================================================================================

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

                                    FORM 10-Q

(Mark One)

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

       For the quarterly period ended March 31, 2004

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

       For the transition period from ______ to ______

                        Commission File Number: 001-14498

                                   ----------

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

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

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

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

                                   ----------

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

As of April 28, 2004, the issuer had outstanding 15,565,385 shares of Common
Stock, $.01 par value.

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                                  BLUEFLY, INC.
                                TABLE OF CONTENTS



                                                                                          PAGE
                                                                                          ----
                                                                                        
Part I.  Financial Information

Item 1.  Financial Statements

         Consolidated Condensed Balance Sheets as of March 31, 2004
                and December 31, 2003 (unaudited)                                           3

         Consolidated Condensed Statements of Operations for the three months ended
                March 31, 2004 and 2003 (unaudited)                                         4

         Consolidated Condensed Statements of Cash Flows for the three months ended
                March 31, 2004 and 2003 (unaudited)                                         5

         Notes to Consolidated Condensed Financial Statements                               6


Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                                    9

Item 3.  Quantitative and Qualitative Disclosures About Market Risk                        15

Item 4.  Controls and Disclosures                                                          16

Part II. Other Information                                                                 16

Item 1.  Legal Proceedings                                                                 16

Item 2.  Changes in Securities and Use of Proceeds                                         16

Item 6.  Exhibits and Reports on Form 8-K                                                  16

Signature                                                                                  18




PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

                                  BLUEFLY, INC.
               CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)



                                                                                                MARCH 31,       DECEMBER 31,
                                                                                                  2004              2003
                                                                                             --------------    --------------
                                                                                                         
                                     ASSETS
Current assets
  Cash and cash equivalents                                                                  $   12,081,000    $    7,721,000
  Inventories, net                                                                               10,482,000        11,340,000
  Accounts receivable, net of allowance for doubtful accounts                                     1,438,000         1,157,000
  Prepaid expenses                                                                                  195,000           253,000
  Other current assets                                                                              535,000           453,000
                                                                                             --------------    --------------
     Total current assets                                                                        24,731,000        20,924,000

Property and equipment, net                                                                       1,525,000         1,659,000

Other assets                                                                                        411,000           415,000
                                                                                             --------------    --------------
     Total assets                                                                            $   26,667,000    $   22,998,000
                                                                                             ==============    ==============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable                                                                           $    4,003,000    $    3,156,000
  Accrued expenses and other current liabilities                                                  3,046,000         3,869,000
  Deferred revenue                                                                                1,577,000         1,252,000
  Warrant liability                                                                                 835,000                --
  Notes payable to related party shareholders                                                       182,000           182,000
                                                                                             --------------    --------------
     Total current liabilities                                                                    9,643,000         8,459,000

Note payable to related party shareholders                                                        4,000,000         4,000,000
Long-term interest payable to related party shareholders                                            278,000           159,000
Long-term capital lease liability                                                                    20,000           101,000
                                                                                             --------------    --------------
     Total liabilities                                                                           13,941,000        12,719,000
                                                                                             --------------    --------------

Commitments and contingencies

Shareholders' equity
  Series A Preferred stock - $.01 par value; 500,000 shares authorized, 460,000
   issued and outstanding as of March 31, 2004 and December 31, 2003, respectively
   (liquidation preference: $9.2 million plus accrued dividends of $4.2 million and
   $4.0 million as of March 31, 2004 and December 31, 2003, respectively)                             5,000             5,000
  Series B Preferred stock - $.01 par value; 9,000,000 shares authorized,
   8,889,414 shares issued and outstanding as of March 31, 2004 and December 31,
   2003, respectively (liquidation preference: $30 million plus accrued dividends
   of $5.7 million and $5.2 million as of March 31, 2004 and December 31, 2003,
   respectively)                                                                                     89,000            89,000
  Series C Preferred stock - $.01 par value; 3,500 shares authorized and 1,000
   shares issued and outstanding as of March 31, 2004 and December 31, 2003,
   respectively (liquidation preference: $1 million plus accrued dividends of
   $124,000 and $102,000 as of March 31, 2004 and December 31, 2003, respectively)                       --                --
  Series D Preferred stock - $.01 par value; 7,150 shares authorized, 7,136.548
   issued and outstanding as of March 31, 2004 and December 31, 2003 (liquidation
   preference: $7.1 million plus accrued dividends of $896,000 and $678,000 as of
   March 31, 2004 and December 31, 2003, respectively)                                                   --                --
  Series E Preferred stock - $.01 par value; 1,000 shares authorized, issued and
   outstanding as of March 31, 2004 and December 31, 2003, respectively
   (liquidation preference: $1.0 million plus accrued dividends of $103,000 and
   $74,000 as of March 31, 2004 and December 31, 2003, respectively)                                     --                --
  Common stock - $.01 par value; 92,000,000 shares authorized and 14,565,385 and
   12,894,166 shares issued and outstanding as of March 31, 2004 and December 31,
   2003, respectively                                                                               146,000           129,000
  Additional paid-in capital                                                                    105,952,000       102,392,000
  Accumulated deficit                                                                           (93,466,000)      (92,336,000)
                                                                                             --------------    --------------
     Total shareholders' equity                                                                  12,726,000        10,279,000
                                                                                             --------------    --------------
     Total liabilities and shareholders' equity                                              $   26,667,000    $   22,998,000
                                                                                             ==============    ==============


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

                                        3


                                  BLUEFLY, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)



                                                                           THREE MONTHS ENDED
                                                                                MARCH 31,
                                                                    --------------------------------
                                                                         2004              2003
                                                                    --------------    --------------
                                                                                
Net sales                                                           $   11,114,000    $    8,257,000
Cost of sales                                                            7,332,000         6,400,000
                                                                    --------------    --------------
  Gross profit                                                           3,782,000         1,857,000

Selling, marketing and fulfillment expenses                              3,449,000         2,412,000
General and administrative expenses                                      1,759,000         1,203,000
                                                                    --------------    --------------
   Total operating expenses                                              5,208,000         3,615,000

Operating loss                                                          (1,426,000)       (1,758,000)

Interest and other income                                                  456,000             6,000
Interest expense                                                          (160,000)          (88,000)
                                                                    --------------    --------------

Net loss                                                            $   (1,130,000)   $   (1,840,000)

Preferred stock dividends                                               (1,024,000)         (638,000)
Deemed dividend related to beneficial conversion feature on
 Series C Preferred Stock                                                       --          (225,000)
                                                                    --------------    --------------

Net loss available to common shareholders                           $   (2,154,000)   $   (2,703,000)
                                                                    ==============    ==============

Basic and diluted loss per common share                             $        (0.15)   $        (0.25)
                                                                    ==============    ==============
Weighted average common shares outstanding
(basic and diluted)                                                     14,314,722        10,982,390
                                                                    ==============    ==============


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

                                        4


                                  BLUEFLY, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)



                                                                                                    THREE MONTHS ENDED
                                                                                                         MARCH 31,
                                                                                             --------------------------------
                                                                                                  2004              2003
                                                                                             --------------    --------------
                                                                                                         
Cash flows from operating activities
  Net loss                                                                                   $   (1,130,000)   $   (1,840,000)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                                   362,000           402,000
    Provisions for returns                                                                         (588,000)         (421,000)
    Allowance for doubtful accounts                                                                  38,000            50,000
    Write-down of inventory                                                                         100,000            12,000
    Change in value of warrants                                                                    (261,000)
    Changes in operating assets and liabilities:
    (Increase) decrease in
      Inventories                                                                                   758,000           191,000
      Accounts receivable                                                                          (319,000)         (369,000)
      Prepaid expenses                                                                               58,000             1,000
      Other current assets                                                                          (82,000)          (15,000)
    Increase (decrease) in
      Accounts payable                                                                              847,000           348,000
      Accrued expenses and other current liabilities                                               (245,000)         (705,000)
      Long-term interest payable to related party shareholders                                      119,000             4,000
      Deferred revenue                                                                              325,000           160,000
                                                                                             --------------    --------------
  Net cash used in operating activities                                                             (18,000)       (2,182,000)
                                                                                             --------------    --------------

Cash flows from investing activities
  Purchase of property and equipment                                                               (224,000)          (44,000)
                                                                                             --------------    --------------
Net cash used in investing activities                                                              (224,000)          (44,000)
                                                                                             --------------    --------------
Cash flows from financing activities
  Net proceeds from January 2004 Financing                                                        4,577,000                --
  Net proceeds from exercise of stock options                                                        96,000                --
  Proceeds from issuance of Notes Payable (January 2003 Financing)                                       --         1,000,000
  Proceeds from sale of Series D Preferred Stock                                                         --         2,000,000
  Payments of capital lease obligation                                                              (71,000)          (47,000)
                                                                                             --------------    --------------
Net cash provided by financing activities                                                         4,602,000         2,953,000
                                                                                             --------------    --------------

Net increase in cash and cash equivalents                                                         4,360,000           727,000
Cash and cash equivalents - beginning of period                                                   7,721,000         1,749,000
                                                                                             --------------    --------------
Cash and cash equivalents - end of period                                                    $   12,081,000    $    2,476,000
                                                                                             ==============    ==============

Supplemental schedule of non-cash investing and financing activities:
  Exchange of note for equity                                                                            --    $    2,027,000
                                                                                             --------------    ==============
  Conversion of debt to equity                                                                           --    $    1,009,000
                                                                                             ==============    ==============
  Deemed dividend related to beneficial conversion feature on Series C Preferred Stock                   --    $      225,000
                                                                                             ==============    ==============
  Warrants issued to related party shareholders                                                          --    $       43,000
                                                                                             ==============    ==============
  Interest paid                                                                              $        7,000    $       15,000
                                                                                             ==============    ==============


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

                                        5


                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 MARCH 31, 2004

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnote
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations of any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's Form 10-K/A for
the year ended December 31, 2003.

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 on its ability to
establish profitable operations and/or raise additional financing through public
or private debt or equity financing, or other sources to fund operations. The
Company believes that its current funds, together with working capital, will be
sufficient to enable it to meet its planned expenditures through December 31,
2004. The Company may seek additional equity or debt financing to maximize the
growth of its business or if anticipated operating results are not achieved. If
such financings are not available on terms acceptable to the Company, and/or the
Company does not achieve its sales plan, future operations will need to be
modified, scaled back or discontinued.

NOTE 2 - THE COMPANY

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

NOTE 3 - JANUARY 2004 FINANCING

On January 12, 2004, the Company completed a private placement (the "New
Financing") pursuant to which it raised $5,000,000. Under the terms of the deal,
the Company issued 1,543,209 shares of Common Stock at $3.24 per share, which
was 90% of the trailing five-day average of the Company's volume-weighted stock
price as of December 29, 2003, the date that a preliminary agreement was reached
as to the pricing of the deal. The Company also issued the new investors
warrants to purchase 385,801 shares of Common Stock at any time during the next
five years at an exercise price equal to $3.96 per share.
After professional fees and finders fees paid to brokers, the net proceeds were
approximately $4,577,000.

In accordance with EITF 00-19, the Company accounted for the warrants issued in
January 2004 at fair market value and classified the warrants as a liability
because the Company may be required to make cash payments to the investors who
purchased the warrants in the event that the registration statement covering the
offer and sale of the shares underlying the warrants were to no longer be
effective. The Company uses the Black-Scholes option pricing method (assumption:
volatility 147%, risk free rate 3.76%, two year expected life and zero dividend
yield) to calculate the value of the warrants. At January 12, 2004, the date of
the transaction, the warrants had a value of $1,096,000. The value of the
warrants will be marked to market each reporting period as a derivative gain or
loss until the warrants are exercised or expire, or once the potential cash
payments to the investors are no longer considered significant. At March 31,
2004, the value of the warrants had decreased from $1,096,000 to $835,000, and,
accordingly the Company recognized $261,000 of other income for the quarter
ended March 31, 2004.

Upon exercise or expiration of each of the warrants, or once the potential cash
payments to the counterparty are no longer considered significant, the related
liability will be reclassified to additional paid-in-capital. As of March 31,
2004, there were 385,801 warrants outstanding.

                                        6


                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 MARCH 31, 2004

The potential cash payments that require the warrants to be classified as a
liability under EITF 00-19 result from provisions in the stock purchase
agreement that require the Company to maintain the effectiveness of the
registration statement covering the offer and sale of the shares underlying the
warrant until at least January 11, 2005. In the event that the registration
statement is not effective for more than 45 days during that period, the Company
is required to pay liquidated damages equal to 0.0333% of the purchase price per
day for the first 30 days that the registration statement is not effective and
liquidated damages equal to 0.0667% of the purchase price for each day
thereafter that the registration statement is not effective, to and including
January 11, 2005. Based on this formula, the maximum penalty that the Company
could have been required to pay as of March 31, 2004 was approximately 15% of
the purchase price. Assuming that the Company maintains the effectiveness of the
registration statement through June 17, 2004, the maximum penalty that could be
incurred under this formula as of that date would be less than 10% of the
purchase price. Based on current accounting guidance, the Company believes that
the potential cash payments will no longer be considered significant at that
time. Assuming that such potential cash payments are, in fact, no longer
considered significant at that time, and no warrants are exercised prior to that
time, the amount by which $835,000 (the value of the warrants as of March 31,
2004) is less than or exceeds the value of the warrants as of such date will be
included as income or loss, as the case may be, in the Company's statement of
operations for the three and six month periods ended June 30, 2004, and the
related liability will be reclassified to additional paid-in-capital as of such
date.

In January 2004, the Company also extended the maturity dates on the Convertible
Promissory Notes issued to affiliates of Soros Private Equity Partners, LLC that
collectively own a majority of its capital stock (collectively, "Soros") in July
and October 2003 (the "Notes"). The maturity dates of the Notes, which were
originally January and April 2004, respectively, were each extended to March 1,
2005. In February 2004, the maturity date of the Notes was further extended to
May 1, 2005.

NOTE 4 - FINANCING AGREEMENT

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

The Financing Agreement was amended in April 2004 to: (i) extend the term until
March 30, 2005; (ii) substitute $1.25 million of cash collateral pledged by the
Company for the $2.0 million standby letter of credit previously provided by
Soros as collateral security for the Company's obligations under the Loan
Facility; (iii) decrease the maximum amount available under the Loan Facility
from $4.5 million to $4.0 million; (iv) increase the tangible net worth
requirement to $7.0 million; (v) increase the working capital requirement to
$6.0 million; and (vi) increase the minimum cash balance that the Company is
required to maintain to $750,000 (exclusive of the $1.25 million in cash
collateral).

As of March 31, 2004, the maximum availability under the Loan Facility was
approximately $4.0 million of which approximately $2.4 million was committed,
leaving approximately $1.6 million available against the Loan Facility.

NOTE 5 - LOSS PER SHARE

The Company has determined Loss Per Share in accordance with Statement of
Financial Accounting Standards ("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.

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



             Security                    March 31, 2004    Exercise Prices      March 31, 2003     Exercise Prices
             --------                    --------------    ---------------      --------------     ---------------
                                                                                       
             Options                          9,087,447    $0.69 - $16.60           9,570,412      $0.69 - $16.60
             Warrants                         1,704,945    $0.78 - $ 9.08           1,119,144      $0.78 -  $9.08
             Preferred Stock                 43,323,430*                           42,057,813*
             Convertible Notes                       --**                                  --


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

     ** Excludes debt issued in connection with the July 2003 financing and
        October 2003 financing, which is currently not convertible into Common
        Stock.

                                        7


                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 MARCH 31, 2004

NOTE 6 -  STOCK BASED COMPENSATION

The Company applies Statement of Financial Accounting Standards No. ("SFAS") No.
148 "Accounting for Stock Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123", SFAS No. 123 "Accounting for Stock Based
Compensation," and FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("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 quarters ended
2004 and 2003, because the exercise price of employee stock options equals or
exceeds the market price of the underlying stock on the date of grant. Had
compensation expense for the Plan been determined consistent with the provisions
of SFAS No. 123, the effect on the Company's basic and diluted net loss per
share would have been as follows:



                                                                  March 31, 2004    March 31, 2003
                                                                  --------------    --------------
                                                                              
Net loss, as reported                                             $   (1,130,000)   $   (1,840,000)
Deduct: total stock-based employee compensation
        expense determined under fair value based
        method for all awards                                           (742,000)       (1,142,000)
                                                                  --------------    --------------
Pro forma, net loss                                                   (1,872,000)       (2,982,000)

Loss per share:
   Basic and diluted, as reported                                 $        (0.15)   $        (0.25)
Basic and diluted, pro forma                                      $        (0.20)   $        (0.35)


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

NOTE 7 - OTHER INCOME

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

In addition, as discussed in Note 3 above, the Company recognized $261,000 of
other income for the quarter ended March 31, 2004

                                        8


                                  BLUEFLY, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 MARCH 31, 2004

to adjust a liability associated with warrants issued by the Company to its fair
value as of March 31, 2004.

NOTE 8 - RECLASSIFICATIONS

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

Bluefly, Inc., a Delaware corporation, is 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. Bluefly.com, our Web site, was launched in September 1998.

Our net sales increased approximately 35% to $11,114,000 for the quarter ended
March 31, 2004 from $8,257,000 for the first quarter ended March 31, 2003.

Our gross margin increased to 34.0% in the first quarter of 2004 from 22.5% in
the first quarter of 2003. Gross margin during the first quarter of 2003 was
significantly lower than it had been historically due to our decision to turn
more of our out-of-season merchandise, as well as inventory items that we were
particularly deep in, into cash that could be used to purchase new inventory,
rather than holding the inventory for the next season. Given our stronger
balance sheet, we do not expect to face the same issues in 2004 and,
accordingly, we believe that our 2002 first quarter gross margin level of 32.7%
provides a more useful comparison point. Our 34% gross margin level in the first
quarter of 2004 represents an improvement over 2002 levels, and we believe that
our margins for 2004 as a whole will be generally consistent with the first
quarter. Of course, our gross margin is dependent upon a number of factors,
including our ability to forecast demand and fashion trends accurately, and,
accordingly, there can be no assurance that we will meet any particular margin
level.

Our customer acquisition costs increased to $10.72 per customer in the first
quarter of 2004, from $5.26 per customer in the first quarter of 2003 because we
were more aggressive in our customer acquisition efforts. On average, the
positive contribution to overhead that we generate from a customer's purchase
exceeds our current customer acquisition costs by a significant margin.
Accordingly, we believe that it may be prudent to continue to be more aggressive
in acquiring customers (even though it may increase our customer acquisition
costs in 2004 and beyond) in order to acquire larger numbers of customers with
profitable ordering patterns.

Our reserve for returns and credit card chargebacks increased to 37% in the
first quarter of 2004 from 36.7% in the first quarter of 2003. On the whole, our
reserve for returns and credit card chargebacks has risen for the past three
years, from 32% in 2001, to 36% in 2002 to 37% in 2003 as a result of increasing
return rates. The increase in return rates has primarily been driven by shifts
in our merchandise mix. However, we believe that the increase in return rates is
more than offset by higher gross margins and average order sizes that have been
generated by this shift in merchandise mix. While we are testing initiatives to
reduce our return rates, we believe that the overall shift in merchandise mix
has been beneficial to the overall gross profit realized per order. Accordingly,
we do not expect return rates to decrease to 2001 levels in the near term.

From time to time, a portion of our inventory consists of out-of-season
merchandise that we either purchased with the intention of holding for the
appropriate season or were unable to sell in a prior season and have determined
to hold for the next selling season, subject (in some cases) to appropriate
mark-downs.

At March 31, 2004, we had an accumulated deficit of $93,466,000, of which
approximately $29,000,000 was the result of non-cash beneficial conversion
charges incurred in connection with the reduction of the conversion price of the
Company's Preferred Stock. 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,

                                        9


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

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

CRITICAL ACCOUNTING POLICIES

Management Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for sales returns, the recoverability of inventories and deferred tax
valuation allowances. Actual amounts could differ significantly from these
estimates.

Revenue Recognition

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

     .    A customer executes an order via our website.

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

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

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

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

Provision for Returns and Doubtful Accounts

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

Inventory Valuation

Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and in
some instances use markdowns below cost to clear merchandise. Markdowns below
cost 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.

                                       10


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

Deferred Tax Valuation Allowance

We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
realized in income in the period that included the enactment date. We have
assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event that we were to determine
that we would be able to realize our deferred tax assets, an adjustment to the
deferred tax valuation allowance would increase income in the period such
determination is made.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2003

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



                                                                     2004                  2003                  2002
                                                                     ----                  ----                  ----
                                                                         As a % of             As a % of              As a % of
                                                                         Net Sales             Net Sales              Net Sales
                                                                                                       
Net sales                                                      $ 11,114      100.0%  $  8,257      100.0%  $  7,646      100.0%
Cost of sales                                                     7,332       66.0%     6,400       77.5%     5,146       67.3%
                                                               --------              --------              --------
        Gross profit                                              3,782       34.0%     1,857       22.5%     2,500       32.7%

Selling, marketing and fulfillment expenses                       3,449       31.0%     2,412       29.2%     2,436       31.9%
General and administrative expenses                               1,759       15.8%     1,203       14.6%     1,062       13.9%
                                                               --------              --------              --------
        Total operating expenses                                  5,208       46.8%     3,615       43.8%     3,498       45.8%

Operating loss                                                   (1,426)     (12.8)%   (1,758)     (21.3)%     (998)     (13.1)%
Interest (expense) and other income, net                            296        2.7%       (82)      (1.0)%      (67)      (0.9)%
                                                               --------              --------              --------

        Net loss                                                 (1,130)     (10.1)%   (1,840)     (22.3)%   (1,065)     (13.9)%


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 three months ended March 31st, as indicated below:



                                                                                      2004         2003         2002
                                                                                      ----         ----         ----
                                                                                                    
Average Order Size (including shipping & handling)                                 $   189.56   $   167.20   $   161.76
Average Order Size Per New Customer (including shipping & handling)                $   166.90   $   153.01   $   144.73
Average Order Size Per Repeat Customer  (including shipping & handling)            $   202.67   $   175.18   $   171.53

New Customers Added during the Period                                                  33,335       27,031       24,873
Revenue from Repeat Customers as a % of total Revenue                                      68%          67%          67%
Customer Acquisition Costs                                                         $    10.72   $     5.26   $     9.40


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.

Net sales: Gross sales for the three months ended March 31, 2004 increased by
over 35% to $17,650,000, from $13,044,000 for the three months ended March 31,
2003. For the three months ended March 31, 2004, we recorded a provision for
returns and credit card chargebacks and other discounts of $6,536,000, or
approximately 37.0% of gross sales. For the three months ended March 31, 2003,
the provision for returns and credit card chargebacks and other discounts was
$4,787,000, or approximately 36.7% of gross

                                       11


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

sales. The slight increase in this provision as a percentage of gross sales
resulted from an increase in the return rate. The increase was primarily caused
by a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates. However, we believe that this
increase in return rates has been more than offset by the higher gross margins
and average order sizes that have been generated by this shift in merchandise
mix.

After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended March 31, 2004 were $11,114,000. This represents an increase of
approximately 35% compared to the three months ended March 31, 2003, in which
net sales totaled $8,257,000. The growth in net sales resulted from both an
increase in the number of new customers acquired (approximately 23% higher
compared to first quarter 2003) and an increase in average order size
(approximately 13% higher compared to the first quarter 2003). For the three
months ended March 31, 2004 revenue from shipping and handling (which is
included in net sales) increased by 34% to $837,000 from $623,000 for the
quarter ended March 31, 2003. Revenue as a whole increased at a slightly higher
rate than shipping and handling revenue because of the increase in average order
size.

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 three months ended March 31, 2004
totaled $7,332,000, resulting in gross margin of approximately 34%. Cost of
sales for the three months ended March 31, 2003 totaled $6,400,000, resulting in
gross margin of 22.5%. Gross profit increased by over 103%, to $3,782,000 for
the three months ended March 31, 2004 compared to $1,857,000 for the three
months ended March 31, 2003. The growth in gross margin is primarily the result
of increased product margins. In the first quarter of 2003, lower gross margin
resulted primarily from our decision to turn more of our out-of-season
merchandise, as well as inventory items that we were particularly deep in, into
cash that could be used to purchase new inventory, rather than holding the
inventory for the next season. Because we currently have a significantly
stronger balance sheet than we did during a large part of 2003, we do not expect
to face the same issues in 2004. In addition, our merchandise strategy is now
focused on offering the most current trends, which allows us to generate a
higher product margin while still providing significant value to our customers.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 38% in the first three months of 2004
compared to the first three months of 2003. Selling, marketing and fulfillment
expenses were comprised of the following:



                          Three Months Ended    Three Months Ended    Percentage Difference
                            March 31, 2004        March 31, 2003       increase (decrease)
                          ------------------    ------------------    ---------------------
                                                                            
    Marketing                   $    579,000          $    260,000                   122.7%
    Operating                      1,501,000             1,135,000                    32.2%
    Technology                       986,000               715,000                    37.9%
    E-Commerce                       383,000               302,000                    26.8%
                                ------------          ------------
                                $  3,449,000          $  2,412,000                    43.0%


As a percentage of net sales, our selling, marketing and fulfillment expenses
increased slightly to 31.0% for the three months ended March 31, 2004 from 29.2%
in the three months ended March 31, 2003. The increase in selling, marketing and
fulfillment expenses as a percentage of net sales resulted from an increase of
approximately 123% in marketing expenses.

Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. Marketing expenses
increased by a higher percentage than revenue because of a 104% increase in
customer acquisition cost. Customer acquisition costs increased to $10.72 per
customer for the three months ended March 31, 2004, from $5.26 per customer for
the three months ended March 31, 2003 because we were more aggressive in our
customer acquisition efforts (acquiring over 23% more new customers in the first
quarter of 2004 than we acquired in the first quarter of 2003). On average, the
positive contribution to overhead that we generate from a customer's purchase
exceeds our current customer acquisition costs by a significant margin.
Accordingly, we believe that it may be prudent to continue to be more aggressive
in acquiring customers (even thought it may increase our customer acquisition
costs in 2004 and beyond) in order to acquire larger numbers of customers with
profitable ordering patterns.

                                       12


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first three months of 2004 by approximately 32% compared to the
first three months of 2003 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit card fees). The increase in operating expenses was largely the result of
costs associated with our temporary clearance store, which closed in March.

Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web Site hosting. For the three months ended March 31,
2004 technology expenses increased by approximately 38% compared to the three
months ended March 31, 2003. This increase resulted from an increase in
headcount and salary related expenses, an increase in web hosting expense, as
well as an increase in depreciation expense related to new purchases. During the
first quarter of 2004 there were 15 people in the department compared to 11 in
the first quarter of 2003. We believe that our headcount in the technology
department will continue to increase throughout the year, as we intend to invest
in the roll-out of new features that drive the performance of our business.

E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the three months ended March 31, 2004, this
amount increased by approximately 27% as compared to the three months ended
March 31, 2003, primarily due to an increase in salary related expenses as well
as an increase in expenses associated with outside research tools. We believe
that our increased investment in the e-commerce group played a key role in the
growth of our business during the first quarter, and we intend to continue to
invest in this area throughout the year.

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 three months ended
March 31, 2004 increased by approximately 46% to $1,759,000 as compared to
$1,203,000 for the three months ended March 31, 2003. The increase in general
and administrative expenses was primarily the result of increased salary and
benefit expenses. We expect to continue to add to our merchandising team
throughout the year.

As a percentage of net sales, general and administrative expenses for the first
quarter of 2004 increased slightly to approximately 15.8% from 14.6%.

Loss from operations: Operating loss decreased by almost 19% in the first three
months of 2004 to $1,426,000 from $1,758,000 in the first three months of 2003
as a result of the increase in gross margin.

Interest and other income: Other income for the three months ended March 31,
2004 increased to $456,000 from $6,000 for the three months ended March 31,
2003. The increase resulted from $261,000 recognized to adjust a liability
associated with warrants issued by us to their fair value as of March 31, 2004,
the $169,000 realized in connection with the judgment we received in the Breider
Moore litigation and an increase in interest income earned on our cash balance.

Interest expense: Interest expense for the three months ended March 31, 2004
totaled $160,000, and related primarily to fees paid in connection with the Loan
Facility and interest expense on the Convertible Notes. For the three months
ended March 31, 2003, interest expense totaled $88,000, and related to fees paid
in connection with our Loan Facility as well as amortization of warrants issued
in connection with the January 2003 Financing.

LIQUIDITY AND CAPITAL RESOURCES

General

At March 31, 2004, we had approximately $12.1 million of liquid assets, entirely
in the form of cash and cash equivalents, and working capital of approximately
$15.1 million. In addition, as of March 31, 2004, we had approximately $2.4
million of borrowings committed under the Loan Facility, leaving approximately
$1.6 million of availability. In January of 2004, we raised $5,000,000 through
the sale of 1,543,209 shares of our common stock and warrants to purchase an
additional 385,801 shares of our common stock at an exercise price of $3.96 per
share. In January 2004, we also extended the maturity dates on the Convertible
Promissory Notes issued to Soros in July and October 2003. The Notes originally
matured in January and April 2004, respectively, and the maturity date was
extended to March 1, 2005. In February 2004, the maturity date on the on the

                                       13


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

Convertible Promissory Notes issued to affiliates of Soros were again extended
to May 1, 2005

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

We believe that our current funds, together with working capital, will be
sufficient to enable us to meet our planned expenditures through December 31,
2004. We may seek additional equity or debt financing to maximize the growth of
our business or if anticipated operating results are not achieved. If such
financings are not available on terms acceptable to us, and/or we do not achieve
our sales plan, future operations will need to be modified, scaled back or
discontinued.

Loan Facility

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

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

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

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

                                       14


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

Commitments and Long Term Obligations

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



                                    2004          2005          2006          2007          2008       Thereafter      Total
                                -----------   -----------   -----------   -----------   -----------   -----------   ------------
                                                                                               
Marketing and Advertising       $   122,000            --            --            --            --            --   $    122,000
Operating Leases                    342,000       461,000       468,000       481,000       441,000       475,000   $  2,668,000
Capital Leases                      243,000       101,000            --            --            --            --   $    344,000
Employment Contracts*             1,590,000       911,000       630,000        99,000            --            --   $  3,230,000
Notes payable to shareholders       182,000     4,000,000            --            --            --            --   $  4,182,000
                                -----------   -----------   -----------   -----------   -----------   -----------   ------------
  Grand total                   $ 2,479,000     5,473,000     1,098,000       580,000       441,000       475,000   $ 10,546,000


* Does not include $75,000 that we are required to pay our President if she
relocates herself and her family to the New York City area on or before August
31, 2004. She will also be entitled to stock options to purchase an additional
100,000 shares of our common stock at $1.56 per share if she relocates within
that timeframe.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND DISCLOSURES.

As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in our periodic SEC filings.
There have been no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by us with the
Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and 10-K.
These risks and uncertainties include, but are not limited to, the following:
our history of losses and anticipated future losses; need for additional capital
and potential inability to raise such capital; the risk of default by us under
the Rosenthal financing agreement and the consequences that might arise from us
having granted a lien on substantially all of our assets under that agreement;
potential dilution arising from future equity financings, including potential
dilution as a result of the anti-dilution provisions contained in our Preferred
Stock and Convertible Notes; risks associated with Soros owning a majority of
our stock; the potential failure to forecast revenues and/or to make adjustments
to our operating plans necessary as a result of any failure to forecast
accurately; unexpected changes in fashion trends; cyclical variations in the
apparel and e-commerce markets; risks of litigation for sale of unauthentic or
damaged goods and litigation risks related to sales in foreign countries; the
dependence on third parties and certain relationships for certain services,

                                       15


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

including our dependence on U.P.S. (and the risks of a mail slowdown due to
terrorist activity) and our dependence on our third-party web hosting and
fulfillment centers; online commerce security risks; risks related to brand
owners' efforts to limit our ability to purchase products indirectly; management
of potential growth; the competitive nature of our business and the potential
for competitors with greater resources to enter the business; the availability
of merchandise; the need to further establish brand name recognition; risks
associated with our ability to handle increased traffic and/or continued
improvements to its Web site; rising return rates; dependence upon executive
personnel; the successful hiring and retaining of new personnel; risks
associated with expanding our operations; risks associated with potential
infringement of other's intellectual property; the potential inability to
protect our intellectual property; government regulation and legal
uncertainties; uncertainties relating to the imposition of sales tax on Internet
sales; and risks associated with the agreements with Soros with respect to a
change of control and the liquidation preference of the Preferred Stock owned by
Soros.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

In October 2002, we commenced an action against Breider Moore & Co. LLC
("Breider Moore") and Joseph Breider in the Supreme Court of the State of New
York, County of New York, as a result of Breider Moore's failure to consummate
an agreed upon $7 million investment in the Company. In the action, we asserted
a breach of contract claim against Breider Moore, fraud claims against Breider
Moore and Mr. Breider and a piercing the corporate veil claim against Mr.
Breider. In February 2003, we obtained summary judgment on our breach of
contract claim, and our piercing the corporate veil claim was dismissed. One of
our fraud claims is still pending, and the other has been dismissed. Given that
we had been granted summary judgment on our breach of contract claim, an
evidentiary hearing on our damages was held before a special referee in May
2003. In July 2003, the special referee recommended that we be awarded damages
in the amount of approximately $3.3 million for our breach of contract claim
against Breider Moore. In December 2003, the court entered judgment in our favor
against Breider Moore in the amount of $3,793,688. In the first quarter of 2004,
following the expiration of all applicable appeal periods, we recognized a good
faith deposit of $169,000 previously provided by Breider Moore as other income,
as a partial offset of the damages incurred. Based on the information currently
available to us regarding Breider Moore's finances, we do not believe that it
will be successful in collecting a material amount of additional funds as a
result of the damages award.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Recent Sales of Unregistered Securities

In January 2004, we completed a private placement pursuant to which we raised
$5,000,000 from a group of investors led by Redwood Grove Capital Management,
LLC, a California-based private equity firm. Under the terms of the deal, we
issued 1,543,209 shares of Common Stock at $3.24 per share, which was 90% of the
trailing five-day average of our volume-weighted stock price as of December 29,
2003, the date that a preliminary agreement was reached as to the pricing of the
deal. We also issued to the new investors warrants to purchase 385,801 shares of
Common Stock at any time during the next five years at an exercise price of
$3.96 per share. We agreed to file a registration statement with the Securities
and Exchange Commission on behalf of these new investors within 30 days of the
closing, in order to register the resale of the Common Stock issued, as well as
the Common Stock underlying the warrants, and to use commercially reasonable
efforts to have such registration statement declared effective within 90 days of
the closing. We also agreed to certain liquidated damages provisions to the
extent that we did not meet these deadlines. We filed the required registration
statement on January 16, 2004, and the registration statement was declared
effective on April 1, 2004. Accordingly, no liquidated damages have been
incurred to date, although they could be incurred in the future were the
registration statement to become subject to a stop order or a blackout period
for an extended period of time. We paid Enable Capital, LLC and Broadband
Capital Management finders fees of $194,000 and $100,000, respectively, in
consideration for their roles in introducing us to the participants in the
transaction.

The above-described sales were deemed exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
4(2) of the Securities Act.

                                       16


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)    The following is a list of exhibits filed as part of this Report:



       EXHIBIT NUMBER                                     DESCRIPTION
       ---------------------------------------------------------------
                         
       10.62                Amended and Restated Financing Agreement, dated as of April 21, 2004, by and between the
                            Company and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 99.1 to the
                            Company's Current Report on Form 8-K, filed on April 22, 2004).

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

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

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

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

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


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

(b)    Reports on Form 8-K:

Current Report on Form 8-K, filed on January 13, 2004, regarding the
consummation of a $5 million private placement of common stock and warrants.

Current Report on Form 8-K, filed on January 16, 2004, attaching the press
release announcing the extension of the maturity date of the Convertible Notes.

Current Report on Form 8-K, filed on February 19, 2004, attaching the press
release announcing the Company's results of operations for the quarter and year
ended December 31, 2003.

                                       17


                                  BLUEFLY, INC.
                                 MARCH 31, 2004

                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, 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

                                             By: /s/ Patrick C. Barry
                                                 -----------------------------
                                                 Patrick C. Barry
                                                 Chief Financial Officer

May 3, 2004

                                       18