods on consignment and may explore leasing or partnering
select departments with strategic partners and distributors. Due to our limited
working capital, a number of our suppliers have limited our payment terms and,
in some cases, have required us to pay for merchandise in advance of delivery.
See, "Risk Factors - We Do Not Have Long Term Contracts With Our Vendors And
Therefore The Availability Of Merchandise Is At Risk."

We anticipate that the proceeds from the January 2003 Financing, the March 2003
Financing the Loan Facility and the 2003 Standby Commitment, together with
existing resources and cash generated from operations, should be sufficient to
satisfy our cash requirements through the end of fiscal 2003. However, we may
seek additional debt and/or equity financing in order to maximize the growth of
our business. There can be no assurance that any additional financing or other
sources of capital will be available to us upon acceptable terms, or at all. The
inability to obtain additional financing, if needed, would have a material
adverse effect on our business, financial condition and results of operations.
See, "Risk Factors - We are Making a Substantial Investment in our Business and
May Need to Raise Additional Funds" and "Certain Events Could Result in
Significant Dilution of Your Ownership of our Common Stock."

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," required
that gains and losses from extinguishment of debt be classified as an
extraordinary item, net of the related income tax effect. Any gain or loss on
extinguishment of debt that was classified, as an extraordinary item in prior
periods presented that does not meet the criteria in APB Opinion No. 30 for
classification as an extraordinary item shall be reclassified. SFAS No. 13,
"Accounting for Leases," has been amended to require sale-leaseback accounting
for certain lease modifications that are similar to sale-leaseback transactions.
The rescission of SFAS No. 4 and the amendment to SFAS No. 13 shall be effective
for fiscal years and transactions, respectively, occurring after May 15, 2002.
We adopted the provisions of SFAS No. 145 during 2002, and the adoption did not
have a material effect on the financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses the accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized at fair market value when the
liability is incurred, rather than upon an entity's commitment to an exit plan,
as prescribed by EITF No. 94-3. SFAS No. 146 is effective for exit and disposal
activities initiated after December 31, 2002. We will adopt SFAS No. 146 on
January 1, 2003.

In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosure requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing certain
guarantees. FIN 45 also incorporates, without change, the guidance in FIN 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," which it
supersedes. The incremental disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The initial recognition and initial


                                       29
<PAGE>

measurement provisions are applicable to guarantees issued or modified after
December 31, 2002. The accounting followed by a guarantor on prior guarantees
may not be changed to conform to the guidance of FIN 45. We do not believe that
the adoption of FIN 45 will have a material impact on our consolidated financial
statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for fiscal years and interim periods beginning after December 15,
2002. We continue to account for stock-based employee compensation under the
intrinsic value method of APB 25, "Accounting for Stock Issued to Employees." We
adopted the disclosure provisions of SFAS No. 148 for the year ended December
31, 2002.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". FIN 46 requires an investor to
consolidate a variable interest entity if it is determined that the investor is
a primary beneficiary of that entity, subject to the criteria set forth in FIN
46. Assets, liabilities, and non controlling interests of newly consolidated
variable interest entities will be initially measured at fair value. After
initial measurement, the consolidated variable interest entity will be accounted
for under the guidance provided by Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." FIN 46 is effective for variable interest
entities created or entered into after January 31, 2003. For variable interest
entities created or acquired before February 1, 2003, FIN 46 applies in the
first fiscal year or interim period beginning after June 15, 2003. We do not
believe that the adoption of FIN 46 will have a material impact on our
consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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


                                       30
<PAGE>

Item 8.  Financial Statements

(a)  Index to the Financial Statements

            Report of Independent Accountants                                F-2

            Consolidated Balance Sheets as of December 31, 2002 and 2001     F-3

            Consolidated Statements of Operations for the three years
                      ended December 31, 2002, 2001 and 2000                 F-4

            Consolidated Statements of Changes in Shareholders' Equity
                      and Redeemable Preferred Stock for the three years
                      ended December 31, 2002, 2001 and 2000                 F-5

            Consolidated Statements of Cash Flows for the three years
                      ended December 31, 2002, 2001 and 2000                 F-6

            Notes to Consolidated Financial Statements                       F-7


                                       31
<PAGE>


                        Report of Independent Accountants

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


In our opinion, the accompanying consolidated balance sheets and the related
consolidated Statements of Operations, Changes in Shareholders' Equity and
Redeemable Preferred Stock and Cash Flows present fairly, in all material
respects, the financial position of Bluefly, Inc. and its subsidiary at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002 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 audits. We conducted our audits of these statements 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 audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, N.Y.
March 21, 2003


                                      F-2
<PAGE>

<TABLE>
<CAPTION>

Bluefly, Inc.
Consolidated Balance Sheets
As of December 31, 2002 and 2001
(Dollars rounded to the nearest thousand)
---------------------------------------------------------------------------------------------------------------------

                                                                                            2002              2001
<S>                                                                                  <C>                 <C>
Assets

Current assets:
      Cash and cash equivalents                                                         $  1,749,000    $  5,419,000
      Inventories, net                                                                    10,868,000       6,388,000
      Accounts receivable, net of allowance for doubtful accounts                          1,147,000       1,197,000
      Prepaid expenses and other current assets                                              326,000         474,000
                                                                                        ------------    ------------
               Total current assets                                                       14,090,000      13,478,000

Property and equipment, net                                                                2,604,000       1,155,000
Other assets                                                                                 215,000         193,000
                                                                                        ------------    ------------
               Total assets                                                             $ 16,909,000    $ 14,826,000
                                                                                        ============    ============

Liabilities and Shareholders'  Equity

Current liabilities:
      Accounts payable                                                                  $  3,434,000    $  3,338,000
      Accrued expenses and other current liabilities                                       3,067,000       2,213,000
      Deferred revenue                                                                       885,000         691,000
                                                                                        ------------    ------------
               Total current liabilities                                                   7,386,000       6,242,000

Series C Notes payable to shareholders                                                     2,000,000               -
Notes payable to shareholders                                                                182,000         182,000
Long-term capital lease liability                                                            257,000               -
                                                                                        ------------    ------------
               Total liabilities                                                           9,825,000       6,424,000

Commitments and contingencies (Note 7)

Shareholders' equity:
      Series A Preferred Stock - $.01 par value; 500,000 shares authorized,
        issued and outstanding as of December 31, 2002 and 2001, respectively
        (liquidation preference: $10 million plus accrued dividends)                           5,000           5,000
      Series B Preferred Stock - $.01 par value; 9,000,000 shares authorized
        and 8,910,782 shares issued and outstanding as of December 31, 2002 and 2001,
        respectively (liquidation preference: $30 million plus accrued dividends)             89,000          89,000
      Series C Preferred Stock - $.01 par value; 3,500 shares authorized
        and 1,000 shares issued and outstanding as of December 31, 2002
        (liquidation preference: $1.0 million plus accrued dividends)                             -                -
      Series 2002 Convertible Preferred Stock - $.01 par value;
        2,100 shares authorized, issued and outstanding as of December 31, 2002,
        (liquidation preference: $2.1 million)                                                    -                -
      Common Stock - $.01 par value; 92,000,000 shares authorized, 10,391,904
        and 9,205,331 shares issued and outstanding as of December 31, 2002
        and 2001, respectively                                                               104,000          92,000
      Additional paid-in capital                                                          92,628,000      72,184,000
      Accumulated deficit                                                                (85,742,000)    (63,968,000)
                                                                                        ------------    ------------
               Total shareholders' equity                                                  7,084,000       8,402,000
                                                                                        ------------    ------------
               Total liabilities and shareholders' equity                               $ 16,909,000    $ 14,826,000
                                                                                        ============    ============
</TABLE>

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


                                      F-3
<PAGE>

<TABLE>
<CAPTION>

Bluefly, Inc.
Consolidated Statements of Operations
For the three years ended December 31, 2002, 2001 and 2000
(Dollars rounded to the nearest thousand)
----------------------------------------------------------------------------------------------------------------------

                                                                               2002           2001             2000
<S>                                                                       <C>             <C>             <C>
Net sales                                                                 $ 30,606,000    $ 22,950,000    $ 17,512,000
Cost of sales                                                               20,571,000      15,954,000      14,018,000
                                                                          ------------    ------------    ------------
             Gross profit                                                   10,035,000       6,996,000       3,494,000

Selling, marketing and fulfillment expenses                                 11,493,000      13,765,000      18,797,000
General and administrative expenses                                          4,740,000       5,098,000       5,296,000
                                                                          ------------    ------------    ------------
             Total operating expenses                                       16,233,000      18,863,000      24,093,000
                                                                          ------------    ------------    ------------
             Operating loss                                                 (6,198,000)    (11,867,000)    (20,599,000)

Interest (expense) and other income, net of interest income of $68,000,
    $240,000 and $166,000 in 2002, 2001 and 2000, respectively                (281,000)    (13,139,000)       (510,000)
                                                                          ------------    ------------    ------------

             Net loss                                                     $ (6,479,000)   $(25,006,000)   $(21,109,000)
                                                                          ============    ============    ============
             Preferred stock dividends                                      (2,489,000)     (2,926,000)       (802,000)
                                                                          ------------    ------------    ------------
             Deemed dividend related to beneficial conversion feature
               on Series B preferred stock                                 (15,295,000)              -               -
                                                                          ------------    ------------    ------------
             Net loss available to common shareholders                    $(24,263,000)   $(27,932,000)   $(21,911,000)
                                                                          ============    ============    ============

             Basic and diluted loss per share                             $      (2.44)   $      (3.41)   $      (4.45)
                                                                          ============    ============    ============
Weighted average number of common shares outstanding used in
     calculating basic and diluted (loss) per common share                   9,927,027       8,185,065       4,924,906
                                                                          ============    ============    ============
</TABLE>

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


                                      F-4
<PAGE>

<TABLE>
<CAPTION>

Bluefly, Inc.
Consolidated Statements of Changes in Shareholders' Equity and Redeemable Preferred Stock
For the three years ended December 31, 2002, 2001 and 2000
(Dollars rounded to the nearest thousand)
-----------------------------------------------------------------------------------------------------------------------------------

                                                  Redeemable                Series A Preferred Stock      Series B Preferred Stock
                                               Preferred Stock                  $.01 Par value               $.01 Par value
                                           --------------------------       ------------------------      ------------------------
                                           Number of                        Number of                     Number of
                                            Shares          Amount            Shares          Amount        Shares         Amount

<S>                                           <C>        <C>                <C>              <C>           <C>             <C>
Balance at January 1, 2000                    500,000    $ 10,286,000               -        $     -              -        $     -

Issuance of warrants in connection
   with Convertible Notes                           -               -               -              -              -              -

Issuance of warrants to supplier                    -               -               -              -              -              -

Accrued dividends on Series A
   Preferred Stock                                  -         802,000               -              -              -              -

Net loss                                            -               -               -              -              -              -
                                         ------------    ------------    ------------   ------------   ------------   ------------
Balance at December 31, 2000                  500,000      11,088,000               -              -              -              -
                                         ------------    ------------    ------------   ------------   ------------   ------------

Conversion of Redeemable
   Preferred Stock to Series A
   Preferred Stock                           (500,000)    (11,088,000)        500,000          5,000              -              -

Conversion of debt to Series B
   Preferred Stock                                  -               -               -              -      8,910,782         89,000

Sale of common stock in
   connection with Rights
   Offering ($2.34 per share)
   net of $350,000 of expenses                      -               -               -              -              -              -

Issuance of warrants to lender                      -               -               -              -              -              -

Issuance of warrants in exchange
   for services                                     -               -               -              -              -              -

Issuance of warrants to                             -               -               -              -              -              -
   shareholders

Net loss                                            -               -               -              -              -              -
                                         ------------    ------------    ------------   ------------   ------------   ------------
Balance at December 31, 2001                        -               -         500,000          5,000      8,910,782         89,000
                                         ------------    ------------    ------------   ------------   ------------   ------------

Sale of common stock in connection
   with the Standby Agreement
   ($1.57 per share) net of
   $75,000 of expenses                              -               -               -              -              -              -

Sale of Series 2002 Preferred Stock in
   connection with the Standby
   Agreement ($1,000 per share)
   net of $115,000 of expenses                      -               -               -              -              -              -

Sale of Series C Preferred Stock
   ($1,000 per share) net of $23,000
   of expenses                                      -               -               -              -              -              -

Sale of warrants to shareholders in
   connection with the Standby
   Agreement                                        -               -               -              -              -              -

Deemed dividend related to
   beneficial conversion
   feature on Series B
   Preferred Stock                                  -               -               -              -              -              -

Issuance of warrants to lender                      -               -               -              -              -              -

Issuance of warrants to                             -               -               -              -              -              -
   shareholders

Issuance of warrants in exchange
   for services                                     -               -               -              -              -              -

Net loss                                            -               -               -              -              -              -
                                         ------------    ------------    ------------   ------------   ------------   ------------
Balance at December 31, 2002                        -        $      -         500,000   $      5,000      8,910,782   $     89,000
                                         ============    ============    ============   ============   ============   ============

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                               Series 2002
                                  Series C Preferred Stock    Preferred Stock            Common Stock
                                      $.01 Par value          $.01 Par value            $.01 Par Value
                                  ------------------------    ----------------        --------------------
                                     Number of               Number of               Number of
                                      Shares    Amount        Shares    Amount        Shares     Amount
<S>                                  <C>        <C>           <C>       <C>          <C>        <C>
Balance at January 1, 2000                 -    $    -             -    $    -       4,924,906     $  49,000

Issuance of warrants in connection
   with Convertible Notes                  -         -             -         -               -             -

Issuance of warrants to supplier           -         -             -         -               -             -

Accrued dividends on Series A
   Preferred Stock                         -         -             -         -               -             -

Net loss                                   -         -             -         -               -             -
                                     -------   -------       -------   -------       ---------     ---------
Balance at December 31, 2000               -         -             -         -       4,924,906        49,000
                                     -------   -------       -------   -------       ---------     ---------

Conversion of Redeemable
   Preferred Stock to Series A
   Preferred Stock                         -         -             -         -               -             -

Conversion of debt to Series B
   Preferred Stock                         -         -             -         -               -             -

Sale of common stock in
   connection with Rights
   Offering ($2.34 per share)
   net of $350,000 of expenses             -         -             -         -       4,280,425        43,000

Issuance of warrants to lender             -         -             -         -               -             -

Issuance of warrants in exchange
   for services                            -         -             -         -               -             -

Issuance of warrants to                    -         -             -         -               -             -
   shareholders

Net loss                                   -         -             -         -               -             -
                                     -------   -------       -------   -------       ---------     ---------
Balance at December 31, 2001               -         -             -         -       9,205,331        92,000
                                     -------   -------       -------   -------       ---------     ---------

Sale of common stock in connection
   with the Standby Agreement
   ($1.57 per share) net of
   $75,000 of expenses                     -         -             -         -       1,186,573        12,000

Sale of Series 2002 Preferred Stock
   connection with the Standby
   Agreement ($1,000 per share)
   net of $115,000 of expenses             -         -         2,100         -               -             -

Sale of Series C Preferred Stock
   ($1,000 per share) net of $23,00
   of expenses                         1,000         -             -         -               -             -

Sale of warrants to shareholders in
   connection with the Standby
   Agreement                               -         -             -         -               -             -

Deemed dividend related to
   beneficial conversion
   feature on Series B
   Preferred Stock                         -         -             -         -               -             -

Issuance of warrants to lender             -         -             -         -               -             -

Issuance of warrants to                    -         -             -         -               -             -
   shareholders

Issuance of warrants in exchange
   for services                            -         -             -         -               -             -

Net loss                                   -         -             -         -               -             -
                                     -------    ------       -------    ------       ----------    ---------
Balance at December 31, 2002           1,000    $    -         2,100    $    -       10,391,904    $ 104,000
                                     =======    ======       =======    ======       ==========    =========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                     Total
                                    Additional                    Shareholders'
                                     Paid-in      Accumulated        Equity
                                     Capital       Deficit          (Deficit)

<S>                                 <C>          <C>            <C>
Balance at January 1, 2000          $17,482,000  $(17,231,000)  $    300,000

Issuance of warrants in connection
   with Convertible Notes              467,000              -        467,000

Issuance of warrants to supplier        95,000              -         95,000

Accrued dividends on Series A
   Preferred Stock                    (802,000)             -       (802,000)

Net loss                                     -    (21,109,000)   (21,109,000)
                                   ------------  ------------    -----------
Balance at December 31, 2000        17,242,000    (38,340,000)   (21,049,000)
                                   ------------  ------------    -----------

Conversion of Redeemable
   Preferred Stock to Series A
   Preferred Stock                  18,852,000       (622,000)    18,235,000

Conversion of debt to Series B
   Preferred Stock                  26,318,000              -     26,407,000

Sale of common stock in
   connection with Rights
   Offering ($2.34 per share)
   net of $350,000 of expenses       9,622,000              -      9,665,000

Issuance of warrants to lender          45,000              -         45,000

Issuance of warrants in exchange
   for services                         31,000              -         31,000

Issuance of warrants to                 74,000              -         74,000
   shareholders

Net loss                                     -    (25,006,000)   (25,006,000)
                                   ------------  ------------    -----------
Balance at December 31, 2001        72,184,000    (63,968,000)     8,402,000
                                   ------------  ------------    -----------

Sale of common stock in connection
   with the Standby Agreement
   ($1.57 per share) net of
   $75,000 of expenses               1,776,000              -      1,788,000

Sale of Series 2002 Preferred Stock
   connection with the Standby
   Agreement ($1,000 per share)
   net of $115,000 of expenses       1,985,000              -      1,985,000

Sale of Series C Preferred Stock
   ($1,000 per share) net of $23,00
   of expenses                         977,000              -        977,000

Sale of warrants to shareholders in
   connection with the Standby
   Agreement                            37,000              -         37,000

Deemed dividend related to
   beneficial conversion
   feature on Series B
   Preferred Stock                  15,295,000    (15,295,000)             -

Issuance of warrants to lender          80,000              -         80,000

Issuance of warrants to                255,000              -        255,000
   shareholders

Issuance of warrants in exchange
   for services                         39,000              -         39,000

Net loss                                     -     (6,479,000)    (6,479,000)
                                   -----------   ------------    -----------
Balance at December 31, 2002       $92,628,000   $(85,742,000)   $ 7,084,000
                                   ===========   ============    ===========
</TABLE>

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


                                      F-5
<PAGE>

<TABLE>
<CAPTION>

Bluefly, Inc.
Consolidated Statements of Cash Flows
For the three years ended December 31, 2002, 2001 and 2000
(Dollars rounded to the nearest thousand)
-------------------------------------------------------------------------------------------------------------------

                                                                           2002            2001            2000
<S>                                                                  <C>             <C>             <C>
Cash flows from operating activities:
    Net loss                                                         $ (6,479,000)   $(25,006,000)   $(21,109,000)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
        Depreciation and amortization                                   1,167,000         719,000         766,000
        Issuance of warrants for services rendered                         39,000          31,000               -
        Beneficial conversion - interest expense                                -      13,007,000               -
        Provision for returns                                             350,000         332,000         516,000
        Allowance for doubtful accounts                                   241,000         196,000         312,000
        Write down of inventory                                            17,000         248,000         356,000
        Changes in operating assets and liabilities:
           (Increase) decrease in:
             Inventories                                               (4,497,000)        658,000        (631,000)
             Accounts receivable                                         (191,000)       (625,000)     (1,042,000)
             Other current assets                                         127,000         252,000         (53,000)
             Prepaid expenses                                             (29,000)         84,000         (90,000)
             Other assets                                                  39,000         (18,000)        (75,000)
           (Decrease) increase in:
             Accounts payable                                              96,000         597,000        (857,000)
             Accrued expenses                                             314,000        (423,000)         55,000
             Deferred revenue                                             194,000         548,000         144,000
                                                                     ------------    ------------    ------------
             Net cash used in operating activities                     (8,612,000)     (9,400,000)    (21,708,000)
                                                                     ------------    ------------    ------------

Cash flows from investing activities:
    Purchase of property and equipment                                 (1,788,000)       (378,000)       (876,000)
                                                                     ------------    ------------    ------------
             Net cash used in investing activities                     (1,788,000)       (378,000)       (876,000)
                                                                     ------------    ------------    ------------

Cash flows from financing activities:
    Net proceeds from issuance of Preferred Stock                       3,045,000               -               -
    Net proceeds from notes payable to shareholders                     2,000,000         182,000               -
    Net proceeds from sale of Common Stock and Warrants                 1,899,000               -               -
    Payments of capital lease obligation                                 (214,000)              -               -
    Net proceeds from rights offering                                           -       9,665,000               -
    Net proceeds from convertible notes payable                                                 -      20,000,000
                                                                     ------------    ------------    ------------
             Net cash provided by financing activities                  6,730,000       9,847,000      20,000,000
                                                                     ------------    ------------    ------------

Net (decrease) increase in cash and cash equivalents                   (3,670,000)         69,000      (2,584,000)

Cash and cash equivalents - beginning of year                           5,419,000       5,350,000       7,934,000
                                                                     ------------    ------------    ------------
             Cash and cash equivalents - end of year                 $  1,749,000    $  5,419,000    $  5,350,000
                                                                     ============    ============    ============

Supplemental disclosure of cash flow information:
    Cash paid during the year for:
      Interest                                                       $     94,000    $     14,000    $          -
                                                                     ============    ============    ============
      Income taxes                                                   $          -    $          -    $     25,000
                                                                     ============    ============    ============
    Non-cash investing and financing activites:
      Equipment acquired under capital lease                         $    661,000    $          -    $          -
                                                                     ============    ============    ============
      Warrants issued to shareholders                                $     98,000    $     74,000    $    467,000
                                                                     ============    ============    ============
      Warrant issued to lender                                       $     80,000    $     45,000    $          -
                                                                     ============    ============    ============
      Deemed dividend related to beneficial conversion feature
        on Series B Preferred Stock                                  $ 15,295,000    $          -    $          -
                                                                     ============    ============    ============
      Beneficial conversion charge on conversion of debt to equity   $          -    $ 20,851,000    $          -
                                                                     ============    ============    ============
</TABLE>

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


                                      F-6
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

1.       The Company

         The Company is a leading Internet retailer of designer fashion and home
         accessories at discount prices. The Company's Web store ("Bluefly.com"
         or the "Web Site"), which launched in September 1998, sells over 350
         brands of designer apparel, accessories and home products at discounts
         up to 75% off retail value.

         The Company has sustained net losses and negative cash flows from
         operations since the formation of Bluefly.com. The Company's ability
         to meet its obligations in the ordinary course of business is
         dependent upon its ability to establish profitable operations or raise
         additional financing through public or private debt or equity
         financing, or other sources of financing to fund operations.
         Management believes that its current funds, together with the March
         2003 Financing and the 2003 Standby Commitment (see Note 12), the
         Loan Facility (see Note 10) and cash generated from operations will be
         sufficient to enable the Company to meet its planned expenditures
         through December 31, 2003. The Company may seek additional equity or
         debt financings to maximize the growth of its business or if
         anticipated operating results are not achieved. If such financings are
         not available on terms acceptable to the Company, the Company will
         delay or reduce its expenditures in order to prolong the availability
         of sufficient cash flow to satisfy its obligations while additional
         funding is sought.

2.       Summary of Significant Accounting Policies

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

         Revenue Recognition
         The Company recognizes revenue in accordance with both Staff Accounting
         Bulletin ("SAB") No. 101 and Financial Accounting Standards Board
         ("FASB") Task Force's Emerging Issues Task Force ("EITF") No. 00-10,
         "Accounting for Shipping and Handling Fees and Costs" ("EITF No.
         00-10"). Gross sales consists primarily of revenue from product sales
         and shipping and handling charges and is net of promotional discounts.
         Revenue is recognized when goods are received by the customer, which
         occurs after credit card authorization. Net sales represent gross
         sales, less provisions for returns, credit card chargebacks and
         adjustments for uncollected sales tax.

         Deferred revenue, which consists primarily of goods shipped to
         customers but not yet received and customer credits, totaled
         approximately $885,000 and $691,000 as of December 31, 2002 and 2001,
         respectively.

         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 Company's recent launch of a new
         version of its Web Site; 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; potential dilution arising from future
         financings; 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.


                                      F-7
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         Use of Estimates
         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosures of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Significant estimates and
         assumptions include the adequacy of the allowances for returns and the
         recoverability of inventories. Actual results could differ from those
         estimates.

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

         Provisions for Returns and Doubtful Accounts
         The Company generally permits returns for any reason within 90 days of
         the sale. Accordingly, the Company establishes a reserve for estimated
         future returns and allowance for doubtful accounts at the time of
         shipment based primarily on historical data. The Company performs
         credit card authorizations and checks the verifications of its
         customers prior to shipment of merchandise. Accounts receivable is
         presented on the consolidated balance sheet net of the allowance for
         doubtful accounts. For the years ended December 31, 2002 and 2001 the
         allowance for doubtful accounts was $50,000 and $55,000, respectively.

         Inventories
         Inventories, which consist of finished goods, are stated at the lower
         of cost or market. Cost is determined by the first-in, first-out
         ("FIFO") method. The Company reviews its inventory levels in order to
         identify slow-moving merchandise and uses markdowns to clear
         merchandise. Markdowns may be used if inventory exceeds customer
         demand for reasons of style, changes in customer preference or lack of
         customer acceptance of certain items, or if it is determined that the
         inventory stock will not sell at its currently marked price. Inventory
         is presented net of reserves on the consolidated balance sheet. For
         the years ended December 31, 2002 and 2001 reserves totaled $560,000
         and $455,000, respectively.

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

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

         During 2002, the Company launched an upgraded version of its Web Site.
         Costs related to the development of the new Web Site are being
         capitalized in accordance with EITF Issue No. 00-02 "Accounting for
         Website Development Costs", and are being amortized over 24 months.

         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.


                                      F-8
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         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.

         Stock Based Compensation
         The Company applies Statement of Financial Accounting Standards No.
         ("SFAS") 123 "Accounting for Stock Based Compensation," and FASB
         Interpretation No. 44, "Accounting for Certain Transactions Involving
         Stock Compensation" ("FIN 44") in accounting for its stock based
         compensation plan. In accordance with SFAS No. 123, the Company applies
         Accounting Principles Board ("APB") 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 2002, 2001 and 2000, because the exercise price of
         employee stock options equals or exceeds the market price of the
         underlying stock on the date of grant. See "Recent Accounting
         Pronouncements" below for a discussion of new accounting pronouncements
         related to accounting for employee stock options.

         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,
                                                            -----------------------------------------------
                                                               2002             2001             2000
<S>                                                           <C>            <C>              <C>
         Basic and diluted net loss as reported               $6,479,000     $ 25,006,000     $ 21,109,000
         Basic and diluted net loss per share, as reported    $     2.44     $       3.41     $       4.45
         Basic and diluted net loss, pro forma                $6,632,000     $ 25,074,000     $ 22,611,000
         Basic and diluted net loss per share, pro forma      $     2.45     $       3.42     $       4.59
</TABLE>

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

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

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

                                                       2002              2001
         Security:
           Options                                  8,508,412         4,343,203
           Warrants                                 1,069,144           635,500
           Preferred stock                         27,769,450        13,184,286
           Convertible debt                         2,150,538                 -


         Marketing Expenses
         In addition to marketing salaries, marketing expenses consist primarily
         of online advertising, print advertising, direct mail campaigns as well
         as the related external production costs. The costs associated with
         online and print advertising are expensed as incurred, while the costs
         associated with direct mail campaigns are capitalized and charged to
         expense over the expected future revenue stream. Marketing expenses
         (excluding marketing salaries) for the years ended December 31, 2002,
         2001 and 2000 amounted to approximately $1,722,000, $4,026,000 and
         $9,278,000, respectively.


                                      F-9
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         Fulfillment
         The Company utilizes a third party to perform all of its order
         fulfillment including warehousing, administrative support, returns
         processing and receiving labor. For the years ended December 31, 2002,
         2001 and 2000, fulfillment expenses totaled approximately $2,622,000,
         $2,290,000 and $2,286,000, respectively. These amounts are included in
         selling, marketing and fulfillment expenses in the statement of
         operations.

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

         Recent Accounting Pronouncements
         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
         Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
         Technical Corrections." SFAS No. 4, "Reporting Gains and Losses from
         Extinguishment of Debt," required that gains and losses from
         extinguishment of debt be classified as an extraordinary item, net of
         the related income tax effect. Any gain or loss on extinguishment of
         debt that was classified, as an extraordinary item in prior periods
         presented that does not meet the criteria in APB Opinion No. 30 for
         classification as an extraordinary item shall be reclassified. SFAS No.
         13, "Accounting for Leases," has been amended to require sale-leaseback
         accounting for certain lease modifications that are similar to
         sale-leaseback transactions. The rescission of SFAS No. 4 and the
         amendment to SFAS No. 13 shall be effective for fiscal years and
         transactions, respectively, occurring after May 15, 2002. The Company
         adopted the provisions of SFAS No. 145 during 2002, and the adoption
         did not have a material effect on the consolidated financial
         statements.

         In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
         Associated with Exit or Disposal Activities." SFAS No. 146 addresses
         the accounting and reporting for costs associated with exit or disposal
         activities and nullifies EITF No. 94-3, "Liability Recognition for
         Certain Employee Termination Benefits and Other Costs to Exit an
         Activity (including Certain Costs Incurred in a Restructuring)." SFAS
         No. 146 requires that a liability for a cost associated with an exit or
         disposal activity be recognized at fair market value when the liability
         is incurred, rather than upon an entity's commitment to an exit plan,
         as prescribed by EITF No. 94-3. SFAS No. 146 is effective for exit and
         disposal activities initiated after December 31, 2002. The Company will
         adopt SFAS No. 146 on January 1, 2003.

         In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
         "Guarantor's Accounting and Disclosure Requirements for Guarantees,
         Including Indirect Guarantees of Indebtedness of Others." FIN 45
         elaborates on the disclosure requirements of a guarantor in its interim
         and annual financial statements about its obligations under certain
         guarantees that it has issued. It also requires a guarantor to
         recognize, at the inception of a guarantee, a liability for the fair
         value of the obligation undertaken in issuing certain guarantees. FIN
         45 also incorporates, without change, the guidance in FIN 34,
         "Disclosure of Indirect Guarantees of Indebtedness of Others," which it
         supersedes. The incremental disclosure requirements of FIN 45 are
         effective for financial statements of interim or annual periods ending
         after December 15, 2002. The initial recognition and initial
         measurement provisions are applicable to guarantees issued or modified
         after December 31, 2002. The accounting followed by a guarantor on
         prior guarantees may not be changed to conform to the guidance of FIN
         45. The Company does not believe that the adoption of FIN 45 will have
         a material impact on its consolidated financial statements.


                                      F-10
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
         Stock-Based Compensation - Transition and Disclosure, an amendment of
         FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting
         for Stock-Based Compensation," to provide alternative methods of
         transition for a voluntary change to the fair value based method of
         accounting for stock-based employee compensation. In addition, SFAS No.
         148 amends the disclosure requirements of SFAS No. 123 to require
         prominent disclosures in both annual and interim financial statements
         about the method of accounting for stock-based employee compensation
         and the effect of the method used on reported results. SFAS No. 148 is
         effective for fiscal years and interim periods beginning after December
         15, 2002. The Company continues to account for stock-based employee
         compensation under the intrinsic value method of APB 25, "Accounting
         for Stock Issued to Employees." The Company adopted the disclosure
         provisions of SFAS No. 148 for the year ended December 31, 2002.

         In January 2003, the FASB issued FIN 46, "Consolidation of Variable
         Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires an
         investor to consolidate a variable interest entity if it is determined
         that the investor is a primary beneficiary of that entity, subject to
         the criteria set forth in FIN 46. Assets, liabilities, and non
         controlling interests of newly consolidated variable interest entities
         will be initially measured at fair value. After initial measurement,
         the consolidated variable interest entity will be accounted for under
         the guidance provided by Accounting Research Bulletin No. 51,
         "Consolidated Financial Statements." FIN 46 is effective for variable
         interest entities created or entered into after January 31, 2003. For
         variable interest entities created or acquired before February 1, 2003,
         FIN 46 applies in the first fiscal year or interim period beginning
         after June 15, 2003. The Company does not believe that the adoption of
         FIN 46 will have a material impact on its consolidated financial
         statements.

         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, 2002 and 2001, property and equipment for continuing
         operations consist of the following:

                                                   2002          2001

         Leasehold improvements              $   538,000    $   535,000
         Office equipment                        433,000        418,000
         Computer equipment and software       3,711,000      1,566,000
                                             -----------    -----------
                                               4,682,000      2,519,000
             Less accumulated depreciation    (2,078,000)    (1,364,000)
                                             -----------    -----------
                                             $ 2,604,000    $ 1,155,000
                                             -----------    -----------

         Depreciation and amortization of property and equipment was
         approximately $1,000,000, $547,000 and $587,000, for the years ended
         December 31, 2002, 2001 and 2000, respectively.


                                      F-11
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

4.       Prepaid Expenses and Other Current Assets

         As of December 31, 2002 and 2001, prepaid expenses and other current
         assets consist of the following:

<TABLE>
<CAPTION>
                                                                  2002          2001

<S>                                                           <C>           <C>
         Prepaid expenses                                     $248,000      $219,000
         Other current assets                                   78,000       205,000
         Deferred financing costs                                    -        50,000
                                                              --------      --------
                                                              $326,000      $474,000
                                                              ========      ========
</TABLE>

5.       Accrued Expenses and Other Current Liabilities

         As of December 31, 2002 and 2001, accrued expenses and other current
         liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                 2002          2001

<S>                                                         <C>          <C>
         Provision for returns                              $1,725,000   $1,375,000
         Accrued expenses                                      185,000      167,000
         Salary, vacation and bonus accrual                    655,000      599,000
         Deposit from third party                              170,000            -
         Current portion of the long term lease liability      190,000            -
         Accrued media expenses                                142,000       72,000
                                                            ----------   ----------
                                                            $3,067,000   $2,213,000
                                                            ==========   ==========
</TABLE>

6.       Income Taxes

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

<TABLE>
<CAPTION>

                                                                2002             2001
<S>                                                       <C>             <C>
         Deferred tax assets
             Net operating losses                         $ 27,098,000    $ 24,433,000
             Depreciation and amortization                     427,000         381,000
             Accounts receivable and inventory reserves        281,000         240,000
             Accrued bonuses                                   174,000         196,000
             Other                                               4,000           4,000
                                                          ------------    ------------
                                                            27,984,000      25,254,000
                 Valuation Allowance                       (27,984,000)    (25,254,000)
                                                          ------------    ------------
                      Net deferred tax asset (liability)  $          -    $          -
                                                          ------------    ------------
</TABLE>


                                      F-12
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

The Company is in an accumulated loss position for both financial and income tax
reporting purposes. The Company has U.S. Federal net operating loss
carryforwards of approximately $67,455,000 at December 31, 2002 which have
expiration dates through 2022. Pursuant to Section 382 of the Internal Revenue
Code, the usage of these net operating loss carryforwards may be limited due to
changes in ownership that have occurred. The Company has not yet determined the
impact, if any, that changes in ownership have had on net operating loss
carryforwards. The Company provided a full valuation allowance on the entire
deferred tax asset balance to reflect the uncertainty regarding the
realizability of these assets due to operating losses incurred since inception.

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

<TABLE>
<CAPTION>
                                                     2002              2001             2000
<S>                                                <C>               <C>              <C>
Statutory federal income tax rate                  (35.00)   %       (35.00) %        (34.00)  %
State tax benefit, net of federal taxes             (5.41)            (5.41)           (5.24)
Other                                                0.55              0.05             0.08
Valuation allowance on deferred tax asset           39.86             40.36            39.16
                                                -----------     ------------     ------------
Effective tax rate                                      -   %             -  %             -   %
                                                -----------     ------------     ------------
</TABLE>

7.       Commitments and Contingencies

         Employment Contracts
         The Company has entered into certain employment contracts, which expire
         through June 30, 2005. As of December 31, 2002, the Company's aggregate
         commitment for future base salary under these employment contracts is:

         2003                                                     $1,200,000
         2004                                                      1,160,000
         2005                                                        391,000
                                                                  ----------
             Total                                                $2,751,000
                                                                  ==========

         Leases
         The Company leases equipment and space under various capital and
         operating leases that expire at various dates beginning in 2003 and
         running through 2011. Future minimum lease payments under capital and
         operating leases, excluding utilities, that have initial or remaining
         noncancelable terms in excess of one year are as follows:


                                      F-13
<PAGE>

<TABLE>
<CAPTION>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------------------

                                                                  Capital          Operating
                                                                  Leases            Leases
<C>                                                             <C>               <C>
2003                                                            $ 190,000         $ 431,000
2004                                                              190,000           437,000
2005                                                               67,000           443,000
2006                                                                    -           450,000
2007                                                                    -           452,000
Thereafter                                                              -           816,000
                                                           ---------------  ----------------
           Total Minimum Payments                                 447,000       $ 3,029,000
                                                           ---------------  ----------------

           Obligations due within one year                       (190,000)
                                                           ---------------
           Long-term obligations under capital leases           $ 257,000
                                                           ---------------
</TABLE>

         Rent expense aggregated approximately $412,000, $407,000 and $345,000
         for the years ended December 31, 2002, 2001 and 2000, respectively.

         Marketing Commitments
         As of December 31, 2002, the Company has advertising and marketing
         commitments in connection with its online relationships of
         approximately $440,000 through December 31, 2003.

         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.

8.       Shareholders' Equity

         Authorized Shares
         In December 2002, the Company increased the number of authorized shares
         of common stock, $.01 par value per share ("Common Stock") to
         92,000,000 in the aggregate. In February 2001, the Company
         reincorporated in the state of Delaware, increased the number of
         authorized shares of preferred stock, $.01 par value per share, to
         25,000,000 in the aggregate and increased the number of authorized
         shares of Common Stock to 40,000,000 in the aggregate. The preferred
         stock is designated as follows: 500,000 shares of Series A Convertible
         Preferred Stock, (the "Series A Preferred Stock"), 9,000,000 shares of
         Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
         3,500 shares of Series C Convertible Preferred Stock (the "Series C
         Preferred Stock"), 2,100 shares of Series 2002 Convertible Preferred
         Stock (the "Series 2002 Convertible Preferred Stock") and 15,494,400
         shares undesignated and available for issuance. Prior to February 2001,
         the Company had been incorporated in the state of New York and had
         authorized for issuance 2,000,000 shares of preferred stock, $.01 par
         value per share, and 15,000,000 shares of common stock, $.01 par value
         per share.

         Series A Convertible Preferred Stock
         On July 27, 1999, the Company entered into an investment agreement (the
         "First Soros Investment Agreement") with an investor group led by
         affiliates of Soros Private Equity Partners, LLC ("Soros") pursuant to
         which the Company issued 500,000 shares of Series A Convertible
         Preferred Stock (the


                                      F-14
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         "Original Series A Preferred Stock") for an aggregate purchase price of
         $10 million. The Original Series A Preferred Stock was convertible into
         shares of Common Stock at a rate of $10.50 per share, and bore a
         cumulative compounding dividend of 8% per annum, payable upon
         conversion at the Company's option in cash or in Common Stock. The
         Original Series A Preferred Stock had a liquidation preference equal to
         its face value plus accrued dividends and ranked 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.

         Excluding shares of Common Stock issuable as payment of accrued and
         unpaid dividends, the 500,000 shares of Original Series A Preferred
         Stock were convertible into 952,381 shares of Common Stock, subject to
         certain antidilution provisions. The holders of the Original Series A
         Preferred Stock had the right to appoint a designee to the Company's
         Board of Directors and the Company was prohibited from taking certain
         actions without the approval of the holders of the majority of the
         Original Series A Preferred Stock. In addition, holders of the Original
         Series A Preferred Stock had registration rights with respect to the
         Common Stock issuable upon conversion of the Original Series A
         Preferred Stock and certain anti-dilution and pre-emptive rights with
         respect to future issuances of capital stock by the Company.

         Pursuant to the Second Soros Investment Agreement (as defined below),
         upon the effectiveness of the reincorporation of the Company as a
         Delaware corporation, the terms of the Original Series A Preferred
         Stock were amended to adjust the conversion price to $2.34 per share
         and to remove certain other provisions that prevented it from being
         included in permanent equity, as well as certain provisions regarding
         antidilution rights, (as amended the "Amended Series A Preferred
         Stock") as of December 31, 2001. Excluding shares of Common Stock that
         may be issued as payment of accrued and unpaid dividends, the 500,000
         shares of Amended Series A Preferred Stock are convertible into
         4,273,504 shares of Common Stock, and bear a cumulative compounding
         dividend of 8% per annum, payable upon conversion at the Company's
         option in cash or in Common Stock. Each share of Amended Series A
         Preferred Stock has a liquidation preference equal to the greater of
         (i) its face value plus accrued dividends (an aggregate of $12,744,000)
         or (ii) the amount that the holder of such a share would receive if it
         were to convert such a share into shares of Common Stock immediately
         prior to liquidation, 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
         holders of the Amended Series A Preferred Stock have the right to
         appoint a designee to the Company's Board of Directors and the Company
         is prohibited from taking certain actions without the approval of the
         holders of the majority of the Amended Series A Preferred Stock. In
         addition, holders of the Amended Series A Preferred Stock have
         registration rights with respect to the Common Stock issuable upon
         conversion of the Amended Series A Preferred Stock and certain
         anti-dilution and pre-emptive rights with respect to future issuances
         of capital stock by the Company.

         Series B Convertible Preferred Stock
         On November 13, 2000, the Company entered into a second investment
         agreement with Soros (the "Second Soros Investment Agreement") pursuant
         to which affiliates of Soros agreed to invest up to an additional $15
         million in the Company, subject to certain conditions (the "Soros
         Investment"). Under the terms of the Second Soros Investment Agreement,
         in November 2000, Soros invested an additional $5 million in the form
         of a promissory note (the "New Note"), convertible into Series B
         Preferred Stock at a rate of $2.34 per share. On February 5, 2001, upon
         the second closing under the Second Soros Investment Agreement, the
         principal amount of, and the interest accrued and unpaid on, the Soros
         Notes (as defined below in the heading "Soros Warrants") and the New
         Note, totaling approximately $20 million, were converted into shares of
         Series B Preferred Stock at a rate of $2.34 per share.


                                      F-15
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         Excluding shares of Common Stock that may be issued as payment of
         accrued and unpaid dividends, the shares of Series B Preferred Stock
         are convertible into shares of Common Stock on a 2.52-to-1 basis,
         subject to certain antidilution provisions, and bear a cumulative
         compounding dividend of 8% per annum, payable upon conversion at the
         Company's option in cash or in Common Stock. Each share of Series B
         Preferred Stock has a liquidation preference equal to the greater of
         (i) its face value plus accrued dividends plus $10 million (an
         aggregate of $33,172,000) or (ii) the amount that the holder of such a
         share would receive if it were to convert such a share into shares of
         Common Stock immediately prior to liquidation, 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 holders of the Series B Preferred
         Stock have the right to appoint a designee to the Company's Board of
         Directors and the Company is prohibited from taking certain actions
         without the approval of the holders of the majority of the Series B
         Preferred Stock. In addition, holders of the Series B Preferred Stock
         have certain pre-emptive rights with respect to future issuances of
         capital stock by the Company, and have certain antidilution and
         registration rights with respect to the Common Stock issuable upon
         conversion of the Series B Preferred Stock.

         March 2002 Standby Agreement
         On March 27, 2002, the Company entered into an agreement (the "March
         2002 Standby Agreement") with Soros, pursuant to which Soros agreed to
         provide the Company with up $4.0 million ($4,000,000) (the "March 2002
         Standby Commitment Amount") of additional financing on a standby basis
         at any time prior to January 1, 2003, all of which has since been
         funded.

         June 2002 Financing
         In June 2002, Soros invested $1.9 million in the Company through the
         purchase of Common Stock and warrants, thereby reducing its March 2003
         Standby Commitment Amount to $2.1 million. Under the terms of the
         transaction, the Company issued to Soros 1,186,573 shares of Common
         Stock at $1.57 per share, and warrants to purchase 296,644 shares of
         Common Stock at any time during the next five years at an exercise
         price of $1.88 per share for a purchase price of $0.125 per warrant
         (the "June 2002 Financing").

         The June 2002 Financing was negotiated as part of an equity financing
         in which third party investors would also participate. In particular,
         one third party investor committed to invest approximately $7 million
         on the same terms and conditions as those that applied to Soros'
         investment. However, this third party investment has not been
         consummated, and the Company does not know when or if it will be
         consummated. To date, the only funds that the Company has received from
         the third party investor is a good faith deposit, for which the Company
         agreed, for a limited period of time, not to pursue remedies against
         the third party investor as a result of its failure to honor its
         investment commitment. That period has since expired, and the Company
         has commenced an action against the investor. In February 2003, the
         Company obtained summary judgment on its breach of contract claims
         against the third party investor. However, under the terms of the
         summary judgment order, the Company is still required to prove the
         amount of its damages. Litigation is subject to inherent risks and
         uncertainties, and there can be no assurance as to the amount of
         damages that it would be able to prove. Moreover, given the substantial
         costs involved with litigation, there can be no assurance that the
         amount that the Company would be able to collect with respect to any
         judgment rendered in connection with such litigation would exceed the
         costs associated with obtaining such judgment.

         In connection with the June 2002 Financing, the Company agreed to file
         a registration statement with the Commission within 45 days of closing,
         in order to register the Common Stock issued in the financing, as well
         as the Common Stock underlying the warrants. However, given the failure
         to date of the third party investors to consummate their investment,
         Soros has agreed with the Company to delay


                                      F-16
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         the filing of such registration statement, although the Company expects
         that it will be required to file such registration statement at some
         point in the future.

         As a result of the June 2002 Financing, the conversion price of the
         Series B Preferred Stock, decreased from $2.34 to $1.57. In accordance
         with EITF 00-27, this reduction in the conversion price of the
         Company's Series B Preferred Stock resulted in the Company recording a
         beneficial conversion feature in the approximate amount of $10.2
         million as part of its second quarter financial results. This non-cash
         charge, which is analogous to a dividend, resulted in an adjustment to
         the Company's computation of Loss Per Share.

         Series 2002 Convertible Preferred Stock
         In August 2002, Soros invested an additional $2.1 million in the
         Company, thereby reducing its March 2002 Standby Commitment Amount to
         zero. Under the terms of the transaction, the Company issued to Soros
         2,100 shares of newly-designated Series 2002 Convertible Preferred
         Stock at a price of $1,000 per share. The Series 2002 Convertible
         Preferred Stock has a liquidation preference of $1,000 per share and is
         convertible in whole or in part, at the holder's option, into the type
         of equity securities sold by the Company in any subsequent round of
         equity financing, at the lowest price per share paid by any participant
         in such financing and upon such other terms and conditions as such
         securities are sold in such financing. The Series 2002 Convertible
         Preferred Stock does not have any fixed dividend rate, and does not
         provide the holders thereof with any voting rights, other than with
         respect to transactions or actions that would adversely affect the
         rights, preference, powers and privileges of the Series 2002
         Convertible Preferred Stock. Subsequent to year end, the Series 2002
         Convertible Preferred Stock was converted into Series D Convertible
         Preferred Stock in connection with the March Financing described in
         Note 12 below.

         Series C Preferred Stock and Series C Notes
         In September 2002, the Company and Soros entered into an agreement
         pursuant to which Soros purchased 1,000 shares of the Series C
         Preferred Stock and promissory notes convertible into Series C
         Preferred Stock ("Series C Notes") in the aggregate principal amount of
         $2,000,000, all for the aggregate purchase price of $3,000,000. Each
         share of Series C Preferred Stock has a face value of $1,000 and a
         liquidation preference equal to the greater of (i) $1,000 plus accrued
         and unpaid dividends (an aggregate of $2,021,000) and (ii) the amount
         the holder of such share would receive if it were to convert such share
         into Common Stock immediately prior to the liquidation of the Company.
         The Series C Preferred Stock is convertible, at any time and from time
         to time at the option of the holder into Common Stock at the rate of
         one to 1,075.27. In addition, holders of the Series C Preferred Stock
         have certain pre-emptive rights with respect to future issuances of
         capital stock by the Company, and have certain antidilution and
         registration rights with respect to the Common Stock issuable upon
         conversion of the Series C Preferred Stock. Subsequent to year end, the
         Series C Convertible Preferred Stock was converted into Series D
         Convertible Preferred Stock in connection with the March Financing
         described in Note 12 below.

         As a result of the September 2002 financing, the conversion price of
         the Series B Preferred Stock, almost all of which is held by Soros,
         automatically decreased from $1.57 to $0.93. In accordance with EITF
         00-27, this reduction in the conversion price of the Company's Series B
         Preferred Stock resulted in the Company recording a beneficial
         conversion feature in the approximate amount of $5.1 million as part of
         its third quarter financial results. This non-cash charge, which is
         analogous to a dividend, resulted in an adjustment to the Company's
         computation of Loss Per Share.

         Rights Offering
         Pursuant to the Second Soros Investment Agreement, on February 7, 2001
         the Company offered the public shareholders of the Company, as of
         February 7, 2001, the right to purchase up to an aggregate of


                                      F-17
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         $20 million in Common Stock at $2.34 per share (the "Rights Offering").
         The Second Soros Investment Agreement provided for Soros to purchase
         the difference between $20 million and the amount of Common Stock
         purchased by the public shareholders in the Rights Offering, up to a
         total of $10 million, all at the rate of $2.34 per share (the "Standby
         Commitment"). The Rights Offering was completed on March 26, 2001. The
         public shareholders subscribed for 6,921 shares in the Rights Offering
         for aggregate proceeds of approximately $16,000. In accordance with the
         Second Soros Investment Agreement, Soros purchased 4,273,504 shares of
         Common Stock of the Company for an aggregate amount of $10 million on
         March 28, 2001 at a price of $2.34 per share.

         The accompanying consolidated financial statements reflect the
         conversion of certain notes and the New Note into Series B Preferred
         Stock at a price of $2.34 per share, after giving effect to the
         remaining unamortized discount of $302,000 and the conversion of
         accrued interest on certain notes and New Note of $851,000 through
         February 5, 2001 into shares of Series B Preferred Stock. The Company
         recorded a beneficial conversion feature of approximately $5,556,000 in
         connection with the conversion of certain notes into Series B Preferred
         Stock. This amount was credited to additional paid-in capital and
         charged against interest expense in accordance with Emerging Issues
         Task Force Issue No. 98-5 ("EITF No. 98-5"). In addition, as a result
         of certain changes made to the terms of the Certificate of Designation
         for the Series A Preferred Stock in connection with the second closing
         of the agreement with Soros, the Original Series A Preferred Stock was
         converted into permanent equity and the conversion price was reduced
         from $10.50 to $2.34. This resulted in the recording of approximately
         $7,771,000 to additional paid-in capital. The corresponding charge to
         accumulated deficit consisted of the following: $5,000,000 was
         classified as debt discount on the New Note, and charged to interest
         expense, $2,149,000 was classified as interest expense and $622,000 was
         assigned to dividends.

         Soros Warrants
         In exchange for the March 2002 Standby Agreement, the Company issued to
         Soros a warrant to purchase 100,000 shares of Common Stock at an
         exercise price of $1.68 per share (the 20 day trailing average of the
         closing sale price of the Company's Common Stock on the date of
         issuance), exercisable at any time until March 27, 2007. The Company
         accounted for the warrant by crediting additional paid in capital for
         approximately $157,000.

         In connection with a financing commitment during 2000, Soros provided
         the Company with the aggregate principal amount of $15 million in
         convertible debt financing in the form of notes that bore interest at a
         rate of 8% per annum and were due in May 2001 (the "Soros Notes"). On
         February 5, 2001, pursuant to the Second Soros Investment Agreement,
         the Soros Notes were converted into Series B Preferred Stock, as
         described above. In connection with the Soros Commitment and the
         issuance of the Soros Notes, the Company granted Soros warrants (the
         "Soros Warrants") pursuant to which Soros has the right to purchase up
         to 375,000 shares of Common Stock at an exercise price equal to $2.29
         per share, exercisable at any time during the five years following
         issuance. The Soros Warrants have been valued at $467,000 using the
         Black-Scholes option pricing model and, accordingly, the Company has
         recorded the issuance of the warrants as a credit to additional paid in
         capital and recognized a debt discount, which was amortized over the
         life of the Notes.

         In addition to the transactions described above and the 296,644
         warrants purchased in connection with the June 2002 Financing, the
         Company issued 160,000 warrants to Soros in connection with the
         Reimbursement Agreement described more fully in Note 10.


                                      F-18
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         The following table represents warrants issued to purchase Common Stock
         as of December 31, 2002:

<TABLE>
<CAPTION>
                Party            Number of Warrants       Exercise Price Range              Expiration Dates
                -----            ------------------       --------------------              ----------------
<S>                                    <C>                    <C>                     <C>
                Soros                  931,644                $0.88 - $9.08           March 2007 - September 2011

                Lender                 50,000                     $1.34                        March 2006

                Others                 87,500                 $1.34 - $2.34           September 2005 - March 2006
</TABLE>

         Stock Option Plan
         The Company's Board of Directors has adopted two stock option plans,
         one in July 2000 (the "2000 Plan") and the other in May 1997 (the "1997
         Plan"). The Plans were adopted for the purpose of encouraging key
         employees, consultants and directors who are not employees to acquire a
         proprietary interest in the growth and performance of the Company.
         Options are granted in terms not to exceed ten years and become
         exercisable as specified when the option is granted. Vesting terms of
         the options range from immediately to a ratable vesting period of four
         years. The 2000 Plan has 1,500,000 shares authorized for issuance.
         During 2001, the Company amended the 1997 Plan in order to increase the
         maximum number of shares that may be granted under the Plan to
         12,200,000.

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

<TABLE>
<CAPTION>
                                                                        Number             Weighted
                                                                          of               Average
                                                                        Shares          Exercise Price

<S>                                                                     <C>                      <C>
          Balance at January 1, 2000                                    1,109,150                $10.35
                                                                      -----------
          Options granted                                               3,746,362                 $2.98
          Options canceled                                              (104,627)                 $7.21
          Options exercised                                                     -                 $0.00
                                                                      -----------
          Balance at December 31, 2000                                  4,750,885                 $4.61
          Options granted                                                 321,750                 $1.72
          Options canceled                                              (729,432)                 $5.26
          Options exercised                                                     -                 $0.00
                                                                      -----------
          Balance at December 31, 2001                                  4,343,203                 $4.28

          Options granted                                               5,239,000                 $0.94
          Options canceled                                            (1,073,791)                 $5.26
          Options exercised                                                     -                 $0.00
                                                                      -----------
          Balance at December 31, 2002                                  8,508,412                 $2.27
                                                                      -----------

          Eligible for exercise at December 31, 2000                      644,457                 $7.23
                                                                      -----------
          Eligible for exercise at December 31, 2001                    2,069,120                 $4.78
                                                                      -----------
          Eligible for exercise at December 31, 2002                    3,612,420                 $3.59
                                                                      -----------
</TABLE>


                                      F-19
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         The stock options are exercisable in different periods through 2011.
         Additional information with respect to the outstanding options as of
         December 31, 2002, 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>               <C>
          $0.69 - $0.95          4,968,750       9.96 Years              $0.91          805,666           $0.91
          $1.01 - $2.94          1,974,512       7.85 Years              $2.57        1,536,528           $2.62
          $3.06 - $5.22          1,054,750       7.59 Years              $3.15          835,318           $3.17
          $8.34 - $10.97            85,750       6.61 Years              $9.35           73,698           $9.37
          $11.22 - $12.34          235,500       6.97 Years             $11.47          176,805          $11.47
          $13.81 - $16.60          189,150       6.10 Years             $15.48          184,405          $15.48
                               ------------                                         ------------
          $0.69 - $16.60         8,508,412       8.98 Years              $2.27        3,612,420           $3.59
</TABLE>

         The Company does not recognize compensation expense for stock options
         granted to employees and directors at or above fair market value, in
         accordance with APB No. 25. The fair value of options granted to
         employees during 2002, 2001 and 2000 was approximately $4.0 million,
         $448,000 and $7.8 million, respectively. The Company calculated the
         fair value of each option grant on the date of the grant using the
         Black-Scholes option pricing model as prescribed by SFAS No. 123.

         The following assumptions were used in applying the model:

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                  ------------------------------------------------------
                                                        2002               2001               2000
         <S>                                         <C>                <C>               <C>
         Risk-free interest rates                    3.47 - 5.29%       4.42 - 5.27%      5.16 - 6.81%
         Expected lives (in years)                        6                  6                 6
         Dividend yield                                  0%                 0%                 0%
         Expected volitility                            164%               119%               80%
         </TABLE>

         As of December 31, 2002, the Company has reserved an aggregate of
         39,101,899 shares of Common Stock for the conversion of Preferred
         Stock, the exercise of Stock Options and Warrants.

9.       Notes Payable to Shareholders

         Long-Term
         On December 15, 2001, the Company issued a promissory note in the
         amount of $182,000 to Soros, in exchange for services provided during
         the course of the year. The Note bears interest at 9% per annum and has
         a maturity date of December 15, 2004.


                                      F-20
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         Series C Notes
         Interest on the Series C Notes (described in Note 8 above) accrues at
         an annual rate equal to 3% on a cumulative, compounding basis and was
         payable only upon repayment of the principal amount, whether at
         maturity or upon a mandatory or optional prepayment. The outstanding
         principal amount of the Series C Notes and all accrued and unpaid
         interest was payable in full no later than March 26, 2003. The
         principal amount and interest accrued on the Series C Notes were
         convertible into Series C Preferred Stock, at the option of the holder
         and at any time at the rate of $1,000 per share. The Company's
         obligations under the Series C Notes are subordinated to its
         obligations under the Rosenthal Financing Agreement although such
         subordination does not effect Soros's conversion rights with respect to
         the Series C Notes. Subsequent to year end, the Series C Notes were
         repaid. See Note 12 below.

10.      Financing Agreement

         The Company has a Financing Agreement (the "Financing Agreement") with
         Rosenthal & Rosenthal, Inc. ("Rosenthal") pursuant to which Rosenthal
         provides the Company with certain credit accommodations, including
         loans and advances, factor-to-factor guarantees or letters of credit in
         favor of suppliers or factors or purchases of payables owed to the
         Company's suppliers (the "Loan Facility"). During fiscal 2002, the
         maximum amount available under the Loan Facility did not exceed $2.5
         million.

         The Financing Agreement was amended in December 2002 and March 2003 to:
         (i) extend the term until June 30, 2004; (ii) increase the maximum
         amount available under the Loan Facility (subject to an existing $10
         million cap) to an amount equal to the Soros Guarantee plus the lower
         of (x) $2 million (instead of the prior $1 million), (y) 20% of the
         book value of the Company's inventory or (z) the full liquidation value
         of the Company's inventory; (iii) increased the tangible net worth
         requirement to $5,000,000 from $1,500,000; (iv) redefine the working
         capital definition to exclude short-term debt held by affiliates
         (effective as of December 19, 2002), (v) increase the working capital
         requirement to $4,000,000 from $3,500,000; (vi) increase the annual fee
         the Company pays Rosenthal for the Loan Facility to $30,000 from
         $10,000, (vii) require the Company to maintain a cash balance of at
         least $250,000 and; (viii) require Soros to increase from $1.5 million
         to $2.0 million the amount of the standby letter of credit that Soros
         is maintaining (the "Soros Guarantee") to help collateralize the Loan
         Facility and extend the term of the Soros Guarantee to November 15,
         2004 from November 15, 2003. In consideration for Soros' agreement to
         maintain the Soros Guarantee until November 15, 2004, the Company
         issued to Soros a warrant to purchase 25,000 shares of our Common Stock
         at an exercise price equal to $0.78 per share (the 10 day trailing
         average of the closing sale price of our Common Stock on the date of
         issuance), exercisable at any time prior to March 17, 2013.

         As of December 31, 2002, the Company had approximately $2.5 million
         available under the Loan Facility. Of the total amount available under
         the Loan Facility as of December 31, 2002, approximately $2.2 million
         had been committed, leaving approximately $300,000 available against
         the Loan Facility. The Company pays interest monthly on the average
         daily amount outstanding under the Loan Facility during the preceding
         month at a per annum rate equal to the prime rate plus 1% (at December
         31, 2002 - 5.25%). For the period ended December 31, 2002 and 2001,
         interest expense and fees totaled approximately $91,000 and $26,000
         respectively. As of March 17, 2003, after giving effect to the
         amendment, the maximum availability under the Loan Facility was
         approximately $3.7 million of which $2.1 million was committed, leaving
         approximately $1.6 million available against the Loan Facility.


                                      F-21
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         In addition to the annual facility fee of $30,000, we also pay
         Rosenthal certain fees to open letters of credit and guarantees in an
         amount equal to a certain percentage of the face amount of the letter
         of credit for each thirty (30) days such letter of credit, or a portion
         thereof, remains open.

         Rosenthal Warrants
         In consideration for the Loan Facility, among other things, the Company
         granted to Rosenthal a first priority lien on substantially all of its
         assets, including control of all of its cash accounts upon an event of
         default and certain of its cash accounts in the event that the total
         amount of monies loaned to the Company under the Loan Facility exceeds
         90% of the maximum amount available under the Loan Facility for more
         than 10 days. Upon inception of the Loan Facility in March 2001, the
         Company issued to Rosenthal a warrant to purchase 50,000 shares of
         Common Stock at an exercise price of $2.34, exercisable for five years.
         The Company valued the warrant using the Black-Scholes option pricing
         model and amortized the amount over the life of the Loan Facility. In
         March 2002, when the agreement was amended and as partial consideration
         for the amendment, the Company extended the termination date of the
         warrant it issued to Rosenthal on March 30, 2001 to purchase 50,000
         shares of its Common Stock at an exercise price of $2.34 per share from
         March 30, 2006 to March 30, 2007. The Company revalued the warrant as
         of the new measurement date, using the Black-Scholes option pricing
         model and credited additional paid in capital for $80,000. This amount
         was amortized over the remaining life of the Loan Facility.

         Soros Warrants in Connection with Loan Facility
         In consideration for the Soros Guarantee, the Company agreed to
         reimburse Soros for any amounts it pays to Rosenthal pursuant to the
         Soros Guarantee and granted to Soros a lien (the "Soros Lien")
         subordinated to the Rosenthal Lien on substantially all of the
         Company's assets, including its cash balances, in order to
         collateralize its reimbursement obligations. In connection with the
         Reimbursement Agreement, the Company issued to Soros a warrant (the
         "Soros Upfront Warrant") to purchase 100,000 shares of Common Stock at
         an exercise price equal to $0.88 per share, exercisable for ten years
         beginning on September 16, 2001. The Company accounted for the warrant
         in accordance with Accounting Principles Board Opinion No. 14 ("APB
         No. 14") and credited additional paid in capital for approximately
         $74,000. This amount was amortized over the initial life of the Loan
         Facility. In exchange for Soros' agreement to maintain the Soros
         Guarantee until November 15, 2003, the Company issued to Soros a
         warrant to purchase 60,000 shares of its Common Stock at an exercise
         price of $1.66 per share (the 20 day trailing average of the closing
         sale price of the Company's Common Stock on the date of issuance),
         exercisable at any time until March 30, 2007. The Company valued the
         warrant using the Black-Scholes option pricing model and credited
         additional paid in capital for $98,000. This amount is being amortized
         over the life of the Loan Facility.

         Subject to certain conditions, if the Company defaults on any of its
         obligations under the Loan Facility, Rosenthal has the right to draw
         upon the Soros Guarantee to satisfy any such obligations. If and when
         Rosenthal draws on the Soros Guarantee, pursuant to the terms of the
         Reimbursement Agreement, the Company would have the obligation to,
         among other things, reimburse Soros for any amounts drawn under the
         Soros Guarantee plus interest accrued thereon. In addition, to the
         extent that Rosenthal draws on the Soros Guarantee during the
         continuance of a default under the Loan Facility or at any time that
         the total amount outstanding exceeds 90% of the Soros Guarantee, the
         Company will be required to issue to Soros a warrant (each a
         "Contingent Warrant") to purchase a number of shares of Common Stock
         equal to the quotient of (a) any amounts drawn under the Soros
         Guarantee and (b) 75% of the average of the closing price of its Common
         Stock on the ten days preceding the date of issuance of such warrant.
         Each Contingent Warrant will be exercisable for ten years from the date
         of issuance at an exercise price equal to 75% of the average closing
         price of the Company's Common Stock on the ten days preceding the ten
         days after the date of issuance.


                                      F-22
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         Under the terms of the Loan Facility, Soros has the right to purchase
         all of the Company's obligations from Rosenthal at any time during its
         term (the "Buyout Option"). With respect to such Buyout Option, Soros
         has the right to request that Rosenthal make a draw under the Soros
         Guarantee as consideration to Soros for the purchase of such
         obligation.

11.      Quarterly Results of Operations (Unaudited)

         Amounts in thousands, except per share data

<TABLE>
<CAPTION>
                                                        Quarter Ended
                   2002              March 31        June 30      September 30  December 31

<S>                                  <C>             <C>            <C>            <C>
         Net Revenues                 $ 7,646        $ 6,799        $ 6,305        $ 9,856
                                      -------        -------        -------        -------
         Gross Profit                 $ 2,500        $ 2,407        $ 2,073        $ 3,055
                                      -------        -------        -------        -------
         Net Loss                     $(1,065)       $(1,519)       $(2,235)       $(1,660)
                                      -------        -------        -------        -------

         (Loss) per common share -
            basic and diluted         $ (0.18)       $ (1.27)       $ (0.76)       $ (0.22)
                                      -------        -------        -------        -------
</TABLE>

<TABLE>
<CAPTION>
                                                        Quarter Ended
                   2001              March 31       June 30      September 30  December 31
<S>                                  <C>            <C>            <C>            <C>
         Net Revenues                $  4,646       $  5,285       $  5,113       $  7,906
                                     --------       --------       --------       --------
         Gross Profit                $  1,283       $  1,724       $  1,459       $  2,530
                                     --------       --------       --------       --------
         Net Loss                    $(17,031)      $ (4,168)      $ (2,428)      $ (1,379)
                                     --------       --------       --------       --------

         (Loss) per common share -
            basic and diluted        $  (3.57)      $  (0.52)      $  (0.33)      $  (0.22)
                                     --------       --------       --------       --------
</TABLE>

<TABLE>
<CAPTION>
                                                          Quarter Ended
                  2000               March 31       June 30      September 30  December 31
<S>                                  <C>           <C>           <C>           <C>
         Net Revenues                 $ 3,736        $ 4,560        $ 3,455        $ 5,761
                                      -------        -------        -------        -------
         Gross Profit                 $   668        $   843        $   560        $ 1,423
                                      -------        -------        -------        -------
         Net Loss                     $(5,667)       $(5,301)       $(4,781)       $(5,360)
                                      -------        -------        -------        -------

         (Loss) per common share -
            basic and diluted         $ (1.19)       $ (1.12)       $ (1.01)       $ (1.13)
                                      -------        -------        -------        -------
</TABLE>

12.      Subsequent Events

          January 2003 Financing
          In January 2003 the Company issued to Soros $1 million of demand
          convertible promissory notes that bore interest at a rate of 8% per
          annum and had a maturity date of July 28, 2003 ("January 2003
          Financing") and warrants to purchase 25,000 shares of its common
          stock, exercisable at any time on or prior to January 28, 2007 at
          $1.12 per share. The promissory notes together with any accrued
          interest were convertible into equity securities that the Company
          might issue in any subsequent round of financing, at the holder's
          option, at a price that was equal to the lowest price per share
          accepted by any investor in such subsequent round of financing.
          Interest on the notes was payable only upon repayment of the principal
          amount, whether at maturity or upon a mandatory or optional
          prepayment. The outstanding principal amount of the notes and all
          accrued and unpaid interest was payable in full no later than July 28,
          2003. These


                                      F-23
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

          notes were converted into Series D Preferred Stock in connection with
          the March 2003 Financing defined below.

          March 2003 Financing
          In March 2003, the Company entered into an agreement with Soros
          pursuant to which Soros: (i) provided $2 million of new capital by
          purchasing 2,000 shares of Series D Preferred Stock, (ii) converted
          the promissory notes issued to it in the January 2003 Financing and
          all of its Series 2002 Preferred Stock into 3,109.425 shares of Series
          D Preferred Stock and (iii) purchased 2,027.123 additional shares of
          Series D Preferred Stock for approximately $2 million, with such $2
          million in additional proceeds being retained by Soros as payment in
          full of the Company's obligations under the demand promissory notes
          issued to Soros in September 2002 (the "March 2003 Financing").

          Each share of Series D Preferred Stock has a face value of $1,000 and
          a liquidation preference equal to the greater of (i) $1,000 plus
          accrued and unpaid dividends or (ii) the amount the holder of such
          shares would receive if it were to convert such shares into Common
          Stock immediately prior to the liquidation of the Company. The Series
          D Preferred Stock is convertible, at any time and from time to time at
          the option of the holder into Common Stock at the rate of one to
          1,315.79. The conversion price of the Series D Preferred Stock is
          subject to an anti-dilution adjustment, pursuant to which, subject to
          certain exceptions, to the extent that the Company issues Common Stock
          or securities convertible into Common Stock at a price per share less
          than the Series D Preferred Stock conversion price in the future, the
          conversion price of the Series D Preferred Stock would be decreased so
          that it would equal the conversion price of the new security or the
          price at which shares of common stock are sold, as the case may be.
          However, to the extent required by the rules of the Nasdaq SmallCap
          Market or any other national securities exchange or quotation system
          upon which the Common Stock may be listed from time to time, until
          such time as such conversion provisions are approved by the Company's
          stockholders, the total number of shares of Common Stock issuable upon
          conversion of the Series D Preferred Stock may not exceed 2,204,803
          shares (which represents approximately 19.99% of the Company's
          currently outstanding Common Stock), regardless of any adjustment to
          the Series D Preferred Stock conversion price.

          Beginning on November 13, 2004, the Company is entitled to redeem all,
          but not less than all, of the outstanding Series D Preferred Stock for
          cash at the price of, depending upon the date of such redemption, four
          times, four and one-half times or five times the market price of the
          Common Stock on the date of the initial issuance of the Series D
          Preferred Stock. Dividends accrue on the Series D Preferred Stock at
          an annual rate equal to 12% of the face value and are payable only
          upon conversion or redemption of the Series D Preferred Stock or upon
          the liquidation of the Company. The Series D Preferred Stock votes on
          an as converted basis, except with respect to approval of the
          conversion provisions of the Series D Preferred Stock or any equity
          securities issued in connection with the fund of the 2003 Standby
          Commitment Amount, as defined below.

          Additionally, Soros agreed to provide the Company with up to $1
          million in additional financing (the "2003 Standby Commitment Amount")
          on a standby basis at any time prior to January 1, 2004, provided that
          the Company's cash balances are less than $1 million (the "2003
          Standby Commitment.") Such financing can be made in one or more
          tranches as determined by the members of the Company's Board of
          Directors who are not Soros designees, and any and all draws against
          the 2003 Standby Commitment Amount shall be effected through the
          purchase of newly-designated shares of Series E Preferred Stock on
          terms and conditions substantially identical to the Series D Preferred
          Stock, except that: (1) the conversion price of the Series E Preferred
          Stock will be the lower of (a) the average closing price of the Common
          Stock on the Nasdaq SmallCap Market for the ten trading days preceding
          the issuance of the Series E Preferred Stock and (b) $0.76; and (2)
          the Series E Preferred Stock will not be convertible


                                      F-24
<PAGE>

Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
--------------------------------------------------------------------------------

         into Common Stock (and will not be entitled to vote with the Common
         Stock on matters submitted to a vote of the holders of the Common
         Stock) until such time as the Company's stockholders approve the
         conversion rights of the Series E Preferred Stock to the extent
         required by the rules of the Nasdaq SmallCap Market or any other
         national securities exchange or quotation system upon which the Common
         Stock may be listed from time to time. Subject to certain limitations,
         the 2003 Standby Commitment Amount shall be reduced on a
         dollar-for-dollar basis by the gross cash proceeds received by the
         Company or any of its subsidiaries from the issuance of any equity or
         convertible securities after March 12, 2003. To the extent that a
         drawdown on the 2003 Standby Commitment Amount results in the
         conversion price of the Series E Preferred Stock being less than
         $0.76, Soros has agreed to waive its right to readjust the conversion
         price on the Series B, C and D Preferred Stock in connection with the
         issuance of the Series E Preferred Stock.

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

         Nasdaq
         On March 11, 2003, the Company was advised by the Nasdaq Stock Market,
         Inc. ("Nasdaq") that it no longer in compliance with Nasdaq's
         continued listing requirements (the "Listing Requirements") because
         shares of its Common Stock have closed at a per share price of less
         than $1.00 for at least 30 days and that, if the Company is unable to
         achieve compliance with the Listing Requirements by September 8, 2003,
         the Nasdaq Staff will determine whether the Company meets certain of
         the initial listing criteria of the Nasdaq SmallCap Market. In the
         event that the Company meets such initial listing criteria, the
         Company will be granted an additional 180-day grace period to regain
         compliance. In order to regain compliance, shares of the Company's
         Common Stock would need to close at a price of $1.00 or more for at
         least ten consecutive trading days. In the event that the Company does
         not regain compliance within the requisite time period, it intends to
         appeal any delisting. However, no assurance can be provided that any
         such appeal will be successful.


                                      F-25
<PAGE>

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

None.

                                    PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act

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

<TABLE>
<CAPTION>
       Name                          Age    Position
       ----                          ---    --------
<S>                                  <C>    <C>
       E. Kenneth Seiff              38     Chairman of the Board of Directors, Chief Executive Officer,
                                            President and Treasurer
       Patrick C. Barry              40     Chief Financial Officer and Chief Operating Officer
       Jonathan B. Morris            35     Executive Vice President and Secretary
       Robert G. Stevens             49     Director
       Josephine Esquivel            47     Director
       Alan Kane                     60     Director
       Martin Miller                 71     Director
       Neal Moszkowski               37     Director
       David Wassong                 32     Director
</TABLE>

E. Kenneth Seiff, our founder, has served as our Chairman of the Board, Chief
Executive Officer and Treasurer since its inception in April 1991. He assumed
the additional role of President of the Company in October 1996.

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

Jonathan B. Morris has served as an Executive Vice President and Secretary 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 that
specializes in Internet and technology law. From September 1993 to November
1995, Mr. Morris was an attorney with Mudge, Rose, Guthrie, Alexander & Ferdon.

Robert G. Stevens has served as a director since December 1996. From December
1999 to May 2002, Mr. Stevens also served as an Executive Vice President. Since
May 2002, Mr. Stevens has been the President of Growth Insight, Inc. ("Growth
Insight"), a consulting firm that specializes in developing growth strategies.
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.

Josephine Esquivel was appointed as a director in June 2001. Ms. Esquivel was a
senior apparel, textiles, footwear and luxury goods equity analyst with Morgan
Stanley Dean Witter from February 1995 until April 2001. From June 1987 to
February 1995, Ms. Esquivel was a Senior Vice President at Lehman Brothers, and
from August 1983 to June 1987, she was a Business Manager for the textile
Company J.P. Stevens & Co.


                                       33
<PAGE>

Alan Kane was appointed a director in August 2002. Since September 1997, Mr.
Kane has been the professor of retailing at the Columbia University Graduate
School of Business. Before joining the Columbia Business School, Mr. Kane spent
28 years in the retailing industry.

Martin Miller has served as a director 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 since August 1999 and is the Series A
Preferred Stock designee. Mr. Moszkowski has been a partner of Soros Private
Equity Partners LLC ("Soros Private Equity") since August 1998. Prior to joining
Soros Private Equity, Mr. Moszkowski was an Executive Director of Goldman Sachs
International and a Vice President of Goldman, Sachs & Co., an investment
banking firm, in its Principal Investment Area. He joined Goldman, Sachs & Co.
in August 1993. Mr. Moszkowski is also a Director of Integra Life Sciences
Holdings, Inc., a medical products company, Medicalogic/Medscape, Inc., a
medical data, information and technology company and Jet Blue Airways
Corporation.

David Wassong has served as a director since February 2001 and is the Series B
Preferred Stock designee. Mr. Wassong has been a partner of Soros Private Equity
since June 1998. Prior to joining Soros Private Equity, from July 1997 to June
1998, Mr. Wassong was Vice President, and previously Associate, at Lauder Gaspar
Ventures, LLC, a media, entertainment and telecommunications-focused venture
capital fund. From September 1995 to June 1997, Mr. Wassong attended the Wharton
School, The University of Pennsylvania, and received his Masters in Business
Management.

The Board of Directors has established an Audit Committee ("Audit Committee")
comprised of Martin Miller, Alan Kane and Josephine Esquivel. The Audit
Committee is responsible for the appointment of the our outside
accountants/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 ("Compensation Committee") consisting of Neal Moszkowski and Martin
Miller. The Compensation Committee administers our 1997 Stock Option Plan (the
"1997 Plan") and our 2000 Stock Option Plan (the "2000 Plan" and together with
the 1997 Plan the "Plans"), establishes the compensation levels for executive
officers and key personnel and oversees our bonus plans.

In October 2001, the Board of Directors also established a Technology Committee
(the "Technology Committee") to approve any plan, agreement, instrument or
document it deems necessary, appropriate or desirable to reduce our technology
expenses while preserving the reliability and performance of our technology
infrastructure. The Technology Committee consists of Neal Moszkowski and David
Wassong.

Our executive officers are appointed annually by, and serve at the discretion
of, the Board of Directors. Each director holds office as a director until our
next annual meeting of stockholders or until his or her successor has been duly
elected and qualified. There are no family relationships among any of our
executive officers or directors.

We maintain 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 our directors and executive officers and persons who
beneficially own more than ten percent of our Common Stock (collectively, the
"Reporting Persons") to file with the Commission initial reports of beneficial
ownership and reports of changes in beneficial ownership of the Common Stock.
Reporting Persons are required to furnish the Corporation with copies of all
such reports. To our knowledge, based solely on a review of copies of such
reports furnished to us, we believe that during the 2002 fiscal year all
Reporting Persons complied with all applicable Section 16(a) reporting
requirements, except that the initial Form 3 of Alan Kane was inadvertently
filed late, but was filed on October 31, 2002.


                                       34
<PAGE>

Item 11.  Executive Compensation

Compensation of Directors

Our independent, outside non-employee directors are paid a cash stipend of $500
for each board or committee meeting attended in person and are reimbursed for
expenses incurred on our behalf. Each non-employee director receives an option
to purchase 3,750 shares of Common Stock under the 1997 Plan at the time that
such director is appointed and an annual grant of an option to purchase 3,750
shares of Common Stock under the 1997 Plan.

Compensation of Executive Officers

The following table sets forth information concerning the compensation paid by
us during the fiscal years ended December 31, 2002, 2001 and 2000 to our Chief
Executive Officer and our three other executive officers who received total
compensation from us in excess of $100,000 in the year 2002 (the "Named
Executive Officers").

<TABLE>
<CAPTION>
                                                                                                              Long Term
                                                                   Annual Compensation                       Compensation
                                                      -----------------------------------------------      -----------------

                                                                                                              Securities
                                                                                      Other Annual            Underlying
Name and Principal Position                   Year     Salary           Bonus         Compensation             Options
---------------------------                   ----    --------         -------        ------------             --------
<S>                                           <C>     <C>               <C>              <C>                  <C>
E. Kenneth Seiff                              2002    $274,999          $50,000(7)       $3,782               1,000,000(2)
Chief Executive Officer, President            2001    $267,308          $81,750(6)       $1,000                   --
     and Treasurer                            2000    $250,367          $50,000          $1,000                 980,000(1)(3)

Patrick C. Barry                              2002    $224,999          $35,000(7)       $  590               1,000,000(2)
Chief Financial Officer and Chief             2001    $249,039(4)       $44,000(6)       $  590                   --
          Operating Officer                   2000    $200,433(4)       $    --          $  590                 489,912(2)(3)

Jonathan B. Morris                            2002    $224,369          $35,000(7)       $  330               1,000,000(2)
Executive Vice President                      2001    $249,039(4)       $40,000(8)       $  330                   --
                                              2000    $200,433(4)       $    --          $  330                 490,000(2)(3)

Robert G. Stevens(5)                          2002    $153,355          $    --          $   --                   --
Executive Vice President                      2001    $249,039(4)       $40,000(8)       $   --                   --
                                              2000    $168,000          $    --          $   --                 490,000(2)(3)
</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 during fiscal year 2000 for services performed
     in fiscal 2000.
(4)  Includes amounts paid pursuant to retroactive salary adjustments.
(5)  Mr. Stevens' position as an executive officer of the Company terminated in
     May 2002.
(6)  Represents amounts earned in 2001, but paid in fiscal 2002.
(7)  Represents amounts earned but not yet paid.
(8)  Represents amounts earned in 2001, but paid in fiscal 2002 and 2003.

Employment Agreements

We have entered into employment agreements with each of the Named Executive
Officers who is currently employed by us. Each such employment agreement
provides for a base salary, subject to increase by the Compensation Committee,
and an annual bonus to be determined by the Compensation Committee. Mr. Seiff's
annual base salary is $275,000, and the annual base salary of Messrs. Barry and
Morris is $225,000. Prior to the termination of his employment agreement in May
2002, Mr. Steven's annual base salary was $225,000. The employment agreement for
each of Messrs. Seiff, Morris, and Barry terminates on June 30, 2005, unless we
fail to provide notice of our desire not to renew such agreement at least 90
days prior to the end of the term of such agreement in which case the employment
agreement shall automatically renew for a successive one-year term.


                                       35
<PAGE>

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

Option Grants in Last Fiscal Year

The following table contains information concerning the grant of stock options
under the Plan to the Named Executives Officers during the fiscal year ended
December 31, 2002:

<TABLE>
<CAPTION>
                                                         Individual Grants
                                                         -----------------

                                                                   of Total Options
                                     Number of Securities             Granted to
                                      Underlying Options             Employees in           Exercise or
      Name                                Granted (#)               Fiscal Year (%)         Base Price ($)    Expiration Date
      ----                                -----------               ---------------         --------------    ---------------
<S>                                         <C>                         <C>                    <C>               <C>
      E. Kenneth Seiff                      790,000                     15.1%                  $0.91             12/26/12
                                            210,000                     4.0%                   $0.91             12/26/12

      Patrick C. Barry                      790,000                     15.1%                  $0.91             12/26/12
                                            210,000                     4.0%                   $0.91             12/26/12

      Jonathan B. Morris                    790,000                     15.1%                  $0.91             12/26/12
                                            210,000                     4.0%                   $0.91             12/26/12
</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 number and value of unexercised options held at
 December 31, 2002. None of the Named Executive Officers exercised any
 outstanding options during the fiscal year ended December 31, 2002.

<TABLE>
<CAPTION>
                                           Securities Underlying Unexercised            Value of Unexercised In-the-Money
                                            Options at December 31, 2002 (#)           Options at December 31, 2002 ($)(1)
                                            --------------------------------           -----------------------------------
           Name                             Exercisable         Unexercisable         Exercisable           Unexercisable
           ----                             -----------         -------------         -----------           --------------
<S>                                          <C>                   <C>                 <C>                    <C>
           E. Kenneth Seiff                  1,122,013             982,988             $ 410,000              $ 1,230,000
           Patrick C. Barry                   784,155              860,757             $ 410,000              $ 1,230,000
           Jonathan B. Morris                 784,219              860,782             $ 410,000              $ 1,230,000
           Robert G. Stevens(2)               188,250                --                $ 287,000              $      0
</TABLE>

         (1)Represents the value of unexercised, in-the-money stock options at
         December 31, 2002, using the $1.64 closing price of the Common Stock on
         that date.

         (2) Mr. Stevens' position as an executive officer of the Corporation
         terminated in May 2002.


                                       36
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Common Stock

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of March 17, 2003,
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                                                                      1,735,157(3)(4)       14.16%
     Josephine Esquivel                                                                        7,500(5)             *
     Alan Kane                                                                                    --                *
     Martin Miller                                                                            27,500(6)(7)          *
     Neal Moszkowski (8)                                                                      15,000(9)             *
     David Wassong (8)                                                                         7,500(10)            *
     Robert G. Stevens                                                                       221,189(11)          1.97%
     Patrick C. Barry                                                                        842,973(12)          7.11%
     Jonathan B. Morris                                                                      850,912(13)          7.17%
     SFM Domestic Investments                                                              1,535,250(14)         12.39%
     Quantum Industrial Partners LDC                                                      46,914,115(15)(18)     89.10%
     George Soros                                                                         48,449,365(16)(18)     89.70%
     All directors and executive officers as a group (9 persons)                           3,707,731(17)         26.16%
</TABLE>

________________
     *Less than 1%.

(1)     Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
(2)     Beneficial ownership is determined in accordance with the rules of the
        Commission and generally includes voting or investment power with
        respect to securities. Shares of Common Stock issuable upon the exercise
        of options or warrants currently exercisable or exercisable within 60
        days are deemed outstanding for computing the percentage ownership of
        the person holding such options or warrants but are not deemed
        outstanding for computing the percentage ownership of any other person.
(3)     Includes 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 1,230,000 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
(5)     Includes 7,500 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
(6)     Includes 24,500 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
(7)     Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
        Martin Miller, as to which Mr. Miller disclaims beneficial ownership.
(8)     Messrs. Moszkowski and Wassong's address is c/o Soros Private Equity
        Partners LLC, 888 Seventh Avenue, 28th floor, New York, New York 10106.
        Messrs. Moszkowski and Wassong are the designees of the holders of the
        Series A and B Preferred Stock, respectively. Messrs. Moszkowski and
        Wassong disclaim beneficial ownership of the shares of Common Stock
        beneficially owned by George Soros, SFMDI and QIP (as defined in notes
        (14) and (15) below) and none of such shares are included in the table
        above as being beneficially owned by them.
(9)     Includes 15,000 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
(10)    Includes 7,500 shares of Common Stock issuable upon exercise of options
        granted under the Plan.
(11)    Includes 188,250 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
(12)    Includes 837,973 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
(13)    Includes 838,049 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
(14)    Represents: 124,701 shares of Common Stock issuable upon conversion of
        14,590 shares of Series A Preferred Stock;


                                       37
<PAGE>

        867,068 shares of Common Stock issuable upon conversion of 281,571
        shares of Series B Preferred Stock; 41,710 shares of Common Stock
        issuable upon conversion of 31.7 shares of Series C Preferred Stock;
        297,669 shares of Common Stock issuable upon conversion of 226.229
        shares of Series D Preferred Stock; 172,995 shares of Common Stock;
        31,107 shares of Common Stock issuable upon exercise of warrants (the
        "SFMDI Shares") held in the name of SFM Domestic Investments LLC
        ("SFMDI"). SFMDI is a Delaware limited liability company. As sole
        managing member of SFMDI, George Soros ("Mr. Soros") may also be deemed
        the beneficial owner of the SFMDI Shares. The principal address of SFMDI
        is at 888 Seventh Avenue, 33rd Floor, New York, New York 10106. The
        foregoing information was derived, in part, from certain publicly
        available reports, statements and schedules filed with the Commission.
(15)    Represents: 3,806,923 shares of Common Stock issuable upon conversion of
        445,410 shares Series A Preferred Stock; 26,502,970 shares of Common
        Stock issuable upon conversion of 8,607,843 shares of Series B Preferred
        Stock; 1,274,078 shares of Common Stock issuable upon conversion of
        968.3 shares of Series C Preferred Stock; 9,092,525 shares of Common
        Stock issuable upon conversion of 6,910.319 shares of Series D Preferred
        Stock; 5,287,082 shares of Common Stock; 950,537 shares of Common Stock
        issuable upon exercise of options and warrants (collectively, 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.
        QIH Management Investor L.P., a Delaware limited partnership ("QIHMI"),
        is a minority shareholder of QIP and is vested with investment
        discretion with respect to portfolio assets held for the account of QIP.
        The sole general partner of QIHMI is QIH Management, LLC., a Delaware
        limited liability company ("QIH Management"). Mr. 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, may be deemed to have sole voting power and sole
        investment power with respect to the QIP Shares. Accordingly, each of
        QIP, QIHMI, QIH Management, SFM LLC and Mr. Soros may be deemed to be
        the beneficial owners of the QIP Shares. Each has their principal office
        at 888 Seventh Avenue, 33rd Floor, New York, New York 10106. The
        foregoing information was derived, in part, from certain publicly
        available reports, statements and schedules filed with the Commission.
(16)    See (14) and (15) above
(17)    Includes 3,148,772 shares of Common Stock issuable upon exercise of
        options granted under the Plan.
(18)    See, "Risk Factors - Soros Owns a Majority of Our Stock."

Series A Preferred Stock

The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock of the Company as of March
17, 2003, 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                                                                            -                -
     Josephine Esquivel                                                                          -                -
     Mark H. Goldstein                                                                           -                -
     Alan Kane                                                                                   -                -
     Neal Moszkowski (3)                                                                         -                -
     David Wassong (3)                                                                           -                -
     Robert G. Stevens                                                                           -                -
     Patrick C. Barry                                                                            -                -
     Jonathan B. Morris                                                                          -                -
     Quantum Industrial Partners LDC                                                     445,410(4)(6)          96.8%
     George Soros                                                                        460,000(5)(6)         100.0%
     All directors and executive officers as a group (9 persons)                                 -                -
</TABLE>
________________
     *Less than 1%.


                                       38
<PAGE>

(1)     Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
(2)     Beneficial ownership is determined in accordance with the rules of the
        Commission and generally includes voting or investment power with
        respect to securities. Shares of Common Stock issuable upon the exercise
        of options or warrants currently exercisable or exercisable within 60
        days are deemed outstanding for computing the percentage ownership of
        the person holding such options or warrants but are not deemed
        outstanding for computing the percentage ownership of any other person.
(3)     Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
        Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106.
        Messrs. Moszkowski and Wassong are the designees of the holders of the
        Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the Series A Preferred Stock beneficially owned
        by George Soros and QIP and none of such shares are included in the
        table above as being beneficially owned by them.
(4)     Represents the 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. QIHMI is a
        minority shareholder of QIP and is vested with investment discretion
        with respect to portfolio assets held for the account of QIP. The sole
        general partner of QIHMI is QIH Management. 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, may be deemed to have sole voting power and sole
        investment power with respect to the QIP A Shares. Accordingly, each of
        QIHMI, QIH Management, SFM LLC and Mr. Soros may be deemed to be
        beneficial owners of the QIP Shares. Each has their principal office at
        888 Seventh Avenue, 33rd Floor, New York, New York 10106. The foregoing
        information was derived, in part, from certain publicly available
        reports, statements and schedules filed with the Commission.
(5)     Represents both (i) the SFMDI Shares held in the name of SFMDI and (ii)
        the QIP Shares referenced in Note 4 above. As sole managing member of
        SFMDI, Mr. Soros also may be deemed the beneficial owner of the SFMDI
        Shares. The principal office of SFMDI is at 888 Seventh Avenue, 33rd
        Floor, New York, New York 10106.
(6)     See "Risk Factors -Change of Control Covenant and Liquidation Preference
        of Preferred Stock."

Series B Preferred Stock

The following table sets forth certain information with respect to the
beneficial ownership of the Series B Preferred Stock of the Company as of March
17, 2003, for (i) each person who is known by the Company to own beneficially
more than 5% of the Series B Preferred Stock of the Company, (ii) each of the
Company's directors, (iii) the Named Executive Officers, and (iv) all directors
and executive officers as a group.

<TABLE>
<CAPTION>
                                                                                        Number of Shares
     Name (1)                                                                          Beneficially Owned    Percentage (2)
     --------                                                                          ------------------    --------------
<S>                                                                                     <C>                 <C>
     E. Kenneth Seiff                                                                           -                 -
     Josephine Esquivel                                                                         -                 -
     Alan Kane                                                                                  -                 -
     Martin Miller                                                                              -                 -
     Neal Moszkowski (3)                                                                        -                 -
     David Wassong (3)                                                                          -                 -
     Robert G. Stevens                                                                          -                 -
     Patrick C. Barry                                                                           -                 -
     Jonathan B. Morris                                                                         -                 -
     Quantum Industrial Partners LDC                                                    8,607,843 (4)(6)         96.8%
     George Soros                                                                       8,889,414 (5)(6)        100.0%
     All directors and executive officers as a group (9 persons)                                -                 -
</TABLE>

________________
     *Less than 1%.


                                       39
<PAGE>

(1)     Except as otherwise indicated, the address of each of the individuals
        listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
        10018.
(2)     Beneficial ownership is determined in accordance with the rules of the
        Commission and generally includes voting or investment power with
        respect to securities. Shares of Common Stock issuable upon the exercise
        of options or warrants currently exercisable or exercisable within 60
        days are deemed outstanding for computing the percentage ownership of
        the person holding such options or warrants but are not deemed
        outstanding for computing the percentage ownership of any other person.
(3)     Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
        Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106.
        Messrs. Moszkowski and Wassong are the designees of the holders of the
        Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
        beneficial ownership of the shares of Series B Preferred Stock
        beneficially owned by George Soros and QIP and none of such shares are
        included in the table above as being beneficially owned by them.
(4)     Represents the 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, may be deemed to have sole voting power and sole
        investment power with respect to the QIP B Shares. Accordingly, each of
        QIHMI, QIH Management, SFM LLC and Mr. Soros may be deemed to be
        beneficial owners of the QIP Shares. Each has their principal office at
        888 Seventh Avenue, 33rd Floor, New York, New York 10106. The foregoing
        information was derived, in part, from certain publicly available
        reports, statements and schedules filed with the Commission.
(5)     Represents both (i) 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.
(6)     See "Risk Factors - Change of Control Covenant and Liquidation
        Preference of Preferred Stock."

Series C Preferred Stock

The following table sets forth certain information with respect to the
beneficial ownership of the Series C Preferred Stock of the Corporation as of
March 17, 2003, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series C Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                               Number of Shares
     Name (1)                                                                 Beneficially Owned          Percentage (2)
     --------                                                                 ------------------          --------------
<S>                                                                          <C>                         <C>
     E. Kenneth Seiff                                                                 -                         -
     Josephine Esquivel                                                               -                         -
     Alan Kane                                                                        -                         -
     Martin Miller                                                                    -                         -
     Neal Moszkowski (3)                                                              -                         -
     David Wassong (3)                                                                -                         -
     Robert G. Stevens                                                                -                         -
     Patrick C. Barry                                                                 -                         -
     Jonathan B. Morris                                                               -                         -
     Quantum Industrial Partners LDC                                            968.3(4)(6)                   96.8%
     George Soros                                                             1,000.0(5)(6)                   100.0%
     All directors and executive officers as a group (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.


                                       40
<PAGE>

(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock issuable upon the exercise of options or
warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding such
options or warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
Moszkowski and Wassong are the designees of the holders of the Series A and B
Preferred Stock. Messrs. Moszkowski and Wassong disclaim beneficial ownership of
the shares of Series C Preferred Stock beneficially owned by George Soros and
QIP and none of such shares are included in the table above as being
beneficially owned by them.
(4) Represents the 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, may be deemed to have sole voting power and sole
investment power with respect to the QIP C Shares. Accordingly, each of QIHMI,
QIH Management, SFM LLC and Mr. Soros may be deemed to be beneficial owners of
the QIP Shares. Each has their principal office at 888 Seventh Avenue, 33rd
Floor, New York, New York 10106. The foregoing information was derived, in part,
from certain publicly available reports, statements and schedules filed with the
Commission.
(5) Represents both (i) 31.7 shares of Series C Preferred Stock held
in the name of SFMDI (the "SFMDI C Shares") and (ii) the QIP C Shares referenced
in Note 4 above. As managing member of SFMDI, Mr. Soros also may be deemed the
beneficial owner of the SFMDI Shares. The principal office of SFMDI is at 888
Seventh Avenue, 33rd Floor, New York, New York 10106.
(6) See "Risk Factors -Change of Control Covenant and Liquidation Preference of
Preferred Stock."

Series D Preferred Stock

The following table sets forth certain information with respect to the
beneficial ownership of the Series D Preferred Stock of the Corporation as of
March 17, 2003, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series D Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                               Number of Shares
     Name (1)                                                                 Beneficially Owned          Percentage (2)
     --------                                                                 ------------------          --------------
<S>                                                                           <C>                         <C>
     E. Kenneth Seiff                                                                  -                         -
     Josephine Esquivel                                                                -                         -
     Alan Kane                                                                         -                         -
     Martin Miller                                                                     -                         -
     Neal Moszkowski (3)                                                               -                         -
     David Wassong (3)                                                                 -                         -
     Robert G. Stevens                                                                 -                         -
     Patrick C. Barry                                                                  -                         -
     Jonathan B. Morris                                                                -                         -
     Quantum Industrial Partners LDC                                             6,910.319(4)(6)               96.8%
     George Soros                                                                7,136.548(5)(6)              100.0%
     All directors and executive officers as a group (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
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


                                       41
<PAGE>

such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106. Messrs.
Moszkowski and Wassong are the designees of the holders of the Series A and B
Preferred Stock. Messrs. Moszkowski and Wassong disclaim beneficial ownership of
the shares of Series D Preferred Stock beneficially owned by George Soros and
QIP and none of such shares are included in the table above as being
beneficially owned by them.
(4) Represents the 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, may be deemed to have sole voting power and sole
investment power with respect to the QIP D Shares. Accordingly, each of QIHMI,
QIH Management, SFM LLC and Mr. Soros may be deemed to be beneficial owners of
the QIP Shares. Each has their principal office at 888 Seventh Avenue, 33rd
Floor, New York, New York 10106. The foregoing information was derived, in part,
from certain publicly available reports, statements and schedules filed with the
Commission.
(5) Represents both (i) 226.229 shares of Series D Preferred Stock
held in the name of SFMDI (the "SFMDI D Shares") and (ii) the QIP D Shares
referenced in Note 4 above. As managing member of SFMDI, Mr. Soros also may be
deemed the beneficial owner of the SFMDI D Shares. The principal office of SFMDI
is at 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
(6) See "Risk Factors -Change of Control Covenant and Liquidation Preference of
Preferred Stock."

Item 13.  Certain Relationships and Related Transactions

Transactions with Soros Relating to the Loan Facility

In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros issued the Soros Guarantee (as of December
31, 2002, in the amount of $1.5 million) in favor of Rosenthal to guarantee a
portion of the Company's obligations under the Loan Facility, we agreed to
reimburse Soros for any amounts it pays to Rosenthal pursuant to such guarantee
and we granted Soros a subordinated lien on substantially all of our assets,
including our cash balances, in order to secure our reimbursement obligations.
By amendment to the Reimbursement Agreement, on March 17, 2003, the amount of
the Soros Guarantee was increased to $2.0 million. In March 2003, the expiration
date of the Loan Facility was extended to June 30, 2004. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Loan Facility."

In consideration for the issuance of the Soros Guarantee in March 2001, pursuant
to the Reimbursement Agreement we issued to Soros a warrant to purchase 100,000
shares of our Common Stock at an exercise price equal to $0.88 per share,
exercisable at any time prior to September 15, 2011. In consideration for Soros'
agreement to maintain the $1.5 million standby letter of credit until initially
August 15, 2003 and subsequently until November 15, 2003, we issued to Soros, in
March 2002, a warrant to purchase 60,000 shares of our Common Stock at an
exercise price equal to $1.66 per share (the 20 day trailing average of the
closing sale price of our Common Stock on the date of issuance), exercisable at
any time prior to March 30, 2007. By amendment to the Reimbursement Agreement,
on March 17, 2003, the amount of the Soros Guarantee was increased to $2 million
and Soros agreed to maintain the Soros Guarantee until November 15, 2004. In
consideration for Soros' agreement to maintain the Soros Guarantee until
November 15, 2004, we issued to Soros a warrant to purchase 25,000 shares of our
Common Stock at an exercise price equal to $0.78 per share (the 10 day trailing
average of the closing sale price of our Common Stock on the date of issuance),
exercisable at any time prior to March 17, 2013.

Subject to certain conditions, if we default on any of our obligations under the
Loan Facility, Rosenthal has the right to draw upon the Soros Guarantee to
satisfy any such obligations. If and when Rosenthal draws on the Soros
Guarantee, pursuant to the terms of the Reimbursement Agreement, we would have
the obligation to, among other things, reimburse Soros for any amounts drawn
under the Soros Guarantee plus interest accrued thereon. In addition, to the
extent that Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility or at any time that the total amount outstanding
under the Loan Facility exceeds 90% of the Soros Guarantee, we will be required
to issue to Soros a Contingent Warrant to purchase a number of shares of Common
Stock equal to the quotient of (a) any amounts drawn under the Soros Guarantee
and (b) 75% of the average of the closing price of our Common Stock on the ten
days preceding the date of issuance of such warrant. Each


                                       42
<PAGE>

Contingent Warrant will be exercisable for ten years from the date of issuance
at an exercise price equal to 75% of the average closing price of our Common
Stock on the ten days preceding the ten days after the date of issuance.

Under the Loan Facility, Soros has the right to purchase all of our obligations
from Rosenthal at any time during its term. With respect to such Buyout Option,
Soros has the right to request that Rosenthal make a draw under the Soros
Guarantee as consideration to Soros for the purchase of such obligations.

Financing Transactions with Soros

March 2002 Standby Commitment. In March 2002, we entered into an agreement with
Soros, pursuant to which Soros agreed to provide us with up to $4 million (the
"March 2002 Standby Commitment Amount") of additional financing on a standby
basis at any time prior to January 1, 2003, all of which has been funded as
described below. We were permitted to draw down on the 2002 Standby Commitment
Amount only at such time as our total cash balances were less than $1 million.
Such financing was permitted to be made in one or more tranches as determined by
the members of our Board of Directors who are not Soros designees, and any and
all financings made were required to be on terms that were consistent with those
in the market at the time the draw was made for similar investments by investors
similar to Soros in companies similar to us. Subject to certain limitations, the
March 2002 Standby Commitment Amount was to be reduced on a dollar-for-dollar
basis by the gross cash proceeds that we or our subsidiaries received from the
issuance of any equity or convertible securities after March 27, 2002. In
exchange for this commitment, but not as a substitute for additional
consideration that Soros would receive if and when any financing was made
pursuant to the Soros Standby Agreement, we issued to Soros a warrant to
purchase 100,000 shares of Common Stock at an exercise price of $1.68 per share
at any time until March 27, 2007. In connection with the issuance of this
warrant, Soros agreed that the issuance of this warrant would not trigger the
anti-dilution provision of Section 5.8.6 of our certificate of incorporation.

First Drawdown on March 2002 Standby Commitment. In June 2002, Soros invested
$1.9 million in us through the purchase of shares of Common Stock and warrants,
thereby reducing the March 2002 Standby Commitment Amount to $2.1 million. Under
the terms of the transaction, we issued 1,186,573 shares of Common Stock at
$1.57 per share, and warrants to purchase 296,644 shares of Common Stock at any
time during the next five years at an exercise price of $1.88 per share for a
purchase price of $0.125 per warrant.

The June 2002 Soros investment was negotiated as part of an equity financing in
which third party investors would also participate. In particular, one-third
party investor committed to invest approximately $7 million on the same terms
and conditions as those that applied to Soros' investment. However, this third
party investment has not been consummated, and we do not know when or if it will
be consummated. To date, the only funds that we have received from the third
party investor is a good faith deposit, for which we agreed, for a limited
period of time, not to pursue remedies against the third party investor as a
result of its failure to honor its investment commitment. That period has since
expired, and we have commenced an action against the investor. In February 2003,
we obtained summary judgment on our breach of contract claims against the third
party investor. However, under the terms of the summary judgment order, we are
still required to prove the amount of our damages. Litigation is subject to
inherent risks and uncertainties, and there can be no assurance as to the amount
of damages that we will be able to prove. Moreover, given the substantial costs
involved with litigation, there can be no assurance that the amount that we
would be able to collect with respect to any monetary judgment rendered in
connection with such litigation would exceed the costs associated with obtaining
such judgment.

In connection with the June 2002 financing, we agreed to file a registration
statement with the Commission within 45 days of closing, in order to register
the Common Stock issued in the financing, as well as the Common Stock underlying
the warrants. However, given the failure to date of the third party investors to
consummate their investment, Soros has agreed with us to delay the filing of
such registration statement, although we expect that we will be required to file
such registration statement at some point in the future.

As a result of the June 2002 financing, the conversion price of the Series B
Preferred Stock, all of which is held by Soros, automatically decreased from
$2.34 to $1.57. In accordance with EITF 00-27, this reduction in the conversion
price of the Series B Preferred Stock resulted in us recording a beneficial
conversion feature in the approximate amount of $10.2 million as part of our
second quarter financial results. This non-cash charge, which is analogous to a
dividend, resulted in an adjustment to our computation of Loss Per Share.


                                       43
<PAGE>

Second Drawdown on March 2002 Standby Commitment. In August 2002, Soros invested
an additional $2.1 million in us through the purchase of Series 2002 Convertible
Preferred Stock. Under the terms of the deal, we issued 2,100 shares of
newly-designated Series 2002 Convertible Preferred Stock to Soros at a price of
$1,000 per share. The Series 2002 Convertible Preferred Stock has a liquidation
preference of $1,000 per share and is convertible in whole or in part, at the
holder's option, into the type of equity securities sold by us in any subsequent
round of equity financing, at the lowest price per share paid by any participant
in such financing and upon such other terms and conditions as such securities
are sold in such financing. The Series 2002 Convertible Preferred Stock does not
have any fixed dividend rate, and does not provide the holders thereof with any
voting rights, other than with respect to transactions or actions that would
adversely affect the rights, preference, powers and privileges of the Series
2002 Preferred Stock. This $2.1 million invested by Soros following the $1.9
million investment made by Soros in June 2002 completed Soros' obligation under
the $4 million standby commitment established in March 2002.

September 2002 Series C Preferred Stock and Note Financing. In September 2002,
we entered into an agreement with Soros pursuant to which Soros purchased 1,000
shares of the Series C Preferred Stock for $1,000,000 and promissory notes
convertible into Series C Preferred Stock ("Series C Notes") in the aggregate
principal amount of $2,000,000, all for the aggregate purchase price of
$3,000,000. Each share of Series C Preferred Stock has a face value of $1,000
and a liquidation preference equal to the greater of (i) $1,000 plus accrued and
unpaid dividends and (ii) the amount the holder of such share would receive if
it were to convert such share into Common Stock immediately prior to the
liquidation of the Company. The Series C Preferred Stock is convertible, at any
time and from time to time at the option of the holder into Common Stock at the
rate of one to 1,075.27. The conversion price of the Series C Preferred Stock is
subject to an anti-dilution adjustment, pursuant to which, subject to certain
exceptions, to the extent that the Company issues Common Stock or securities
convertible into Common Stock at a price per share less than the Series C
Preferred Stock conversion price in the future, the conversion price of the
Series C Preferred Stock would be decreased so that it would equal the price at
which shares of common stock are sold in the new issuance. Beginning on November
13, 2002, we are entitled to redeem all, but not less than all, of the
outstanding Series C Preferred Stock for cash at the price of, depending upon
the date of such redemption, four times, four and one-half times or five times
the market price of the Common Stock on the date of the initial issuance of the
Series C Preferred Stock. Dividends accrue on the Series C Preferred Stock at an
annual rate equal to 8.0% of the face value and are payable only upon conversion
or redemption of the Series C Stock or upon our liquidation. The Series C
Preferred Stock votes on an as converted basis (except that it was not entitled
to vote with respect to the conversion rights for the Series 2002 Convertible
Preferred Stock and for the Series C Preferred Stock, which were approved by our
other shareholders at our annual meeting in November, 2002.) The Series C Notes
were repaid in connection with the March 2003 Financing.

Interest on the Series C Notes accrued at an annual rate equal to 3.0% on a
cumulative, compounding basis and was payable only upon repayment of the
principal amount, whether at maturity or upon a mandatory or optional
prepayment. The outstanding principal amount of the Series C Notes and all
accrued and unpaid interest was payable in full no later than March 26, 2003.
The Series C Notes were subject to (i) mandatory prepayment upon the occurrence
of certain bankruptcy events, whether voluntary or involuntary, (ii) prepayment
at the option of the holder upon the occurrence of certain events of default,
the sale of all or substantially all of our assets, the merger or consolidation
of the Company into another entity or any change of control of the Company and
(iii) prepayment at our option, at any time or from time to time, upon five days
notice to the holder. The principal amount of and interest accrued on the Series
C Notes were convertible into Series C Preferred Stock, at the option of the
holder and at any time and from time to time, at the rate of $1,000 per share.
Our obligations under the Series C Notes were subordinated to our obligations
under the Rosenthal Financing Agreement although such subordination did not
effect Soros' conversion rights with respect to the Series C Notes.

As a result of the September 2002 financing, the conversion price of the Series
B Preferred Stock, all of which is held by Soros, automatically decreased from
$1.57 to $0.93. In accordance with EITF 00-27, this reduction in the conversion
price of the Series B Preferred Stock resulted in us recording a beneficial
conversion feature in the approximate amount of $5.1 million as part of our
third quarter financial results. This non-cash charge, which is analogous to a
dividend, resulted in an adjustment to our computation of Loss Per Share.

January 2003 Convertible Promissory Note Financing. In January 2003 we issued to
Soros $1 million of demand convertible promissory notes that bore interest at a
rate of 8% per annum and had a maturity date of July 28, 2003 and warrants to
purchase 25,000 shares of our Common Stock, exercisable at any time on or prior
to January 28, 2007 at $1.12 per share. The promissory notes together with any
accrued interest were convertible into equity securities that we might issue in
any subsequent round of financing, at the holder's option, at a price that was
equal to the lowest price per share accepted by any investor in such subsequent
round of financing. Interest on the notes accrued at an annual rate equal to
8.0% on a cumulative,


                                       44
<PAGE>

compounding basis and was payable only upon repayment of the principal amount,
whether at maturity or upon a mandatory or optional prepayment. The outstanding
principal amount of the notes and all accrued and unpaid interest was payable in
full no later than July 28, 2003. The notes were subject to (i) mandatory
prepayment upon the occurrence of certain bankruptcy events, whether voluntary
or involuntary, (ii) prepayment at the option of the holder upon the occurrence
of certain events of default, the sale of all or substantially all of our
assets, the merger or consolidation of the Company into another entity or any
change of control of the Company and (iii) prepayment at our option, at any time
or from time to time, upon five days notice to the holder. The notes together
with any interest that had accrued, were convertible into the type of equity
securities that we issued in any subsequent round of financing, at the holder's
option, at a price equal to the lowest price per share accepted by any investor
in such subsequent round of financing. Our obligations under the notes were
subordinated to our obligations under the Rosenthal Financing Agreement although
such subordination does not effect Soros' conversion rights with respect to the
Series C Notes. As part of the March 2003 Financing, the January 2003 promissory
notes were converted into Series D Preferred Stock.

March 2003 Series D Preferred Stock Financing. In March 2003, we entered into an
agreement with Soros pursuant to which Soros did the following: (i) provided $2
million of new capital by purchasing 2,000 shares of Series D Preferred Stock,
(ii) converted the promissory notes issued to it in the January 2003 Financing
and all of its Series 2002 Preferred Stock into 3,109.425 shares of Series D
Preferred Stock and (iii) purchased 2,027.123 additional shares of Series D
Preferred Stock for approximately $2 million, with such $2 million in additional
proceeds being retained by Soros as payment in full of the Company's obligations
under the demand promissory notes issued to Soros in September 2002.

Each share of Series D Preferred Stock has a face value of $1,000 and a
liquidation preference equal to the greater of (i) $1,000 plus accrued and
unpaid dividends or (ii) the amount the holder of such shares would receive if
it were to convert such shares into Common Stock immediately prior to the
liquidation of the Company. The Series D Preferred Stock is convertible, at any
time and from time to time at the option of the holder into Common Stock at the
rate of one to 1,315.79. The conversion price of the Series D Preferred Stock is
subject to an anti-dilution adjustment, pursuant to which, subject to certain
exceptions, to the extent that the Company issues Common Stock or securities
convertible into Common Stock at a price per share less than the Series D
Preferred Stock conversion price in the future, the conversion price of the
Series D Preferred Stock would be decreased so that it would equal the
conversion price of the new security or the price at which shares of Common
Stock are sold, as the case may be. However, to the extent required by the rules
of the Nasdaq SmallCap Market or any other national securities exchange or
quotation system upon which the Common Stock may be listed from time to time,
until such time as such conversion provisions are approved by the Company's
stockholders, the total number of shares of Common Stock issuable upon
conversion of the Series D Preferred Stock may not exceed 2,204,803 shares
(which represents 19.99% of the Company's currently outstanding Common Stock),
regardless of any adjustment to the Series D Preferred Stock conversion price.

Beginning on November 13, 2004, we are entitled to redeem all, but not less than
all, of the outstanding Series D Preferred Stock for cash at the price of,
depending upon the date of such redemption, four times, four and one-half times
or five times the market price of the Common Stock on the date of the initial
issuance of the Series D Preferred Stock. Dividends accrue on the Series D
Preferred Stock at an annual rate equal to 12% of the face value and are payable
only upon conversion or redemption of the Series D Preferred Stock or upon our
liquidation. The Series D Preferred Stock votes on an as converted basis, except
with respect to approval of the conversion provisions of the Series D Preferred
Stock or any equity securities issued in connection with the fund of the 2003
Commitment Amount.

Additionally, Soros agreed to provide us with up to $1 million in additional
financing on a standby basis at any time prior to January 1, 2004, provided that
our cash balances are less than $1 million. Such financing can be made in one or
more tranches as determined by the members of our Board of Directors who are not
Soros designees, and any and all draws against the 2003 Standby Commitment
Amount shall be effected through the purchase of newly-designated shares of
Series E Preferred Stock on terms and conditions substantially identical to the
Series D Preferred Stock, except that: (1) the conversion price of the Series E
Preferred Stock will be the lower of (a) the average closing price of the Common
Stock on the Nasdaq SmallCap Market for the ten trading days preceding the
issuance of the Series E Preferred Stock and (b) $0.76; and (2) the Series E
Preferred Stock will not be convertible into Common Stock (and will not be
entitled to vote with the Common Stock on matters submitted to a vote of the
holders of the Common Stock) until such time as the Company's stockholders
approve the conversion rights of the Series E Preferred Stock to the extent
required by the rules of the Nasdaq SmallCap Market or any other national
securities exchange or quotation system upon which the Common Stock may be
listed from time to time. Subject to certain limitations, the 2003 Standby
Commitment Amount shall be reduced on a dollar-for-dollar basis by the gross
cash proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 12, 2003. To the
extent that a draw down on the 2003 Standby Commitment Amount results in the
conversion price of the Series E Preferred


                                       45
<PAGE>

Stock being less than $0.76, Soros has agreed to waive its right to readjust the
conversion price on the Series B, C and D Preferred Stock in connection with the
issuance of the Series E Preferred Stock.

As a result of the March 2003 Financing, the conversion price of the Series B
Preferred Stock and the Series C Preferred Stock, all of which is held by Soros,
automatically decreased from $0.93 to $0.76. In accordance with EITF 00-27, the
reduction in the conversion price of the Series C Preferred Stock will result in
us recording a beneficial conversion feature in the approximate amount of
$225,000. This non-cash charge, which is analogous to a dividend, will result in
an adjustment to our computation of Loss Per Share in the first quarter of 2003.

Other Related Party Transactions. Until May 2002, Robert G. Stevens, one of our
directors, also served as one of our Executive Vice Presidents. In connection
with the termination of his employment, we agreed to pay Growth Insight, a
corporation wholly owned by Mr. Stevens, $7,000 per month in consideration of
consulting services to be performed from June 1, 2002 to November 30, 2002.

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

Item 14.  Controls and Disclosures

Within the 90 days prior to the date of this Form 10-K, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, our President and Chief Executive Officer along with our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in our
periodic SEC filings. There have been no significant changes in our internal
controls or in other factors which could significantly affect internal controls
subsequent to the date we carried out our evaluation.

Item 15.  Exhibits and Reports on Form 8-K

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

   EXHIBIT NO.    DESCRIPTION
   -----------    -----------

3.1 (g)           Certificate of Incorporation of the Company.

3.2 (g)           By-Laws of the Company.

3.3 (j)           Certificate of Powers, Designations, Preferences and Rights of
                  Series 2002 Preferred Stock of the Registrant

3.4               Certificate of Powers, Designations, Preferences and Rights of
                  Series C Preferred Stock of the Registrant (incorporated by
                  reference to Exhibit 99.3 to the Company's report on Form 8-K,
                  dated October 1, 2002)

3.5               Certificate of Powers, Designations, Preferences and Rights of
                  Series D Preferred Stock of the Registrant

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

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

10.3 (c)          Employment Agreement, dated as of November 3, 1999, by and
                  between the Company and Robert G. Stevens.

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

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

10.6 (f)          Trademark Purchase Agreement, dated as of September 14,
                  1998, by and between the Company and Klear


                                       46
<PAGE>

                  Knit Sales Inc.

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

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

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

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

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

+10.12 (e)        Service Agreement by and between the Company and
                  Distribution Associates, Inc., dated July 27, 2000.

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

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

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

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

10.17 (g)         Reimbursement Agreement, dated March 30, 2001, between the
                  Company, Quantum Industrial Partners LDC and SFM Domestic
                  Investment LLC.

10.18 (g)         Warrant, dated March 30, 2001, issued to Rosenthal &
                  Rosenthal, Inc.

10.19 (g)         Warrant, dated March 30, 2001, issued to Quantum
                  Industrial Partners LDC.

10.20 (g)         Warrant, dated March 30, 2001, issued to SFM Domestic
                  Investments LLC.

10.21 (h)         Promissory Note dated April 27, 2001 by and between the
                  Company and E. Kenneth Seiff dated April 27, 2001.

10.22 (i)         Demand Promissory Note, dated as of December 15, 2001,
                  issued to Quantum Industrial Partners LDC.

10.23 (I)         Demand Promissory Note, dated as of December 15, 2001,
                  issued to SFM Domestic Investments LLC.

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

10.25 (i)         Standby Commitment Agreement, dated March 27, 2002, by and
                  among the Company, Quantum Industrial Partners LDC and SFM
                  Domestic Investments LLC.

+10.26 (i)        Software License and Services Agreement, dated March 12,
                  2002, by and among the Company and Blue Martini Software, Inc.

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

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

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

10.30 (i)         Amendment No. 1 to Reimbursement Agreement, dated March
                  22, 2002, between the Company and Quantum Industrial Partners
                  LDC.

10.31 (i)         Amendment to warrant dated March 22, 2002, issued to
                  Rosenthal & Rosenthal, Inc.


                                       47
<PAGE>

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

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

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

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

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

10.37 (j)         Series 2002 Preferred Stock Purchase Agreement, dated August
                  12, 2002, by and between the Registrant and the investors
                  listed on Schedule 1 thereto.

10.38 (l)         Series C Preferred Stock and Note Purchase Agreement, dated
                  September 27, 2002, by and between the Registrant and the
                  investors listed on Schedule 1 thereto.

10.39             Employment Agreement, dated as of July 31, 2002, by and
                  between the Company and Patrick Barry.

10.40             Employment Agreement, dated as of July 31, 2002, by and
                  between the Company and Jonathan Morris.

10.41             Amendment No. 4 to Financing Agreement, dated December 19,
                  2002, between the Company and Rosenthal & Rosenthal, Inc.

10.42             Employment Agreement, dated as of December 31, 2002, by and
                  between the Company and E. Kenneth Seiff.

10.43             Convertible Demand Promissory Note, dated as of January 28,
                  2003, issued to Quantum Industrial Partners LDC.

10.44             Convertible Demand Promissory Note, dated as of January 28,
                  2003, issued to SFM Domestic Investments LLC.

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

10.46             Warrant No. 1 dated January 28, 2003, issued to Quantum
                  Industrial Partners LDC.

10.47             Warrant No. 2 dated January 28, 2003, issued to SFM Domestic
                  Investments LLC.

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

10.49             Amendment No. 5 to Financing Agreement, dated March 17, 2003,
                  between the Company and Rosenthal & Rosenthal, Inc.

10.50             Amendment No. 2 to Reimbursement Agreement, dated March 10,
                  2003, between the Company and Quantum Industrial Partners LDC.

10.51             Warrant No. 4 dated March 17, 2003, issued to Quantum
                  Industrial Partners LDC.

10.52             Warrant No. 5 dated March 17, 2003, issued to SFM Domestic
                  Investments LLC.

21.1              Subsidiaries of the Registrant.

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

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


                                       48
<PAGE>

(a)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-QSB for the quarterly period ended March 31, 1997.
(b)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-QSB for the quarterly period ended June 30, 1999.
(c)     Incorporated by reference to the Company's Annual report filed on Form
        10-KSB for the year ended December 31, 1999.
(d)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-Q for the quarterly period ended June 30, 2000.
(e)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-Q for the quarterly period ended September 30, 2000.
(f)     Incorporated by reference to the Company's report filed on Form 8-K,
        dated September 15, 1998.
(g)     Incorporated by reference to the Company's Annual report filed on
        Form 10-K for the year ended December 31, 2000.
(h)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-Q for the quarterly period ended March 31, 2001.
(i)     Incorporated by reference to the Company's Annual report filed on Form
        10-K for the year ended December 31, 2001.
(j)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-Q for the quarterly period ended June 30, 2002.
(k)     Incorporated by reference to the Company's Quarterly report filed on
        Form 10-Q for the quarterly period ended September 30, 2002.
(l)     Incorporated by reference to the Company's report on Form 8-K, dated
        October 1, 2002.

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

(d) Reports on Form 8-K.

     None.


                                       49
<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

March 24, 2003

                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>
<S>     <C>
Signature                                       Title                                              Date
---------                                       -----                                              ----

/s/ E. Kenneth Seiff
--------------------
E. Kenneth Seiff                                Chairman of the Board of Directors, Chief          March 24, 2003
                                                Executive Officer, President,
                                                and Treasurer (Principal Executive Officer)

/s/ Patrick C. Barry
--------------------
Patrick C. Barry                                Chief Financial Officer and Chief Operating        March 24, 2003

                                                Officer (Principal Accounting Officer)

/s/ Josephine R. Esquivel
-------------------------
Josephine R. Esquivel                           Director                                            March 24, 2003


/s/ Alan Kane
-------------
Alan Kane                                       Director                                            March 24, 2003


/s/ Martin Miller
-----------------
Martin Miller                                   Director                                            March 24, 2003


/s/ Robert G. Stevens
---------------------
Robert G. Stevens                               Director                                            March 24, 2003


/s/ Neal Moszkowski
-------------------
Neal Moszkowski                                 Director                                            March 24, 2003


/s/ David Wassong
-----------------
David Wassong                                   Director                                            March 24, 2003
</TABLE>


                                       50
<PAGE>

                                  CERTIFICATION

         I, E. Kenneth Seiff, certify that:

         1. I have reviewed this annual report on Form 10-K of Bluefly, Inc;

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

                  b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

                  c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

                  a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date  March 24, 2003                                 /s/ E. Kenneth Seiff
                                                     --------------------
                                                     E. Kenneth Seiff
                                                     Chief Executive Officer


                                       51
<PAGE>

                                  CERTIFICATION

         I, Patrick C. Barry, certify that:

         1. I have reviewed this annual report on Form 10-K of Bluefly, Inc;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

                  b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

                  c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

                  a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date  March 24, 2003                                 /s/ Patrick C. Barry
                                                     --------------------
                                                     Patrick C. Barry
                                                     Chief Financial Officer


                                       52